Why can stock prices remain strong despite geopolitical risks?
Why are investors generally still calm even in the recent situation in the Middle East? Mike Wilson, our Chief Investment Officer and U.S. Chief Equity Strategist, explains. Listen this episode in English (https://mgstnly.lnk.to/gAGuUsRS) . Welcome to the transcript Thoughts on the Market. This podcast brings you Morgan Stanley’s thoughts on recent financial market trends. Chief Investment Officer and U.S. Chief Equity Strategist Today, our Chief Investment Officer and U.S. Chief Equity Strategist Mike Wilson talks about how tensions in the Middle East will affect U.S. stocks. This episode was recorded in New York on June 23rd. If you would like to listen to it in English, please click on the URL listed in the description section. This weekend, the US launched a surprise attack on Iran’s nuclear fuel enrichment facility. The extent of the damage has not been confirmed yet, but President Trump has said Iran’s efforts to develop nuclear weapons have been significantly reduced, if not completely. If that’s true, we can assume that the rate of change has reached its peak for this risk. We believe that many of the risks that kept the heads of US stocks in the first quarter of this year seem to have passed its worst, but in many respects the risks this time also align with this view. Materials like cracking down on illegal immigration, reducing fiscal spending, tariffs and slowing down AI-related capital investments have all contributed to lower corporate earnings forecasts. Fast forward to seeing what has been going on since then to today, all of these factors have passed their peak in terms of negative impact, and earnings forecasts have also started to recover from mid-April. In fact, the recovery in earnings correction breath is one of the biggest in history, and is one of the fundamental reasons why US stocks have been doing so well since bottoming in the week of April 7th. Many people may have predicted a sharp decline in stock prices following the events this weekend, but considering the reasons for the strong developments so far, it is understandable that this did not happen in the stock market this morning. We also looked into the impact on stock prices of 23 major geopolitical events that have occurred since 1950. This has emerged that while it may seem surprising to many people, it is well-recognized among veteran investors. In fact, after a geopolitical shock, stock prices often continue to rise rather than fall in stock prices, especially for six months to 12 months after the shock. Of these 23 cases, only five of the stock prices fell. What’s more, the five cases of stock prices falling have been accompanied by a sharp rise in crude oil prices, with the rate of increase being at least 75% compared to the same period last year. As of this morning, crude oil prices are 10% lower than the same period last year. That’s what it is even after weekend military action. This means that stock prices will not fall over the next six to 12 months. That said, we would like to continue to recommend high-quality large caps over low-quality small caps. This judgment is largely based on the reluctance to long-term interest rates and the fact that the Fed remains unchanged in the late US economy. If this situation changes and the Fed starts to suggest a rate cut, we will be focusing on more cyclical areas. We continue to prefer capital goods and services stocks that are expected to increase capital investments related to electricity and infrastructure development, financial stocks that will benefit from the deregulation scheduled for this fall, and software stocks that are focused on areas that are not affected by tariffs and are next investments to promote AI throughout the economy. Furthermore, we prefer energy stocks over general consumer goods and services stocks as a means of hedging the risk of rising crude oil prices for the time being. Thank you for listening to it until the end. We hope you enjoyed Thoughts on the Market again this time, “Reading the Wind of the Market”? If you would like, we would be happy to share this program with friends and colleagues.
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