Everybody knows what could go wrong, right?

If not, allow me. Monetary policy’s “long and variable lags” — dismissed by bulls as anachronistic, not applicable this cycle or both — could come back to exact their revenge, pushing the US economy into recession and torpedoing corporate profits. So, a hard landing.

Alternatively, ongoing economic resilience could prevent core inflation from receding to target, prompting the Fed to restart rate hikes on the way to… I don’t know. On the way to something bad. An even harder landing maybe.

I think everyone knows what could go right too. This is all just rote repetition by now, after all. Every day, the same people say the same things about the same set of potential macro-policy outcomes.

Thank God I don’t have to do this “professionally.” If I had to dress up in a drab suit and parade myself into an office every morning to write another riff on the same three plane metaphors, I would’ve ended it by now. Maybe one day I’d stand up calmly at my desk, do a series of elaborate stretches, clear my throat loud enough for everyone to look up from their monitors, then run straight through the floor-to-ceiling window at full speed. Geronimooooooooo!!!!! Splat. Hard landing.

Anyway, as discussed here at some length, Morgan Stanley’s Mike Wilson unveiled not one, but two bull and bear cases this week to compliment his updated base case for US equities. So, that’s five total scenarios: Two bull, two bear and one base.

A few (several) readers were interested in the specifics of Wilson’s bull cases given that his 12-month (i.e., June 2025) price target associated with the upside scenarios is a whopping SPX 6350.

The most relevant of Wilson’s two bull cases is the first one. The second bull case is a kind of dream scenario which, while perfectly plausible over the longer run, is vanishingly unlikely to unfold over the next year, in my view. As for “Bull Case 1,” which Wilson described as “more of the same,” here’s Mike’s summary, which I do think is worth highlighting:

In our bull case, fiscal policy support remains robust and potentially increases into the election, but without any negative implications for the bond market. Instead, immigration continues to provide a tailwind to labor supply while commodity prices are contained as China remains stagnant and even exports more deflation in certain areas. The dollar stays strong relative to other currencies but depreciates significantly against gold much like we have witnessed over the past six months. In this scenario, stock prices increase significantly in nominal terms but could continue to churn in real terms relative to gold. Nominal GDP and earnings end up being stronger than expected. Investors recognize this policy/macro backdrop as one where they need to own more assets that can inflate faster than the purchasing power of the dollar — i.e., high quality equities. Such policy may be part of the larger plan to inflate away the excessive debt on the government’s balance sheet and to assist stressed parts of the economy. In the bull case, we assume policy makers are very successful with this strategy and the markets tolerate it. More specifically, we assume the bond market does not push back in a way that is destructive for equity multiples and/or forces fiscal discipline upon Congress. Early warning signs that this is not the case will likely show up in the term premium.

Frankly, that’d be my base case, although I’m not sure I see upside to SPX 6350 under those conditions.

As Wilson pointed out, the liquidity’s there. There’s still $450 billion in the RRP facility, the QT taper’s imminent and the redemption cap for Treasurys ended up being $5 billion lower than expected (bullish for bonds, all else equal).

Wilson elaborated a bit. Actually he elaborated a lot, but here I’m just editorializing around two paragraphs out of 48 pages.

“The reverse repo could be drained via bill issuance [and] the Treasury General Account could be cut in half as a way to reduce the net borrowing needs of Treasury,” Wilson wrote, adding that the reduced pace of balance sheet runoff should be “felt” by the market in H2.

For stocks, the read-through of this scenario is multiple expansion and better earnings, with high quality names enjoying a disproportionate share of the benefits. (Remember: Inequality in America’s not just a social phenomenon. It’s readily apparent in the corporate sector too.)

So, what’s the problem with this scenario? Well, it could be inflationary. But as Wilson went on to note, the Fed may not even be committed to the 2% target anymore, no matter how many times Jerome Powell insists otherwise, and in any case, the bar to hike again is extremely high while the bar to cut’s quite low (two negative NFP prints would surely do the trick).

Wilson reminded investors that the US “may need inflation well above 2%” if the idea is to “inflate debt/GDP ratios back to more sustainable levels over time.” A “primary consideration” for policymakers, he said, is ensuring that Treasury “can fund itself without stress and at a reasonable cost.”