Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Daybreak.
Speaker 1: I'm Nathan Hager alongside Karen Moscow, getting you ready for
Speaker 1: the trading day ahead. Our guest this morning for that,
Speaker 1: Mike Wilson, chief US equity strategist at Morgan Stanley. Great
Speaker 1: to have you back on with us on daybreak this morning, Mike.
Speaker 1: And it looks like a lot of investors, particularly retail investors,
Speaker 1: took your advice to buy the dip after the Moodies
Speaker 1: down grade last Friday. Now, with futures moving a little
Speaker 1: bit lower this morning, I guess the question is now
Speaker 1: what for this market? Good morning, Good morning, Nathan.
Speaker 2: Yeah, Well, I mean part of the sort of buying
Speaker 2: the dip is a factor of the retail community who
Speaker 2: has been actively buying every dip really for the last
Speaker 2: two years. In fact, they bought right through you know,
Speaker 2: liberation week I would call it, you know, that whole
Speaker 2: kind of episode. They didn't really flinch. And there's also
Speaker 2: the systematic strategies, the CTA's and of course corporate buyers.
Speaker 2: So there's just there's just a lot of demand, uh
Speaker 2: that is just coming in and I don't see that
Speaker 2: really changing in the near term. It doesn't mean we're
Speaker 2: going straight up by the way they'll be, They'll be
Speaker 2: pulledbacks and whatnot. But I do think going back to
Speaker 2: the Moody's downgrade specifically, it was the third agency that
Speaker 2: has downgraded US debt, and it was really the first
Speaker 2: two that had a forced impact on you know, folks
Speaker 2: having to sell because of that downgrade. So we just
Speaker 2: felt like that was not going to be you know,
Speaker 2: a major reason for for stocks to sell off. Now.
Speaker 2: I do think the bond that bond yields about four
Speaker 2: and a half percent on US treasuries. I do think
Speaker 2: if that, if that persists and we go higher, that
Speaker 2: that could lead to some corrective activity.
Speaker 1: Okay, as as far as the Moody's downgrade goes, though, Mike, uh,
Speaker 1: does it feed into this narrative that we've seen play
Speaker 1: out in the market following the Liberation announcement that the
Speaker 1: US might be a shakier buy for foreign investors. What's
Speaker 1: your view on that.
Speaker 2: I do think there's some there's some truth to that,
Speaker 2: but I mean, I don't know if it's directly related to,
Speaker 2: you know, the downgrade of US debt. I think there's
Speaker 2: a lot of things going on that that suggests that
Speaker 2: foreign investors may want to pair back their US dollar
Speaker 2: asset investments. Number one, mean they just got too much
Speaker 2: of them. I mean, you know, over the last twenty years,
Speaker 2: they've acquired a lot of US assets, both treasuries and stocks,
Speaker 2: and we know that, you know, a lot of these
Speaker 2: indices are imbalanced because of that. So some of that,
Speaker 2: you know, rebalancing is a good idea. And I would
Speaker 2: just point out that a lot of that rebalancing has
Speaker 2: already happened just through price. Right A lot of the
Speaker 2: foreign stocks in US dollar terms did quite a bit
Speaker 2: better than the US stocks in the first quarter of
Speaker 2: the year. So as I like to say, you know,
Speaker 2: the rebalancing happened through the price channel. And now the
Speaker 2: question is are foreign investors comfortable more comfortable now where
Speaker 2: we are today? I mean, you know they own less.
Speaker 2: Is that enough? I think it's probably fine where they are.
Speaker 2: We focus on the fundamentals, Nathan, as you know, I
Speaker 2: mean earnings revision breath bottomed you know, about a month ago,
Speaker 2: both on an absolute and on a relative basis, meaning
Speaker 2: US stocks are showing better earnings revision breath now and ultimately,
Speaker 2: if that's going to continue, which we think it could.
Speaker 2: Some of that, by the way, is the weaker dollar helping. Then,
Speaker 2: you know, I would suggest that US stocks probably continue
Speaker 2: to do as good, if not better than foreign stocks.
Speaker 1: You mentioned the earnings breadth continuing. Of course, a lot
Speaker 1: of what's been driving the rally once again, even in
Speaker 1: the last few days, has been those magnificent seven names
Speaker 1: that have been driving things for so long, sticking to
Speaker 1: the fundamentals. How do you view those companies in terms
Speaker 1: of their fundamentals.
Speaker 2: Well, that's just it. I mean, you know, the reason
Speaker 2: why those stocks have performed so well for the last
Speaker 2: ten years is really an ear story, and it's it's
Speaker 2: really undeniable. Now, some have shown better earnings and more
Speaker 2: consistent earnings than others, but as a group, it's you know,
Speaker 2: these are monopolistic type businesses, and so you know, they
Speaker 2: they they are earners, and and that's being shown again
Speaker 2: that the revision breath for that group in particular has
Speaker 2: turned up again once again. Some of that is a
Speaker 2: weaker dollar helping, But you know, they go through these
Speaker 2: cycles where they self correct and then the earnings power
Speaker 2: just you know, resumes, and I think you know that
Speaker 2: so in other words, this recent snapback by the Magnificent
Speaker 2: seven is driven by the fundamentals. This is not just
Speaker 2: passive flows going back in there. They are showing good
Speaker 2: relative or inch of vision breath.
Speaker 1: And in terms of the broader market, do you see
Speaker 1: that that fundamental story continuing even with some of this
Speaker 1: uncertainty around trade negotiations continuing.
Speaker 2: Well, we've had a big snapback, So I think, you know,
Speaker 2: we're the view that we're probably kind of back on
Speaker 2: track to our original forecast for this year, which was
Speaker 2: that the first half would be tough, and our original
Speaker 2: range was fifty five hundred and sixty one hundred. We're
Speaker 2: right smack dab in the middle of that again. But
Speaker 2: we do still think, you know, we're going to break
Speaker 2: out of that range in the second half. And this
Speaker 2: is all related to the sequencing of the policy. A
Speaker 2: few other things as well, AI camp Bax you know,
Speaker 2: decelerated in the first quarter, but all those things now
Speaker 2: sort of stabilized. And if you think about, you know,
Speaker 2: this administration, they came in doing all the sort of
Speaker 2: growth negative policy changes the start. You could say the
Speaker 2: president is acting like a new CEO. He's coming in
Speaker 2: and sort of kitchen sinking it. And then in the
Speaker 2: second half is when the more positive strategies or policies
Speaker 2: will start to flow through things like deregulation. We think
Speaker 2: they'll be success in passing this tax bill or budget reconciliation.
Speaker 2: And then of course we can get some of the
Speaker 2: animal spirits going to people we're excited about four or
Speaker 2: five months ago, and that should lead to better growth
Speaker 2: in twenty twenty six. And I want to come back
Speaker 2: again to AI camp backs. AI campbacks is probably detail,
Speaker 2: but it's not going negative. And what we're looking forward
Speaker 2: to now on AI is the productivity benefits that will
Speaker 2: probably start to come through next year. The market will
Speaker 2: start to figure that out in the second half of
Speaker 2: twenty twenty five.
Speaker 1: Only got about thirty seven seconds left, Mike. But does
Speaker 1: that positivity in the second half continue even with the
Speaker 1: FED on the sideline? So you keep hearing a lot
Speaker 1: of FED officials hinting that they may have to stay
Speaker 1: on the sidelines for a little longer.
Speaker 2: Well, glad you brought that up. I mean, you know,
Speaker 2: our economists probably are you have the least amount of
Speaker 2: cut price in of the major folks out there. You know,
Speaker 2: we have no cuts pricing for this year, but then
Speaker 2: they have seven cuts price in for next year. So
Speaker 2: it's coming, is the bottom line. And once again, even
Speaker 2: if there's no cuts in the second half of this year,
Speaker 2: the market will start to look forward to those cuts
Speaker 2: next year. So I think the FED is another example
Speaker 2: of where the rate of change is going to start
Speaker 2: to turn into a tailwind at some point in the
Speaker 2: next six months.