Morgan Stanley’s Mike Wilson is… cautious. That’s one word to describe his disposition towards US equities. There are probably other words too, but I’ll go with “cautious” for our purposes here.

In his latest, published on Monday, Wilson reiterated that up until very recently, US equities were “priced for perfection,” which in this case meant priced for macro perfection. So, priced for a soft landing. And priced for propitious profits too.

But over the past month or two, the data began to surprise to the downside, calling into question the durability of an expansion that’s already very long in the tooth. Of course, expansions don’t die of old age, they’re “murdered” by the Fed (as the adage goes), but that only begs the question: This is a Fed that’s been at terminal for going on 13 months.

Whatever happens with earnings growth, there are now pressing concerns about whether the Fed missed an opportunity to preemptively cut rates at the July meeting. Critics worry that after talking up the many virtues of “insurance cuts” to keep the real policy rate steady as inflation recedes, the Committee was scared out of those cuts by a succession of warm inflation readings earlier this year. That was Bill Dudley’s line on July 24. I have to admit, it looked prescient a little over a week later, when markets were plunged into turmoil by a “triggered” Sahm rule and the yen carry unwind.

By the end of last week, though, equities recovered from the chaos and credit was generally fine. Calls for an emergency cut seemed overwrought. Still, the signal from front-end rates could scarcely be any clearer. Have a look:

I used the chart above last week, but it’s worth another mention. Indeed, Wilson mentioned it Monday.

“Policy rates tend to follow two-year yields and over the last month, two-year Treasury yields have fallen by ~50bps, almost 150bps below the Fed funds rate,” he wrote. The implication’s clear, but Wilson spelled it out. Explicitly. “What this means is that the market is telling the Fed they are too tight and need to cut more aggressively than what they have guided to so far,” he said.

Over the weekend, I highlighted a historic blast of cyclical underperformance. The figure below, from Wilson, shows cyclical performance plotted with the Bloomberg Economic Surprise index.

The big selloff in cyclicals versus defensives was effectively a catch up (sorry, a catch down) to months of macro data disappointments.

Although Morgan Stanley’s house economics call isn’t for any kind of calamity, Wilson emphasized that neither does the bank’s team expect “the kind of re-acceleration in the growth data that is priced into equity markets.”

The problem is simple: The Fed’s just as likely as not to disappoint expectations for a 50bps cut in September. Stocks need better growth outcomes, a Fed that’s not fighting the last war or ideally both, where “both” means the data stabilizes and Jerome Powell indicates in Jackson Hole later this month that the Fed’s not asleep at the wheel.

Wilson captured it well. “With the deterioration in the growth data and a Fed that is in no rush to cut rates pro-actively, markets have started to re-price” the best-case macro/profits conjuncture reflected in valuations as recently as last month.

“Equity markets tend to take cues from the bond market when thinking about Fed policy in terms of what’s needed to orchestrate a soft landing,” he wrote, adding that with rates screaming for cuts, “markets are likely to remain vulnerable in the near-term until we get better growth data or more comfort from the Fed on policy support.”