Welcome to Thoughts on the Market.

I'm Mike Wilson, Chief Investment Officer and Chief US Equity Strategist 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 16th at 12.30 pm in New York.

So let's get after it. With second quarter earnings season wrapping up this week,

the results have been exceptionally strong. In the aggregate, companies in the S&P 500 have beaten

consent assessments by more than 15 percent. This is similar to the past four quarters,

and much higher than the average 4 to 6 percent beat rate over time.

It's also the typical pattern we see after a recession, when analysts forecast become overly

pessimistic and proved to be easy for companies to surpass as the economy recovers.

The primary driver of the upside is operating leverage, as revenues return to pre-recession levels

before costs are layered back in. That was our view a year ago and this time was no different.

In fact, the operating leverage was even more extreme than normal due to the extraordinary

government support of those individuals who lost their jobs during the pandemic.

Normally, such a dramatic decline in employment would lead to significant declines

in economic and sales growth. Instead, the stimulus packages and digital infrastructure allowed

consumers to keep spending at a high rate. In fact, consumption never really declined that much,

and made new highs within just a few quarters of the recession trough. Meanwhile,

companies cut costs and employment to the bone in anticipation of a major slowdown.

The result has been predictable, an incredibly fast return to record profits and profitability

that now look unsustainable. Today, we are raising our earnings forecast after the

strong two-key results and we now expect $205 per share for the S&P 500 in 2021.

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