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CONSOLIDATION FLAVORED WITH A HINT OF DIP BUYING

The market has rallied sharply from what Michael Wilson at Morgan Stanley describes as the peak growth uncertainty stemming from Liberation Day, the day that U.S. President Trump announced tariff levels that shocked Wall Street.

While the MS equity strategist noted that a v-shaped recovery in EPS revisions breadth had helped the recovery, he said that Friday’s weaker than expected jobs report and a Fed that is still on hold may have been the kickoff for "the 3Q consolidation we've been expecting."

Still, Wilson says "we’re buyers of pullbacks and bullish" for the next 12 months.

Wilson's expectation for Q3 consolidation would be based on "lagged impacts of tariffs on growth data (both macro and micro)" and inflation fears that keep the Federal Reserve holding off on interest rate cuts for longer than investors might like.

A couple of weeks ago, the strategist says he saw a softer payroll number combined with tariff-related inflation as the recipe for a correction in what is typically a seasonally weak quarter.

But ultimately he sees tariff-related inflation as temporary and that tariffs could even be disinflationary if they hurt demand in certain industries that sell to the consumer where "pricing power is elusive."

While Wilson sees the Fed eventually moving to rate cuts, he notes that a delay in the face of weaker growth data could also lead to a correction in equities.

But he said, "Friday may be all we get to the downside for now" until the next jobs report or any other weak data releases.

Despite these near-term risks, the strategist is gaining confidence in his bullish view for the next 12 months. His list of supports for that confidence is long: better earnings and cash flow growth, positive operating leverage, AI adoption, dollar weakness, cash tax savings from the recent Big Beautiful Bill, easy growth comparisons, and pent-up demand for many sectors.

"While the Fed remains on hold for now, the combination of a fading inflation impulse later this year plus softness in the labor market should foster a robust cutting cycle," Wilson writes.

(Sinéad Carew)

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EARLIER ON LIVE MARKETS:

THE MAGNIFICENT 7: AND THEN THERE WERE 3 CLICK HERE

SEEING CRACKS IN THE LABOR MARKET, WALL STREET BETS ON SEPTEMBER RATE CUT CLICK HERE

WALL STREET REGAINS SOME LOST GROUND CLICK HERE

S&P 500 INDEX: TRADERS ASSESS THE DAMAGE CLICK HERE

TIME TO REASSESS YOUR EQUITY EXPOSURE, UBS WEALTH MANAGEMENT SAY CLICK HERE

MORE FX HEDGING CHAT, THIS TIME IT'S GOOD FOR THE YEN CLICK HERE

"WE'RE BUYERS OF PULLBACKS," SAYS MS CLICK HERE

SMI SLIDES, FINANCIALS LIFT THE STOXX CLICK HERE

BEFORE THE BELL: EYES ON SWITZERLAND, UK MOTOR FINANCE UPDATE CLICK HERE

BUY THE DIP, WE CAN WORRY ABOUT JOBS LATER CLICK HERE