WEBVTT - Morgan Stanley's Mike Wilson Talks FOMC Preview, Tech Trade

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, Radio News. This is Bloomberg Daybreak

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<v Speaker 1>on Nathan Hager alongside Karen Moscow. Getting ready for a

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<v Speaker 1>pretty important day for the market when we're waiting to

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<v Speaker 1>hear from the FED, Meta and Microsoft. Let's hear now

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<v Speaker 1>from Mike Wilson, chief US equity strategist, chief investment officer

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<v Speaker 1>at Morgan Stanley. Really great to have you back with

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<v Speaker 1>us on daybreak, Mike, on a morning where we're seeing

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<v Speaker 1>a modest lift to the futures this morning for the

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<v Speaker 1>most part, but after a big sell off over the

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<v Speaker 1>last few days, particularly in the chip space. What kind

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<v Speaker 1>of pressure does that put on the hyperscalers while we

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<v Speaker 1>wait to hear from them this afternoon?

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<v Speaker 2>Good morning, Good morning. Yeah. I think the pressure is

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<v Speaker 2>still on the semicon enter companies more than the hyperscalers,

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<v Speaker 2>because the hyperscalers are in control of their destiny. I mean,

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<v Speaker 2>they can decide to spend or not spend, and I

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<v Speaker 2>think that's where the uncertainty now lies. The market has

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<v Speaker 2>been sending a very direct signal to the hyperscalers, and

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<v Speaker 2>that is, if you spend more money, your stock is

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<v Speaker 2>going down. And so I think that What remains to

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<v Speaker 2>be seen now for the rest of this earning season

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<v Speaker 2>is are those companies the spenders going to maybe curtail

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<v Speaker 2>some of their enthusiasm for we're spending more money. We'll

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<v Speaker 2>see you know, we didn't see that last week with Google.

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<v Speaker 2>You know, maybe we'll see that this week with the

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<v Speaker 2>other hyperscalers. But generally speaking, the semiconductor stocks have recognized that, hey,

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<v Speaker 2>the rate of change, you know, the second derivative of

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<v Speaker 2>this spending, is probably going to decelerate at this point,

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<v Speaker 2>not you know, go down in negative terms, but deceleration

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<v Speaker 2>of growth. And let's be honest, I mean, those stocks

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<v Speaker 2>just got out of bounds and so they had to correct.

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<v Speaker 2>And that's what's going on.

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<v Speaker 1>In your note this week, you talked a bit about

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<v Speaker 1>seeing a rotation to quality amid what's happening in the

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<v Speaker 1>AI trade story. Where do you see quality in this

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<v Speaker 1>market right now?

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<v Speaker 2>Mike, Yeah, Well, first of all, that call is a

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<v Speaker 2>little bit more, you know, I guess not just around

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<v Speaker 2>this correction that we're seeing in the in the semi

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<v Speaker 2>other stocks. This is a transition from what we call

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<v Speaker 2>early cycle to mid cycle, and we've we've started to

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<v Speaker 2>see quality the quality factors start to outperform over the

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<v Speaker 2>last month. And that makes sense to us because when

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<v Speaker 2>the rate of change and erning's revisions start to peak

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<v Speaker 2>out after you know, say a recovery from a recession,

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<v Speaker 2>which is what we've had over last year, then we

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<v Speaker 2>see a transition to quality. And that's not a sector call,

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<v Speaker 2>that's a idiosyncratic call. So in other words, we see

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<v Speaker 2>quality outperforming now within each sector. And in the case

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<v Speaker 2>of technology is a little tricky because historically, you know,

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<v Speaker 2>software has been the area of quality, and so when

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<v Speaker 2>you have these transitions, what happens is people go right

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<v Speaker 2>back to software because software is you know, threatened now

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<v Speaker 2>by the invention of AI. That is not an easy call.

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<v Speaker 2>And so what we're going to see now is like

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<v Speaker 2>even within semis or even within software, we're going to

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<v Speaker 2>see the higher quality stocks start to outperform the lower

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<v Speaker 2>quality stocks. Same thing, and retail, same thing, and you know, healthcare,

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<v Speaker 2>same thing in industrials. And so we see this as

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<v Speaker 2>a kind of a call across the market, not a

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<v Speaker 2>not an intersector call.

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<v Speaker 1>So when it comes to that, Mike, does that point

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<v Speaker 1>to a broadening when it comes to what could potentially

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<v Speaker 1>outperform in this market and possibly leading to further gains

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<v Speaker 1>more broadly on the index level.

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<v Speaker 2>Yeah, I mean the broadening has been happening really off

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<v Speaker 2>and on this year. Like before the war, we definitely

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<v Speaker 2>saw a broadening. Then the war happened and oil prices

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<v Speaker 2>spiked and the broad it got narrow again. And then

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<v Speaker 2>the broadening began to expand in May, and we think

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<v Speaker 2>that continues even with a rotation towards quality, we can

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<v Speaker 2>see it broadening. And yesterday is a great example. The

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<v Speaker 2>equal weight to SMP made an all time high yesterday.

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<v Speaker 2>It was up I think about half a percent. And

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<v Speaker 2>so this is this is really the story of twenty

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<v Speaker 2>twenty six that continues even with the transition to quality.

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<v Speaker 2>We think more and more stocks are going to participate

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<v Speaker 2>because the earning story has been great really this year,

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<v Speaker 2>cross many more than It's not just tech stocks. There's

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<v Speaker 2>actually a lot of stocks that have been growing earnings

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<v Speaker 2>for the first time in three years.

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<v Speaker 1>Only have about thirty seconds left here. We got a

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<v Speaker 1>FED decision as well, given what's happened with communication in

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<v Speaker 1>the FED. Does that make things a little trickier for

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<v Speaker 1>equity investors?

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<v Speaker 2>It definitely makes things noisier and I think that's part

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<v Speaker 2>of the story too. We're having this transition to early

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<v Speaker 2>to mid cycle. We're having a transition, we don't know

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<v Speaker 2>what's going on the war yet, and then we're having

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<v Speaker 2>a transition with the FED. And this was always something

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<v Speaker 2>I think a lot of people were highlighting this, including us,

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<v Speaker 2>that when you get in a transition at the FED

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<v Speaker 2>with a new chair, the markets tend to get a

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<v Speaker 2>little bit disrupted, and we're going through that still. I

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<v Speaker 2>don't know if it's going to be solved today. Even

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<v Speaker 2>if the FED does nothing today, I'm not sure that

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<v Speaker 2>answers the question about who Kevin worsh is, what the

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<v Speaker 2>reaction function is going to be doing going forward, and

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<v Speaker 2>so I think this overhanging is going to be with

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<v Speaker 2>us for at least another month or so.

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<v Speaker 1>I really appreciate you coming on with us, Mike again,

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<v Speaker 1>thanks for joining us. That is Mike Wilson, chief US

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<v Speaker 1>equity strategist, chief investment officer at Morgan Stanley