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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Daybreak.

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Speaker 1: I'm Nathan Hager alongside Karen Moscow, getting you ready for

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Speaker 1: the trading day ahead. Our guest this morning for that,

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Speaker 1: Mike Wilson, chief US equity strategist at Morgan Stanley. Great

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Speaker 1: to have you back on with us on daybreak this morning, Mike.

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Speaker 1: And it looks like a lot of investors, particularly retail investors,

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Speaker 1: took your advice to buy the dip after the Moodies

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Speaker 1: down grade last Friday. Now, with futures moving a little

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Speaker 1: bit lower this morning, I guess the question is now

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Speaker 1: what for this market? Good morning, Good morning, Nathan.

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Speaker 2: Yeah, Well, I mean part of the sort of buying

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Speaker 2: the dip is a factor of the retail community who

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Speaker 2: has been actively buying every dip really for the last

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Speaker 2: two years. In fact, they bought right through you know,

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Speaker 2: liberation week I would call it, you know, that whole

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Speaker 2: kind of episode. They didn't really flinch. And there's also

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Speaker 2: the systematic strategies, the CTA's and of course corporate buyers.

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Speaker 2: So there's just there's just a lot of demand, uh

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Speaker 2: that is just coming in and I don't see that

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Speaker 2: really changing in the near term. It doesn't mean we're

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Speaker 2: going straight up by the way they'll be, They'll be

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Speaker 2: pulledbacks and whatnot. But I do think going back to

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Speaker 2: the Moody's downgrade specifically, it was the third agency that

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Speaker 2: has downgraded US debt, and it was really the first

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Speaker 2: two that had a forced impact on you know, folks

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Speaker 2: having to sell because of that downgrade. So we just

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Speaker 2: felt like that was not going to be you know,

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Speaker 2: a major reason for for stocks to sell off. Now.

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Speaker 2: I do think the bond that bond yields about four

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Speaker 2: and a half percent on US treasuries. I do think

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Speaker 2: if that, if that persists and we go higher, that

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Speaker 2: that could lead to some corrective activity.

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Speaker 1: Okay, as as far as the Moody's downgrade goes, though, Mike, uh,

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Speaker 1: does it feed into this narrative that we've seen play

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Speaker 1: out in the market following the Liberation announcement that the

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Speaker 1: US might be a shakier buy for foreign investors. What's

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Speaker 1: your view on that.

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Speaker 2: I do think there's some there's some truth to that,

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Speaker 2: but I mean, I don't know if it's directly related to,

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Speaker 2: you know, the downgrade of US debt. I think there's

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Speaker 2: a lot of things going on that that suggests that

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Speaker 2: foreign investors may want to pair back their US dollar

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Speaker 2: asset investments. Number one, mean they just got too much

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Speaker 2: of them. I mean, you know, over the last twenty years,

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Speaker 2: they've acquired a lot of US assets, both treasuries and stocks,

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Speaker 2: and we know that, you know, a lot of these

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Speaker 2: indices are imbalanced because of that. So some of that,

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Speaker 2: you know, rebalancing is a good idea. And I would

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Speaker 2: just point out that a lot of that rebalancing has

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Speaker 2: already happened just through price. Right A lot of the

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Speaker 2: foreign stocks in US dollar terms did quite a bit

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Speaker 2: better than the US stocks in the first quarter of

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Speaker 2: the year. So as I like to say, you know,

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Speaker 2: the rebalancing happened through the price channel. And now the

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Speaker 2: question is are foreign investors comfortable more comfortable now where

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Speaker 2: we are today? I mean, you know they own less.

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Speaker 2: Is that enough? I think it's probably fine where they are.

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Speaker 2: We focus on the fundamentals, Nathan, as you know, I

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Speaker 2: mean earnings revision breath bottomed you know, about a month ago,

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Speaker 2: both on an absolute and on a relative basis, meaning

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Speaker 2: US stocks are showing better earnings revision breath now and ultimately,

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Speaker 2: if that's going to continue, which we think it could.

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Speaker 2: Some of that, by the way, is the weaker dollar helping. Then,

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Speaker 2: you know, I would suggest that US stocks probably continue

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Speaker 2: to do as good, if not better than foreign stocks.

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Speaker 1: You mentioned the earnings breadth continuing. Of course, a lot

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Speaker 1: of what's been driving the rally once again, even in

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Speaker 1: the last few days, has been those magnificent seven names

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Speaker 1: that have been driving things for so long, sticking to

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Speaker 1: the fundamentals. How do you view those companies in terms

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Speaker 1: of their fundamentals.

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Speaker 2: Well, that's just it. I mean, you know, the reason

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Speaker 2: why those stocks have performed so well for the last

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Speaker 2: ten years is really an ear story, and it's it's

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Speaker 2: really undeniable. Now, some have shown better earnings and more

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Speaker 2: consistent earnings than others, but as a group, it's you know,

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Speaker 2: these are monopolistic type businesses, and so you know, they

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Speaker 2: they they are earners, and and that's being shown again

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Speaker 2: that the revision breath for that group in particular has

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Speaker 2: turned up again once again. Some of that is a

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Speaker 2: weaker dollar helping, But you know, they go through these

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Speaker 2: cycles where they self correct and then the earnings power

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Speaker 2: just you know, resumes, and I think you know that

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Speaker 2: so in other words, this recent snapback by the Magnificent

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Speaker 2: seven is driven by the fundamentals. This is not just

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Speaker 2: passive flows going back in there. They are showing good

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Speaker 2: relative or inch of vision breath.

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Speaker 1: And in terms of the broader market, do you see

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Speaker 1: that that fundamental story continuing even with some of this

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Speaker 1: uncertainty around trade negotiations continuing.

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Speaker 2: Well, we've had a big snapback, So I think, you know,

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Speaker 2: we're the view that we're probably kind of back on

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Speaker 2: track to our original forecast for this year, which was

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Speaker 2: that the first half would be tough, and our original

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Speaker 2: range was fifty five hundred and sixty one hundred. We're

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Speaker 2: right smack dab in the middle of that again. But

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Speaker 2: we do still think, you know, we're going to break

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Speaker 2: out of that range in the second half. And this

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Speaker 2: is all related to the sequencing of the policy. A

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Speaker 2: few other things as well, AI camp Bax you know,

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Speaker 2: decelerated in the first quarter, but all those things now

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Speaker 2: sort of stabilized. And if you think about, you know,

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Speaker 2: this administration, they came in doing all the sort of

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Speaker 2: growth negative policy changes the start. You could say the

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Speaker 2: president is acting like a new CEO. He's coming in

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Speaker 2: and sort of kitchen sinking it. And then in the

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Speaker 2: second half is when the more positive strategies or policies

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Speaker 2: will start to flow through things like deregulation. We think

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Speaker 2: they'll be success in passing this tax bill or budget reconciliation.

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Speaker 2: And then of course we can get some of the

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Speaker 2: animal spirits going to people we're excited about four or

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Speaker 2: five months ago, and that should lead to better growth

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Speaker 2: in twenty twenty six. And I want to come back

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Speaker 2: again to AI camp backs. AI campbacks is probably detail,

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Speaker 2: but it's not going negative. And what we're looking forward

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Speaker 2: to now on AI is the productivity benefits that will

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Speaker 2: probably start to come through next year. The market will

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Speaker 2: start to figure that out in the second half of

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Speaker 2: twenty twenty five.

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Speaker 1: Only got about thirty seven seconds left, Mike. But does

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Speaker 1: that positivity in the second half continue even with the

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Speaker 1: FED on the sideline? So you keep hearing a lot

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Speaker 1: of FED officials hinting that they may have to stay

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Speaker 1: on the sidelines for a little longer.

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Speaker 2: Well, glad you brought that up. I mean, you know,

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Speaker 2: our economists probably are you have the least amount of

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Speaker 2: cut price in of the major folks out there. You know,

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Speaker 2: we have no cuts pricing for this year, but then

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Speaker 2: they have seven cuts price in for next year. So

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Speaker 2: it's coming, is the bottom line. And once again, even

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Speaker 2: if there's no cuts in the second half of this year,

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Speaker 2: the market will start to look forward to those cuts

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Speaker 2: next year. So I think the FED is another example

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Speaker 2: of where the rate of change is going to start

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Speaker 2: to turn into a tailwind at some point in the

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Speaker 2: next six months.