Speaker 1: Bloomberg Audio Studios, Podcasts, Radio News. This is Bloomberg Daybreak
Speaker 1: on Nathan Hager alongside Karen Moscow. Getting ready for a
Speaker 1: pretty important day for the market when we're waiting to
Speaker 1: hear from the FED, Meta and Microsoft. Let's hear now
Speaker 1: from Mike Wilson, chief US equity strategist, chief investment officer
Speaker 1: at Morgan Stanley. Really great to have you back with
Speaker 1: us on daybreak, Mike, on a morning where we're seeing
Speaker 1: a modest lift to the futures this morning for the
Speaker 1: most part, but after a big sell off over the
Speaker 1: last few days, particularly in the chip space. What kind
Speaker 1: of pressure does that put on the hyperscalers while we
Speaker 1: wait to hear from them this afternoon?
Speaker 2: Good morning, Good morning. Yeah. I think the pressure is
Speaker 2: still on the semicon enter companies more than the hyperscalers,
Speaker 2: because the hyperscalers are in control of their destiny. I mean,
Speaker 2: they can decide to spend or not spend, and I
Speaker 2: think that's where the uncertainty now lies. The market has
Speaker 2: been sending a very direct signal to the hyperscalers, and
Speaker 2: that is, if you spend more money, your stock is
Speaker 2: going down. And so I think that What remains to
Speaker 2: be seen now for the rest of this earning season
Speaker 2: is are those companies the spenders going to maybe curtail
Speaker 2: some of their enthusiasm for we're spending more money. We'll
Speaker 2: see you know, we didn't see that last week with Google.
Speaker 2: You know, maybe we'll see that this week with the
Speaker 2: other hyperscalers. But generally speaking, the semiconductor stocks have recognized that, hey,
Speaker 2: the rate of change, you know, the second derivative of
Speaker 2: this spending, is probably going to decelerate at this point,
Speaker 2: not you know, go down in negative terms, but deceleration
Speaker 2: of growth. And let's be honest, I mean, those stocks
Speaker 2: just got out of bounds and so they had to correct.
Speaker 2: And that's what's going on.
Speaker 1: In your note this week, you talked a bit about
Speaker 1: seeing a rotation to quality amid what's happening in the
Speaker 1: AI trade story. Where do you see quality in this
Speaker 1: market right now?
Speaker 2: Mike, Yeah, Well, first of all, that call is a
Speaker 2: little bit more, you know, I guess not just around
Speaker 2: this correction that we're seeing in the in the semi
Speaker 2: other stocks. This is a transition from what we call
Speaker 2: early cycle to mid cycle, and we've we've started to
Speaker 2: see quality the quality factors start to outperform over the
Speaker 2: last month. And that makes sense to us because when
Speaker 2: the rate of change and erning's revisions start to peak
Speaker 2: out after you know, say a recovery from a recession,
Speaker 2: which is what we've had over last year, then we
Speaker 2: see a transition to quality. And that's not a sector call,
Speaker 2: that's a idiosyncratic call. So in other words, we see
Speaker 2: quality outperforming now within each sector. And in the case
Speaker 2: of technology is a little tricky because historically, you know,
Speaker 2: software has been the area of quality, and so when
Speaker 2: you have these transitions, what happens is people go right
Speaker 2: back to software because software is you know, threatened now
Speaker 2: by the invention of AI. That is not an easy call.
Speaker 2: And so what we're going to see now is like
Speaker 2: even within semis or even within software, we're going to
Speaker 2: see the higher quality stocks start to outperform the lower
Speaker 2: quality stocks. Same thing, and retail, same thing, and you know, healthcare,
Speaker 2: same thing in industrials. And so we see this as
Speaker 2: a kind of a call across the market, not a
Speaker 2: not an intersector call.
Speaker 1: So when it comes to that, Mike, does that point
Speaker 1: to a broadening when it comes to what could potentially
Speaker 1: outperform in this market and possibly leading to further gains
Speaker 1: more broadly on the index level.
Speaker 2: Yeah, I mean the broadening has been happening really off
Speaker 2: and on this year. Like before the war, we definitely
Speaker 2: saw a broadening. Then the war happened and oil prices
Speaker 2: spiked and the broad it got narrow again. And then
Speaker 2: the broadening began to expand in May, and we think
Speaker 2: that continues even with a rotation towards quality, we can
Speaker 2: see it broadening. And yesterday is a great example. The
Speaker 2: equal weight to SMP made an all time high yesterday.
Speaker 2: It was up I think about half a percent. And
Speaker 2: so this is this is really the story of twenty
Speaker 2: twenty six that continues even with the transition to quality.
Speaker 2: We think more and more stocks are going to participate
Speaker 2: because the earning story has been great really this year,
Speaker 2: cross many more than It's not just tech stocks. There's
Speaker 2: actually a lot of stocks that have been growing earnings
Speaker 2: for the first time in three years.
Speaker 1: Only have about thirty seconds left here. We got a
Speaker 1: FED decision as well, given what's happened with communication in
Speaker 1: the FED. Does that make things a little trickier for
Speaker 1: equity investors?
Speaker 2: It definitely makes things noisier and I think that's part
Speaker 2: of the story too. We're having this transition to early
Speaker 2: to mid cycle. We're having a transition, we don't know
Speaker 2: what's going on the war yet, and then we're having
Speaker 2: a transition with the FED. And this was always something
Speaker 2: I think a lot of people were highlighting this, including us,
Speaker 2: that when you get in a transition at the FED
Speaker 2: with a new chair, the markets tend to get a
Speaker 2: little bit disrupted, and we're going through that still. I
Speaker 2: don't know if it's going to be solved today. Even
Speaker 2: if the FED does nothing today, I'm not sure that
Speaker 2: answers the question about who Kevin worsh is, what the
Speaker 2: reaction function is going to be doing going forward, and
Speaker 2: so I think this overhanging is going to be with
Speaker 2: us for at least another month or so.
Speaker 1: I really appreciate you coming on with us, Mike again,
Speaker 1: thanks for joining us. That is Mike Wilson, chief US
Speaker 1: equity strategist, chief investment officer at Morgan Stanley