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Morgan Stanley strategist Mike Wilson spies a late-cycle rally driven by monetary policy right now.
Wilson, who has been bearish on equities through the 2023 rally, says current conditions look similar to 2019, when the S&P 500 (SP500) (NYSEARCA:SPY) (IVV) (VOO) rose 29%. That was the best performance since 2013.
"In our view, the positive policy impact has been supported by a very strong fiscal impulse, a still supportive global liquidity backdrop and optimism that the Fed can now transition to easier monetary policy given the falling inflation data," Wilson wrote in a note Monday. "The latest example of such a period occurred in 2019, but for somewhat different reasons - the Fed definitively paused and then cut rates and the Fed's balance sheet began to expand toward the end of the year."
"These developments fostered a robust rally in equities that was driven almost exclusively by multiple and not earnings, as has been the case this year," Wilson said. "Both then and now, mega cap tech has led and growth (IWF) has outperformed value (IWD) as equity market internals process a path to easier monetary policy, in particular."
"The 2019 analogy, in and of itself, suggests more index level upside from here, though we'd note that the Fed was already cutting rates for a good portion of 2019, and the market multiple is already close to 1 turn higher than where it peaked during that period," he added.
"Others suggest we are in a new cyclical upturn. While we're open-minded to this view eventually materializing, we'd like to see a broader swath of business cycle indicators inflect higher, breadth improve and front-end rates come down before adjusting our stance in this regard."
