Michael Wilson of Morgan Stanley with more excellent analysis to sober up stock bulls.
Chair Powell and the Fed make it crystal clear that their job fighting inflation remains unfinished. Ironically, while bonds took the message in stride, stocks seemed to be shocked by the messaging. The path for stocks from here will be determined by earnings, where we still see material downside.
Unfinished business for the Fed…While the Fed’s messaging from its annual meeting at Jackson Hole was completely unsurprising to the bond market, stocks seemed to be shocked by the hawkishness of the tone. We chalk this divergence up to the fact that the equity market became a victim of its own momentum over the past few months as CTAs and other price insensitive buyers drove valuations to unrealistic levels. While P/Es have come back down, they remain well above fair value based on our equity risk premium framework.
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