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

Officer and Chief U.S. Equity Strategies 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, May 17th at 11.30 a.m. in New York, so let's get after it.

Each year at this time our macro research team gets together and updates our 12 month forecasts.

It's also a review of our calendar year ahead outlook, what we got right, and more importantly,

what we got wrong so we can adjust appropriately.

For U.S. equities, our sector and style preferences proved to be spot on, while our forecast for the S&P 500 was too conservative.

In fact, just five months into the year, the S&P 500 is already trading above our year-end price target of 3,900.

However, we're not raising that target today.

Instead, we're doubling down and why we think the upside for the main U.S. index is

cap for the rest of the year.

In short, we continue to believe valuations are too high

and we'll adjust materially lower over the next six months.

The primary reason we think valuation will prove to be a head win in our view

is we've left the early cycle part of this recovery.

We call it the mid-cycle transition and it tends to coincide with the peak rate of change in

policy and growth.

Typically during this period, the price earnings multiple for the S&P 500 falls by approximately 20%.

So far it's declined by just 5%.

Second, long-term interest rates have moved significantly higher this year as many of the most

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