WEBVTT - Morgan Stanley's Mike Wilson Talks Moody's Rating Cut

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Daybreak.

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<v Speaker 1>I'm Nathan Hager alongside Karen Moscow, getting you ready for

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<v Speaker 1>the trading day ahead. Our guest this morning for that,

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<v Speaker 1>Mike Wilson, chief US equity strategist at Morgan Stanley. Great

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<v Speaker 1>to have you back on with us on daybreak this morning, Mike.

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<v Speaker 1>And it looks like a lot of investors, particularly retail investors,

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<v Speaker 1>took your advice to buy the dip after the Moodies

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<v Speaker 1>down grade last Friday. Now, with futures moving a little

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<v Speaker 1>bit lower this morning, I guess the question is now

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<v Speaker 1>what for this market? Good morning, Good morning, Nathan.

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<v Speaker 2>Yeah, Well, I mean part of the sort of buying

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<v Speaker 2>the dip is a factor of the retail community who

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<v Speaker 2>has been actively buying every dip really for the last

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<v Speaker 2>two years. In fact, they bought right through you know,

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<v Speaker 2>liberation week I would call it, you know, that whole

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

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<v Speaker 2>the systematic strategies, the CTA's and of course corporate buyers.

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<v Speaker 2>So there's just there's just a lot of demand, uh

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<v Speaker 2>that is just coming in and I don't see that

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

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<v Speaker 2>going straight up by the way they'll be, They'll be

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<v Speaker 2>pulledbacks and whatnot. But I do think going back to

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<v Speaker 2>the Moody's downgrade specifically, it was the third agency that

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<v Speaker 2>has downgraded US debt, and it was really the first

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<v Speaker 2>two that had a forced impact on you know, folks

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<v Speaker 2>having to sell because of that downgrade. So we just

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<v Speaker 2>felt like that was not going to be you know,

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<v Speaker 2>a major reason for for stocks to sell off. Now.

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<v Speaker 2>I do think the bond that bond yields about four

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<v Speaker 2>and a half percent on US treasuries. I do think

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<v Speaker 2>if that, if that persists and we go higher, that

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<v Speaker 2>that could lead to some corrective activity.

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<v Speaker 1>Okay, as as far as the Moody's downgrade goes, though, Mike, uh,

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<v Speaker 1>does it feed into this narrative that we've seen play

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<v Speaker 1>out in the market following the Liberation announcement that the

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<v Speaker 1>US might be a shakier buy for foreign investors. What's

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<v Speaker 1>your view on that.

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<v Speaker 2>I do think there's some there's some truth to that,

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

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

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<v Speaker 2>a lot of things going on that that suggests that

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<v Speaker 2>foreign investors may want to pair back their US dollar

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<v Speaker 2>asset investments. Number one, mean they just got too much

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<v Speaker 2>of them. I mean, you know, over the last twenty years,

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

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<v Speaker 2>and we know that, you know, a lot of these

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<v Speaker 2>indices are imbalanced because of that. So some of that,

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<v Speaker 2>you know, rebalancing is a good idea. And I would

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<v Speaker 2>just point out that a lot of that rebalancing has

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<v Speaker 2>already happened just through price. Right A lot of the

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<v Speaker 2>foreign stocks in US dollar terms did quite a bit

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<v Speaker 2>better than the US stocks in the first quarter of

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<v Speaker 2>the year. So as I like to say, you know,

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<v Speaker 2>the rebalancing happened through the price channel. And now the

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<v Speaker 2>question is are foreign investors comfortable more comfortable now where

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<v Speaker 2>we are today? I mean, you know they own less.

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

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<v Speaker 2>We focus on the fundamentals, Nathan, as you know, I

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<v Speaker 2>mean earnings revision breath bottomed you know, about a month ago,

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<v Speaker 2>both on an absolute and on a relative basis, meaning

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<v Speaker 2>US stocks are showing better earnings revision breath now and ultimately,

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

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<v Speaker 2>Some of that, by the way, is the weaker dollar helping. Then,

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<v Speaker 2>you know, I would suggest that US stocks probably continue

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<v Speaker 2>to do as good, if not better than foreign stocks.

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<v Speaker 1>You mentioned the earnings breadth continuing. Of course, a lot

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<v Speaker 1>of what's been driving the rally once again, even in

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<v Speaker 1>the last few days, has been those magnificent seven names

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<v Speaker 1>that have been driving things for so long, sticking to

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<v Speaker 1>the fundamentals. How do you view those companies in terms

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<v Speaker 1>of their fundamentals.

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

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<v Speaker 2>why those stocks have performed so well for the last

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<v Speaker 2>ten years is really an ear story, and it's it's

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<v Speaker 2>really undeniable. Now, some have shown better earnings and more

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

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<v Speaker 2>these are monopolistic type businesses, and so you know, they

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<v Speaker 2>they they are earners, and and that's being shown again

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<v Speaker 2>that the revision breath for that group in particular has

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<v Speaker 2>turned up again once again. Some of that is a

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<v Speaker 2>weaker dollar helping, But you know, they go through these

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<v Speaker 2>cycles where they self correct and then the earnings power

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<v Speaker 2>just you know, resumes, and I think you know that

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<v Speaker 2>so in other words, this recent snapback by the Magnificent

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<v Speaker 2>seven is driven by the fundamentals. This is not just

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<v Speaker 2>passive flows going back in there. They are showing good

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<v Speaker 2>relative or inch of vision breath.

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<v Speaker 1>And in terms of the broader market, do you see

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<v Speaker 1>that that fundamental story continuing even with some of this

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<v Speaker 1>uncertainty around trade negotiations continuing.

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

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<v Speaker 2>we're the view that we're probably kind of back on

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<v Speaker 2>track to our original forecast for this year, which was

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<v Speaker 2>that the first half would be tough, and our original

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<v Speaker 2>range was fifty five hundred and sixty one hundred. We're

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<v Speaker 2>right smack dab in the middle of that again. But

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<v Speaker 2>we do still think, you know, we're going to break

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<v Speaker 2>out of that range in the second half. And this

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<v Speaker 2>is all related to the sequencing of the policy. A

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<v Speaker 2>few other things as well, AI camp Bax you know,

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<v Speaker 2>decelerated in the first quarter, but all those things now

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<v Speaker 2>sort of stabilized. And if you think about, you know,

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<v Speaker 2>this administration, they came in doing all the sort of

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<v Speaker 2>growth negative policy changes the start. You could say the

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<v Speaker 2>president is acting like a new CEO. He's coming in

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<v Speaker 2>and sort of kitchen sinking it. And then in the

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<v Speaker 2>second half is when the more positive strategies or policies

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<v Speaker 2>will start to flow through things like deregulation. We think

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

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<v Speaker 2>And then of course we can get some of the

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<v Speaker 2>animal spirits going to people we're excited about four or

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<v Speaker 2>five months ago, and that should lead to better growth

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<v Speaker 2>in twenty twenty six. And I want to come back

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<v Speaker 2>again to AI camp backs. AI campbacks is probably detail,

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

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<v Speaker 2>to now on AI is the productivity benefits that will

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<v Speaker 2>probably start to come through next year. The market will

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<v Speaker 2>start to figure that out in the second half of

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<v Speaker 2>twenty twenty five.

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<v Speaker 1>Only got about thirty seven seconds left, Mike. But does

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<v Speaker 1>that positivity in the second half continue even with the

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<v Speaker 1>FED on the sideline? So you keep hearing a lot

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<v Speaker 1>of FED officials hinting that they may have to stay

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<v Speaker 1>on the sidelines for a little longer.

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<v Speaker 2>Well, glad you brought that up. I mean, you know,

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<v Speaker 2>our economists probably are you have the least amount of

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<v Speaker 2>cut price in of the major folks out there. You know,

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<v Speaker 2>we have no cuts pricing for this year, but then

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<v Speaker 2>they have seven cuts price in for next year. So

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

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

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<v Speaker 2>the market will start to look forward to those cuts

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<v Speaker 2>next year. So I think the FED is another example

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<v Speaker 2>of where the rate of change is going to start

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<v Speaker 2>to turn into a tailwind at some point in the

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<v Speaker 2>next six months.