The stock market still hasn't priced in the positive impact from interest-rate cuts, says Morgan Stanley's Mike Wilson

Morgan Stanley strategist Mike Wilson asserts that the stock market has yet to fully price in the positive impact of anticipated interest rate cuts, despite bond markets already forecasting approximately five 25-basis-point reductions by year-end 2026. Wilson's research indicates stocks perform robustly during rate-cutting cycles, with lower policy rates supporting higher valuations and a reflationary economy benefiting equities. He advises investors to buy dips, challenging the conventional 'buy the rumor, sell the fact' adage for this cycle.

Analysis

Morgan Stanley's strategist, Mike Wilson, posits that equities have not yet fully incorporated the positive effects of anticipated Federal Reserve interest rate cuts. This view is substantiated by the bond market, which is already pricing in approximately five 25-basis-point cuts by the end of 2026. Contrary to the 'buy-the-rumor, sell-the-fact' maxim, Wilson's research indicates that stock market returns are historically strong during the rate-cutting cycle itself. The supportive mechanism is twofold: lower policy rates directly underpin higher equity valuations by reducing the discount rate on future earnings, and the resulting reflationary environment is expected to be beneficial for corporate earnings growth, particularly when it exceeds the long-term median. Based on this outlook, Wilson recommends that investors utilize market dips, such as those historically seen in September, as buying opportunities.

Key Decisions for Investors

• Consider increasing equity exposure on market pullbacks, aligning with the 'buy the dip' strategy recommended for the anticipated rate-cutting cycle.
• Focus on assets sensitive to lower discount rates, as the thesis suggests valuations for companies with strong future earnings streams are currently undervalued.
• Closely monitor bond market pricing and central bank forward guidance, as any deviation from the projected five rate cuts by 2026 represents the primary risk to this bullish equity thesis.