Welcome and thoughts on the market. I'm Mike Wilson, Chief Investment Officer and Chief

U.S. Equity Strategy for Morgan Stanley. Along with my colleagues bringing you a variety

of perspectives, I'll be talking about the latest trends in the financial marketplace. It's

Monday August 5th at 9 a.m. Eastern, so let's get after it. In last week's

comments we strongly suggested the Fed meeting would lead to a sell the

news event no matter what the outcome.

Our view was predicated on three things.

First, the Fed's pivot had been fully priced for the most part

based on historical precedent of Fed cuts versus Fed pauses.

More specifically, when the Fed pauses like in January

that's generally bullish for the stock market but the first cut is not if it's

associated with a full-blown rate cutting cycle. We've argued all year that there is little evidence to support the view that the U.S. economy is

mid-cycle.

To the contrary, with the output and unemployment gap near extremes, there's little slack in the economy

even if the Fed were able to rekindle it.

The corporate profit cycle has turned also, which has led to significant reductions in

operating expenses and capital spending. We're also starting to see labor cutbacks

by smaller companies and

believe there's now elevated risk that large cap companies may follow too should

earnings and confidence not improve. On that score the large cap S&P 500 has has EPS growth that's just barely negative on a year-of-year basis.

However, the small cap S&P 600 and mid-cap S&P 400-ePS growth is down 8% year-over-year, putting these smaller companies in a full-blown earnings

recession already.

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