Guess who isn’t bullish?

“We see limited upside at the index level on a six- to 12-month horizon given where valuations and earnings expectations are,” Morgan Stanley’s Mike Wilson said, in a Tuesday note.

Beginning earlier this year, Wilson subtly (and wisely) pivoted away from weekly recitations of the broader bear case (such as it was) in favor of a more nuanced narrative centered around a preference for quality. That served him well at a time when index bears were driven to the brink of extinction by an inexorable rally which found the S&P scoring some three dozen record highs in rapid succession.

But Wilson never turned overtly — let alone enthusiastically — bullish. Rather, he just swiveled enough to stay on the right side of things. In his latest, Wilson presented the figure below, which I happen to like because it conjures a point I’ve made repeatedly, including in the latest Weekly.

Rates, commodities, FX and cyclicals are still discounting the early-August growth scare, even as “broad” stocks forgot about it in short order.

“Many equity market indices have rallied back to near all-time highs, while the bond market, yen and commodities reflect lingering suspicions that the coast might not be clear,” Wilson wrote.

Just a few hours later, the ISM manufacturing release covering August suggested the coast is anything but clear: The key new orders gauge printed a 15-month low.

As ever, Wilson fretted about valuations. “At 21x NTM earnings, the S&P 500 is trading around the top decile of its historical valuation range,” he remarked, on the way to emphasizing that consensus is assuming robust profit growth this year and next.

To be sure, profits looked fine during Q2 reporting season. But as the figure on the right, above, shows, 15% growth in 2025 would count as double the long-term average.

That brings us back to a familiar cognitive dissonance: Expectations for deep Fed cuts and double-digit profit growth. Those aren’t necessarily mutually exclusive, but there’s certainly some tension between them. If the Fed’s cutting aggressively, it’s typically in response to deteriorating macro fundamentals, and deteriorating macro fundamentals aren’t conducive to bumper profits.

Morgan Stanley’s house call for the US economy is a soft landing, by the way. But that doesn’t mean big equity upside. Or at least not if you’re Wilson.

“The bond market has already done the Fed’s cutting for it in some respects, with back-end rates falling by more than 100bps over the past 10 months,” he said. “Unless the Fed cuts more than the market is already expecting, the economy strengthens, and/or additional forms of policy stimulus are introduced, equity investors should expect minimal returns at the index level.”