Morgan Stanley’s chief investment officer, Mike Wilson, is optimistic about U.S. stocks as the Federal Reserve begins cutting interest rates. He believes there are still growth opportunities, even though markets have reached record highs. Wilson highlights that small-cap stocks might be particularly appealing right now.

Equities and Rate Cuts

Wilson argues that the idea the market has fully priced in rate cuts isn’t accurate. Historically, stocks perform well when rates drop, and many sectors, especially small caps, are currently at low levels. While he notes that the next few weeks might be tough for stocks, Morgan Stanley plans to invest during any downturns. Generally, lower policy rates help boost stock valuations, especially when earnings grow faster than average. With the Federal Reserve expected to start reducing rates soon, we see more upside for U.S. stocks. The CME FedWatch Tool indicates a 95% chance of a 25-basis-point cut during the meeting on September 20th, driven by August’s CPI data of 2.8%. This policy change should help the market in the upcoming weeks. Traders might want to consider buying call options or selling out-of-the-money put spreads on indexes like the S&P 500. Even though the markets are at record levels, the first round of rate cuts isn’t fully factored into current valuations. In past easing cycles, stocks have shown strong returns. For instance, in 2019, the S&P 500 rose over 12% within six months of the first rate cut. A particularly appealing opportunity right now is in small-cap stocks, which have not performed as well. While the S&P 500 has risen nearly 18% in 2025, the Russell 2000 index has only gained 4%. This presents a chance for a catch-up, making bullish call spreads on the IWM ETF a smart move with manageable risk.

Seasonal Market Weakness

We recognize that the next few weeks are typically weak for stocks. Historically, September has been the worst month for the S&P 500, averaging a decline of about 1% since 1950. This trend suggests there may be short-term drop-offs before the market moves higher. However, this seasonal dip should be seen as a buying opportunity rather than a sign to go bearish. For derivative traders, this means taking advantage of any market weakness in September by selling puts with October or November expirations. This strategy enables you to earn premium while preparing for the expected rally following the Fed’s decision. Create your live VT Markets account and start trading now.

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