WEBVTT - Morgan Stanley's Mike Wilson Talks S&P Call, Fed Policy 0:00:02.440 --> 0:00:07.160 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.120 --> 0:00:10.360 Mike Wilson's capitulated, he's moved from forty five hundred to 0:00:10.520 --> 0:00:12.520 fifty four hundred and all of that. Can we just 0:00:12.560 --> 0:00:15.240 start with the skub the wide range of outcomes, because 0:00:15.240 --> 0:00:17.520 that was the headline of the piece, the back case 0:00:17.640 --> 0:00:19.919 versus the bull case. Has it ever been this wide? 0:00:20.040 --> 0:00:22.599 Well, not for us, I think for other people they've 0:00:22.600 --> 0:00:25.560 had wider skews. And look, it just reflects the uncertainty 0:00:26.040 --> 0:00:28.080 that has been the case for the last several years. 0:00:28.480 --> 0:00:30.960 And quite frankly, I wouldn't be surprised if we hit 0:00:30.960 --> 0:00:32.760 both sides, you know, I mean, like, that's kind of 0:00:32.800 --> 0:00:35.000 the world we're in, which is, you know, think about 0:00:35.000 --> 0:00:36.400 this year, and we talked about this at the beginning 0:00:36.400 --> 0:00:37.920 of the year, which is we had three sort of 0:00:37.960 --> 0:00:40.839 equally similar opera you know, sort of outcomes. One was 0:00:40.960 --> 0:00:43.000 a soft landing is the goldilax, which is kind of 0:00:43.000 --> 0:00:45.400 consents us now and that's our house view. Then you 0:00:45.440 --> 0:00:47.680 have the no landing, which is kind of a reacceleration, 0:00:47.800 --> 0:00:51.239 the stickier inflation even maybe a stagflationary outcome, which is 0:00:51.240 --> 0:00:53.720 what the market was thinking about in April and now 0:00:53.720 --> 0:00:55.320 you're back to a soft link, but you still can't 0:00:55.360 --> 0:00:57.720 rule out of recession either, right, So like all these 0:00:57.760 --> 0:01:00.200 are very possible, and you know they could help. All 0:01:00.240 --> 0:01:03.880 happened with a higher than normal degree of certainty. 0:01:04.240 --> 0:01:06.080 So that's that's really. 0:01:05.800 --> 0:01:07.959 The headline that should have been out is that, look, 0:01:08.000 --> 0:01:10.399 nobody knows anything, right, I mean, and particularly at a 0:01:10.400 --> 0:01:13.160 point in time. And I think maybe maybe our mistake 0:01:13.240 --> 0:01:14.920 is just admitting that we don't know as much as 0:01:14.920 --> 0:01:19.000 maybe everybody else claims to. That's called humility, something that 0:01:19.000 --> 0:01:20.560 we've learned the hard way over life. 0:01:20.959 --> 0:01:22.119 But anyways, the point here. 0:01:22.040 --> 0:01:24.319 Is that the meat of our report this year or 0:01:24.360 --> 0:01:26.520 this this update was really more about how do you 0:01:26.560 --> 0:01:30.760 make money in an environment we have basically zero percent 0:01:30.840 --> 0:01:33.040 upside and the base case and you could have twenty 0:01:33.040 --> 0:01:34.800 percent upside or twenty percent downside. 0:01:34.840 --> 0:01:37.240 And that's what clients pay us for, right. It's the process. 0:01:37.440 --> 0:01:39.560 It's understanding, Okay, what kind of environment and how are 0:01:39.600 --> 0:01:41.400 we going to navigate that and manage that. So we 0:01:41.440 --> 0:01:43.679 spent a large part of the report yesterday talking about 0:01:43.680 --> 0:01:47.840 trade ideas, specific sector ideas. That's not the headline that 0:01:47.840 --> 0:01:50.480 people wanted to write about. That's fine, and it's your prerogative, 0:01:51.040 --> 0:01:52.320 but that's what we want to talk. 0:01:52.160 --> 0:01:53.960 About that was never going to fit in the headline. 0:01:54.120 --> 0:01:55.760 We will talk about some of that stuff in just 0:01:55.760 --> 0:01:58.360 a moment. Let's talk about the headline just brieflake Sure 0:01:58.240 --> 0:02:00.600 a youth the emphasize in the fifty four hundred. Are 0:02:00.600 --> 0:02:02.440 you saying it's a price target? It's not actually that 0:02:02.480 --> 0:02:04.200 important to you in affirm what is that? 0:02:04.360 --> 0:02:05.960 Well, it's not important to most clients. 0:02:06.120 --> 0:02:08.720 Institial clients don't care about the target on the S 0:02:08.720 --> 0:02:10.320 and P five phnals to being honest say they're trying 0:02:10.320 --> 0:02:12.480 to pick stocks and look. One of the most important 0:02:12.480 --> 0:02:14.560 things we talked about in the report is alpha generation. 0:02:14.639 --> 0:02:17.200 This year has been spectacular. The way we measure it 0:02:17.240 --> 0:02:19.720 with our client our client base, which is significant. Is 0:02:19.760 --> 0:02:22.440 this the best alpha generation alpha capture we've seen since 0:02:22.440 --> 0:02:24.560 we've started recording it since twenty ten. 0:02:25.040 --> 0:02:26.320 So that's what people care about. 0:02:26.600 --> 0:02:29.840 We're trying to help them in their process of Okay, 0:02:29.840 --> 0:02:32.760 what kinds of stocks work in this environment? Oh, by 0:02:32.800 --> 0:02:35.280 the way, when we skew from these different outcomes, you 0:02:35.360 --> 0:02:37.480 need to be ready to pivot towards different types of 0:02:37.560 --> 0:02:40.880 securities right now, like our house call is it's a 0:02:40.880 --> 0:02:45.000 soft landing goldilocks outcome. We're not that confident that we 0:02:45.040 --> 0:02:46.760 want to make that bet fully, like, we think it's 0:02:46.760 --> 0:02:49.920 still late cycle, which means quality okay, large caps over 0:02:50.280 --> 0:02:53.960 small caps. Still, we like staples over discretionary. We have 0:02:54.040 --> 0:02:57.600 two defensive sectors overweight utilities and staples because that kind 0:02:57.600 --> 0:03:00.160 of protects against slowing growth risk. So there's a bunch 0:03:00.200 --> 0:03:02.560 of different things, but the main factor. 0:03:02.240 --> 0:03:03.480 That's been working is quality. 0:03:03.600 --> 0:03:05.679 Quality has been the most consistent factor, and we don't 0:03:05.680 --> 0:03:06.400 see that changing. 0:03:06.600 --> 0:03:07.840 I just want to say that if you wrote a 0:03:07.880 --> 0:03:09.880 headline saying nobody knows anything, I mean, we could do 0:03:09.880 --> 0:03:12.600 that every day, but it probably wouldn't really gain that 0:03:12.680 --> 0:03:16.000 much attraction. I am wondering if there are certain areas 0:03:16.040 --> 0:03:18.680 that would win in either scenario, the fifty four hundred 0:03:19.080 --> 0:03:20.200 or the forty five hundred. 0:03:20.840 --> 0:03:22.680 Well, I think that we laid it out once again, 0:03:22.840 --> 0:03:25.640 that's our bare case. A forty five hundred scenario is 0:03:26.120 --> 0:03:27.760 that's not really our bare case. That's our base case 0:03:27.800 --> 0:03:30.440 for a year end Originally that obviously has proven to 0:03:30.440 --> 0:03:33.640 be wrong, mainly because of multiples. Right, I think this 0:03:33.720 --> 0:03:36.720 is the main thing said that people have either gotten 0:03:36.800 --> 0:03:38.680 right or wrong in the last twelve months. Is that 0:03:39.080 --> 0:03:43.120 I mean, a twenty one multiple is in the top 0:03:43.200 --> 0:03:45.480 death style of the last eighty years. I mean, that 0:03:45.600 --> 0:03:48.880 is an expensive multiple. So the question I think investors 0:03:48.920 --> 0:03:51.400 have to ask themselves is is that a fair multiple 0:03:51.440 --> 0:03:54.400 to be paying well in the goaldilocks, you know, perfect 0:03:54.440 --> 0:03:57.360 soft landing. I think that's plausible, but that's where we're trading, 0:03:57.360 --> 0:03:59.360 and that's why there's not a lot of upside at 0:03:59.360 --> 0:04:00.200 the index level. 0:04:00.240 --> 0:04:03.400 Which raises this question, are there specific sectors that win 0:04:03.640 --> 0:04:06.720 regardless of the overall index? Do you see certain areas 0:04:06.720 --> 0:04:09.680 that are kind of independent of this overall shift of 0:04:09.720 --> 0:04:12.480 whether there is this momentum and international money that pours 0:04:12.520 --> 0:04:14.600 in and keeps valuations high and sends them higher. 0:04:14.680 --> 0:04:15.760 It's large camp quality. 0:04:15.880 --> 0:04:17.560 I mean that, I mean that is what's continues to 0:04:17.560 --> 0:04:19.040 and by the way, it's not just high growth. It's 0:04:19.080 --> 0:04:21.800 also cyclicals can work in that. But it's still up 0:04:21.839 --> 0:04:24.120 the quality curve, and we show it in the note 0:04:24.200 --> 0:04:26.680 very clearly. I mean, it's just it's it's the it's 0:04:26.720 --> 0:04:29.600 been the best carry factor for the last year, year 0:04:29.640 --> 0:04:31.920 and a half, which is a classic late cycle winner, 0:04:32.040 --> 0:04:35.120 which is where we are so you know, don't overthink 0:04:35.160 --> 0:04:37.440 that and don't try to be cute and say, well, 0:04:37.440 --> 0:04:39.479 I'm going to jump over here because I think there's 0:04:39.520 --> 0:04:42.000 better returns there could be. Look in the small cap 0:04:42.080 --> 0:04:45.039 and in the lower quality areas. You can't own nothing. 0:04:45.080 --> 0:04:47.120 I mean, but it's very idiosyncratic. 0:04:47.240 --> 0:04:49.520 It's very idiosyncratic. It's not a. 0:04:49.200 --> 0:04:51.760 Factor that's carrying well, it's a okay, I have a 0:04:51.760 --> 0:04:54.800 stock specific idea. It's a low quality stock potentially that 0:04:54.920 --> 0:04:56.839 has a very unique story to itself. 0:04:57.040 --> 0:04:58.600 Next me still for this mall case. You know it's 0:04:58.600 --> 0:05:01.680 tomorrow afternoon. We get numbers from and Vidia, megacap Tech. 0:05:02.000 --> 0:05:05.120 What supports that fifty four hundred? What supports it for you? 0:05:05.240 --> 0:05:07.119 Is it mega cap tech? The in videos of this world? 0:05:07.200 --> 0:05:07.960 Is it elsewhere? 0:05:08.120 --> 0:05:11.400 Well, it's basically you're assuming that multiple stay elevated. 0:05:11.480 --> 0:05:11.640 Right. 0:05:12.279 --> 0:05:15.040 You know, we didn't change our earnings forecasts in this report. 0:05:15.240 --> 0:05:18.040 We've had this sort of boom idea that we had 0:05:18.200 --> 0:05:20.760 the boom bust thesis for a while. We probably were 0:05:20.760 --> 0:05:23.240 early in calling for a recovery and earnings this year 0:05:23.279 --> 0:05:25.560 in twenty twenty five, so that didn't change. So you 0:05:25.600 --> 0:05:27.480 have earnings coming from a lot of different groups. Now, 0:05:27.480 --> 0:05:31.600 I would say the biggest contributors have been technology. Energy 0:05:31.680 --> 0:05:35.040 has been a big contributor surprisingly, industrials because of all 0:05:35.040 --> 0:05:37.600 the spending that's going on fiscally. So those are three 0:05:37.600 --> 0:05:40.200 major sectors that are contributed to the earning story. But 0:05:40.320 --> 0:05:43.919 ultimately the fifty four hundred is being supported by policy, 0:05:44.200 --> 0:05:48.200 right by very loose fiscal and monetary policy. Now you 0:05:48.240 --> 0:05:50.680 may say, well, monetary policy is tight, not really. I 0:05:50.680 --> 0:05:52.680 mean we have an incredible amount of liquidity coming in 0:05:52.720 --> 0:05:55.440 to pay for that fiscal So, to me, the risk 0:05:55.520 --> 0:05:57.800 in the story for the next six to twelve months 0:05:57.920 --> 0:06:02.960 is do the market start to balk at this unsustainable 0:06:03.240 --> 0:06:06.720 fiscal policy and the way that they're funding it. 0:06:06.800 --> 0:06:08.600 And we wrote about this, you know in detail. 0:06:08.920 --> 0:06:12.000 We have these liquidity provisions in place now, the reverse 0:06:12.040 --> 0:06:15.000 repo which everybody knows about. The Treasury General Account can 0:06:15.040 --> 0:06:17.920 be drained if necessary to pay for fiscal stemus in 0:06:17.960 --> 0:06:20.080 a budget if they need to. And the Fed has 0:06:20.080 --> 0:06:22.960 already said they're going to start tapering QT. Well, that's 0:06:23.040 --> 0:06:26.479 like a trillion dollars of liquidity that's pretty loose right 0:06:26.520 --> 0:06:28.920 to pay for the fiscal So to me, does of 0:06:28.960 --> 0:06:30.480 the market and I think this is. This is something 0:06:30.520 --> 0:06:34.520 we're watching very carefully. Last fall, when multiples came down hard, 0:06:34.600 --> 0:06:36.840 it was because rates were going up due to term 0:06:36.839 --> 0:06:40.440 premium widening, meaning the bond market we're starting to push 0:06:40.520 --> 0:06:43.080 back on this strategy right now. 0:06:42.960 --> 0:06:43.919 That's not a problem. 0:06:44.200 --> 0:06:45.960 So one of the things we're going to be watching this, 0:06:46.200 --> 0:06:48.240 you know, to change our view on how things trade 0:06:48.240 --> 0:06:50.320 at the index level is does the term premium start 0:06:50.360 --> 0:06:51.119 to widen again? 0:06:51.240 --> 0:06:53.080 We don't know, but that's what we're gonna be watching. 0:06:53.080 --> 0:06:55.400 So big risk factor is in the bond market, and 0:06:55.400 --> 0:06:59.200 in the bond market, the big focus is November. Does 0:06:59.200 --> 0:07:01.400 this have a political twist to it? An election co 0:07:01.720 --> 0:07:02.400 embedded in it? 0:07:02.720 --> 0:07:05.400 Well, I mean yes and no, because I wouldn't say 0:07:05.480 --> 0:07:08.720 either party has shown any fiscal discipline right So in 0:07:08.760 --> 0:07:10.840 other words, I think we're going to get a strong 0:07:11.200 --> 0:07:14.520 fiscal support no matter who wins the election, both in 0:07:14.600 --> 0:07:18.560 Congress or at the presidential level. The real question for 0:07:18.680 --> 0:07:21.240 markets is how does it get funded? 0:07:21.600 --> 0:07:22.400 How is it funded? 0:07:22.720 --> 0:07:25.440 Can they fund it at a reasonable rate? Right now, 0:07:25.520 --> 0:07:29.600 the bondb market seems very relaxed about that feature, which 0:07:29.640 --> 0:07:31.280 is why multiples have expanded again. 0:07:31.480 --> 0:07:33.640 So if the bond market stays relaxed about this, but 0:07:33.640 --> 0:07:35.360 there's a lot of people prick that it will and 0:07:35.360 --> 0:07:37.560 believe me, I get very excited about auctions, but every 0:07:37.560 --> 0:07:40.280 week people tell me that I shouldn't because there's plenty 0:07:40.320 --> 0:07:44.200 of interest at these levels. If there isn't pushback, then 0:07:44.240 --> 0:07:46.240 fifty four hundred is that too conservative? 0:07:46.600 --> 0:07:47.560 Maybe it could be. 0:07:47.640 --> 0:07:49.680 I mean, look, I can make a case for seventeen times, 0:07:49.720 --> 0:07:52.000 which is when our target was originally for this year, 0:07:52.120 --> 0:07:54.200 seventeen eighteen times. I can make a case for twenty 0:07:54.240 --> 0:07:55.880 one times. I can make case for twenty two times. 0:07:55.920 --> 0:07:58.840 That's the problem, right, We don't know, so that's why 0:07:58.840 --> 0:07:59.920 we have a wider skew. 0:08:00.200 --> 0:08:02.120 And I would say this Lisa, that. 0:08:03.040 --> 0:08:06.840 The target will be more determined, probably by multiples than 0:08:07.240 --> 0:08:10.200 we're going to be wildly surprised on earnings. Okay, unless 0:08:10.200 --> 0:08:12.520 it's recession, of course, then you'll be surprising the downside. 0:08:12.560 --> 0:08:14.800 But I don't like the earnings haven't really moved that 0:08:14.880 --> 0:08:17.040 much for twenty twenty four and twenty five. Right, if 0:08:17.040 --> 0:08:19.680 you think about since October, which is with the low 0:08:19.760 --> 0:08:23.880 last fall, twenty twenty four, earnings estimates are a couple percent. 0:08:24.400 --> 0:08:26.640 You know, the markets at twenty five thirty. So it's 0:08:26.720 --> 0:08:29.360 all multiple. So this is why you just need to 0:08:29.400 --> 0:08:32.439 be alert to things changing potentially in the bombing market 0:08:32.480 --> 0:08:34.560 first and then that will feed into the equity multiples. 0:08:34.600 --> 0:08:36.520 When you talk about fiscal spending, to go back to 0:08:36.600 --> 0:08:40.520 John's point earlier in the election, it's very different what 0:08:40.600 --> 0:08:42.959 the fiscal spending may be used on depending on who 0:08:42.960 --> 0:08:45.960 wins the White House. You're talking about potentially industrials, the 0:08:45.960 --> 0:08:48.600 green energy economy. This is a new industrial policy from 0:08:48.600 --> 0:08:51.280 the Biden administration that could continue or it could stop 0:08:51.280 --> 0:08:53.600 short if it's Trump. How are you thinking about twenty 0:08:53.600 --> 0:08:54.120 twenty five. 0:08:54.520 --> 0:08:56.679 Well, I mean, look, I think the industrial policy will 0:08:56.720 --> 0:08:58.959 remain strong. I mean that's our reshoring thing, which is 0:08:59.040 --> 0:09:01.480 which was part of the Trumpet iministration. So half of 0:09:01.520 --> 0:09:04.360 the industrial policy is potentially green energy and half of it, 0:09:04.360 --> 0:09:07.120 I would say, is reshoring in the de globalization trend. 0:09:07.200 --> 0:09:09.240 So there's going to be spending either way. 0:09:09.360 --> 0:09:12.400 It may be redirected, like I could see maybe the 0:09:12.520 --> 0:09:16.439 energy policy shifting back towards traditional energy, but I would 0:09:16.440 --> 0:09:20.800 be surprised as spending is curtailed in a meaningful way. 0:09:20.440 --> 0:09:23.280 From that standpoint, I think we will see changes or 0:09:23.320 --> 0:09:25.679 differences is in maybe in the tariffs sol though recently 0:09:25.720 --> 0:09:28.160 that seemed to be more aligned. And then, of course 0:09:28.200 --> 0:09:30.640 immigration is a big one, and that was a huge 0:09:30.640 --> 0:09:34.280 surprise this year that really nobody saw coming around the 0:09:34.440 --> 0:09:37.320 label to positive labor shock from immigration. So to me, 0:09:37.400 --> 0:09:40.200 that's a while. That's probably the single biggest wildcard depending on. 0:09:40.240 --> 0:09:40.920 Who wins the election. 0:09:41.200 --> 0:09:43.240 Bigger not tighter is if you coming from men and 0:09:43.320 --> 0:09:45.600 Zenner and the team more and Stanley, this economy can 0:09:45.880 --> 0:09:49.600 grow without it getting tighter and generating inflation pressure. Are 0:09:49.600 --> 0:09:51.440 you saying that could flip the other way pretty quickly 0:09:51.559 --> 0:09:52.720 based on the outcome the election. 0:09:53.200 --> 0:09:56.200 I think that well, depending on how things behave if 0:09:56.240 --> 0:09:57.280 policy really changes. 0:09:57.320 --> 0:10:00.000 But yeah, sure, if you if you all of a sudden. 0:09:59.760 --> 0:10:03.960 Sh borders down and you know, Trump's talking about deporting people, 0:10:04.520 --> 0:10:06.680 that would be a negative labor shock, and then we'd 0:10:06.679 --> 0:10:09.120 be in a reverse situation. So look, right now, I 0:10:09.160 --> 0:10:11.000 think the election is literally a fifty to fifty I mean, 0:10:11.000 --> 0:10:13.120 I mean the polls are right there forty eight, forty 0:10:13.160 --> 0:10:15.360 nine to fifty percent for both sides. 0:10:15.400 --> 0:10:17.680 So this is this is not an issue yet. We've 0:10:17.679 --> 0:10:18.480 talked about this in the. 0:10:18.440 --> 0:10:21.920 Note two, which is that volatility and election years typically 0:10:21.920 --> 0:10:24.760 doesn't start picking up until August September, so I think 0:10:24.760 --> 0:10:26.199 it'll be okay for the next month. 0:10:26.280 --> 0:10:27.480 Or this is not going to be a topic, but 0:10:27.559 --> 0:10:27.880 it can 0:10:27.920 --> 0:10:31.720 Come at us quickly, probably post the conventions.