Morgan Stanley Wilson Highlights Earnings Support with Fed Policy and Funding Market Risks

This analysis is based on the MarketWatch report [1] published on November 3, 2025, which detailed Morgan Stanley Chief U.S. Equity Strategist Michael Wilson’s assessment of current market conditions.

The market is experiencing a complex dynamic where earnings fundamentals are providing support while macro headwinds create uncertainty. As of October 31, 2025, major indices showed recent weakness with the S&P 500 closing at 6,840.20 (-0.57%), NASDAQ at 23,724.96 (-0.91%), and Dow Jones at 47,562.87 (-0.20%) [0]. However, pre-market trading shows the SPDR S&P 500 ETF Trust (SPY) up 0.33% at $682.06, indicating some positive momentum [0].

Sector performance reveals significant divergence that aligns with Wilson’s concerns about market breadth. Energy leads with +2.81% gains, followed by Real Estate (+1.77%) and Financial Services (+1.38%), while Technology underperforms at -1.74% and Utilities shows the weakest performance at -1.99% [0]. This rotation pattern suggests investors are seeking defensive positioning while growth-oriented sectors face headwinds.

: Wilson emphasizes that Federal Reserve policy remains a primary concern. The Fed funds rate currently sits 60-65 basis points above two-year Treasury yields, indicating policy may still be too restrictive [2]. Wilson defines the Fed “getting ahead of the curve” as fed funds being at least equal to, but preferably below, two-year Treasury yields [2]. This policy stance creates a challenging environment for equity valuations, particularly in rate-sensitive sectors.

: The second risk involves funding market stress attributed to ongoing quantitative tightening draining bank reserves [3]. Wilson observes that “widening in spreads suggests banking reserves may already be too low and restrictive for the pick-up in economic activity and capital spending that requires more liquidity” [2]. This liquidity constraint could potentially spill over into equity markets, creating a scenario where strong earnings fundamentals are overshadowed by funding concerns.

Despite these headwinds, Wilson maintains a constructive view based on earnings fundamentals. He references “better and broader growth in earnings next year” and notes that current earnings growth is coming in “stronger than expected” [1][2]. Wilson’s bullish 12-month outlook is supported by “the combination of positive earnings and cash flow drivers with the easy growth comparisons fostered by the rolling EPS recession and the high probability of the Fed re-starting the cutting cycle by the first quarter of next year” [2].

The current sector performance divergence [0] validates Wilson’s concerns about market breadth. While mega-cap stocks may be showing earnings strength, the underperformance of Technology and Utilities sectors alongside defensive positioning in Energy and Financial Services suggests investors are increasingly risk-averse. This pattern could indicate that earnings support may not be as broad-based as Wilson anticipates.

A critical insight emerges from the potential disconnect between earnings fundamentals and liquidity conditions. Even with strong earnings growth, the combination of restrictive Fed policy and funding market stress could create a scenario where equity valuations are compressed despite improving fundamentals [2][3]. This dynamic is particularly relevant for growth stocks that are more sensitive to liquidity conditions.

Wilson’s expectation of Fed rate cuts beginning by Q1 2026 [2] creates a potential timing mismatch. If funding market stress intensifies before policy accommodation materializes, markets could experience significant volatility despite strong earnings growth. The market’s current defensive rotation [0] suggests investors may already be positioning for this risk.

: The analysis reveals several risk factors that warrant attention. Funding market stress, evidenced by widening spreads and declining bank reserves, could significantly impact equity valuations [2][3]. Technical indicators [0] show current market weakness, with the recent underperformance in growth-sensitive sectors potentially signaling broader concerns.

: The Fed’s policy trajectory remains uncertain, with current restrictive policy potentially creating headwinds until rate cuts materialize [2]. Any delay in policy accommodation could exacerbate funding market stress and impact equity markets.

: Wilson’s analysis suggests that strong earnings growth could provide a foundation for market recovery, particularly if earnings breadth expands beyond mega-cap stocks [2]. The combination of positive earnings drivers and expected Fed policy easing by Q1 2026 creates a potential catalyst for market appreciation.

: Current sector performance [0] indicates potential opportunities in defensive sectors like Energy and Financial Services, which have shown resilience amid broader market uncertainty. These sectors may continue to outperform if liquidity conditions remain challenging.

Investors should be aware that the combination of restrictive Fed policy and funding market stress may significantly impact equity valuations, particularly in growth sectors that are more sensitive to liquidity conditions [2][3]. Wilson’s historical analysis suggests that when funding markets show stress, “it could spill over into equities” [3], creating a scenario where strong earnings fundamentals may be overshadowed by liquidity concerns.

The market is currently characterized by a complex interplay between supporting earnings fundamentals and challenging macro conditions. Morgan Stanley’s Michael Wilson identifies two primary risks: Fed policy that remains 60-65 basis points above two-year Treasury yields [2], and funding market stress from quantitative tightening draining bank reserves [3]. Despite these headwinds, earnings growth is exceeding expectations [1], supporting Wilson’s bullish 12-month outlook.

Current market data shows defensive sector rotation with Energy (+2.81%), Real Estate (+1.77%), and Financial Services (+1.38%) leading, while Technology (-1.74%) and Utilities (-1.99%) underperform [0]. This pattern suggests investors are positioning defensively amid liquidity concerns.

Wilson expects Fed rate cuts to begin by Q1 2026 [2], which could provide a catalyst for market recovery. However, the timing remains uncertain, and any delay could exacerbate funding market stress. The key factors to monitor include funding market spreads, bank reserve levels, Fed policy signals, and earnings breadth across sectors [2][3].

The analysis suggests that while earnings fundamentals provide support, investors should remain vigilant about liquidity conditions and policy developments that could impact market dynamics in the intermediate term.