Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's make some sense of this market. We are very
Speaker 2: pleased to be joined now by Mike Wilson, the chief
Speaker 2: US equity strategist at Morgan Stanley. Great to have you
Speaker 2: back with us on daybreak, Mike, on a morning after
Speaker 2: big tech earnings, a morning where crude oil is trading
Speaker 2: close to wartime highs, morning where the Fed maybe thinking
Speaker 2: about what it wants to do in terms of policy
Speaker 2: for the rest of this year. Where should the investor
Speaker 2: focus be this morning?
Speaker 1: Good morning, Thank good morning, Nathan. I look, I think
Speaker 1: the market is doing a very good job of trying
Speaker 1: to digest all of these, you know, different variables. But
Speaker 1: at the end of the day, you know, as we
Speaker 1: you know, we focus on earnings as always probably the
Speaker 1: most important variable, assuming that you know, the interest rate
Speaker 1: environment is stable, and I think that's where we are.
Speaker 1: So I find it very interesting you kind of pointed
Speaker 1: this out. I mean, the the S and B five hundred,
Speaker 1: it is close to highs, and so is oil. I mean,
Speaker 1: Brent Oyle went to one hundred and twenty six dollars overnight.
Speaker 1: I mean that's fifty percent higher than it was a
Speaker 1: few weeks ago when the SMP was making its low.
Speaker 1: So you know, my view has been, we've been writing
Speaker 1: about this for a while, is that basically that the
Speaker 1: equity market has moved past the war. That doesn't mean
Speaker 1: the war is over, still not a concern, but for
Speaker 1: now it has compartmentalized that and said we're moving forward
Speaker 1: and we're focused on earnings, and this is earning season.
Speaker 1: And last night we had the four you know, the
Speaker 1: four big hyperscalers in area we've been very bullish on
Speaker 1: the last three or four weeks, put up really good
Speaker 1: numbers again and that's just you know, the market will
Speaker 1: not deny that. And so yeah, two of the names
Speaker 1: are down in the pre market, two of the names
Speaker 1: are up, but they've all rallied substantially in the last
Speaker 1: four weeks. And it's not just about the hyperscalers. It's
Speaker 1: about the earnings picture across the market. I mean, many,
Speaker 1: many sectors now are participating in what we've been calling
Speaker 1: a rolling recovery from a year ago. And I think
Speaker 1: that aspect of you know, the economy and what's going
Speaker 1: on in the real world is still being underestimated by
Speaker 1: a lot of investors because they've been distracted by these
Speaker 1: other events. But at the end of the day, back
Speaker 1: market's going to you know, trade off of earnings and
Speaker 1: earnings growth, assuming you know, policy is somewhat predictable and stable.
Speaker 1: So we can talk about the fit a little bit
Speaker 1: more in a minute, but that's my general take.
Speaker 2: Well, I want to talk a little bit more about
Speaker 2: the volatility and the commodities market as well. Obviously we've
Speaker 2: seen a lot of that and the big spike as
Speaker 2: you mentioned overnight as well. If we do see crude
Speaker 2: oil and commodities in general at these kind of sustained
Speaker 2: elevated levels, does that have an impact on the earnings outlook?
Speaker 1: It will, And I think, I mean that's the you know,
Speaker 1: sixty four trillion dollar question is you know, how long
Speaker 1: will it take for oil prices to subside and get
Speaker 1: to a level that's manageable. One hundred and twenty six
Speaker 1: dollars is not manageable. That will have a probably at
Speaker 1: least a ten percent hit to earnings growth in the US.
Speaker 1: We've calculated that, you know, the one. The other thing
Speaker 1: think about the US is somewhat insulated you know from
Speaker 1: this uh you know, from this conflict from geographically and
Speaker 1: we have our own oil supply. It doesn't mean the
Speaker 1: oil prices won't rise here too, But you know, there
Speaker 1: is going to be a bid for US assets over
Speaker 1: international assets if this thing persists. If oil prices stay
Speaker 1: at these levels for another three or four months, Yeah,
Speaker 1: the stock market's going to trade lower for sure. But
Speaker 1: I'm saying I was saying earlier, is the market is
Speaker 1: assuming maybe right, maybe wrong, that this will end up
Speaker 1: resolving itself over the summer.
Speaker 2: Let's talk about Fed policy. Obviously we got the the
Speaker 2: no change as expected from the Fed. You talk about
Speaker 2: an assumption that FED policy stays stable. How strong is
Speaker 2: that assumption? With worsh coming in and J. Powell staying on.
Speaker 1: Yeah, I think this deserves a bit more attention, and
Speaker 1: perhaps it's it's getting And we've written about this too,
Speaker 1: that of all the you know, we've gone through a
Speaker 1: lot this year, right, We've had the AI disruption in
Speaker 1: terms of the labor markets. We've had obviously the private
Speaker 1: credit concerns and now war and you know we've we've
Speaker 1: written about this that the transition at the Federal Reserve
Speaker 1: is is a is a big deal potentially because it
Speaker 1: creates a lot of uncertainty, and we you know, we
Speaker 1: kind of got some more of that yesterday. J Powell is,
Speaker 1: you know, leaving his post as a chair. He says,
Speaker 1: it's you stay on. I think that's a piece of uncertainty.
Speaker 1: You know what what is that going to do to
Speaker 1: the committee and the new chairs ability to kind of
Speaker 1: navigate a you know, and and manage that committee's voice.
Speaker 1: So that's that's a that's a potential risk. And you know,
Speaker 1: there's this presumption that you know, Kevin Wosh is going
Speaker 1: to come in and cut rates because President Trump is
Speaker 1: telling him to. And you know, Kevin Walsh kind of
Speaker 1: pushed back on that is confirmation hearing, and I take
Speaker 1: him to it as his word, and quite frankly, we
Speaker 1: don't really need to cut rates at the moment. So
Speaker 1: what the market's been doing is repricing this this probability
Speaker 1: of rate cuts coming in this year. And right now
Speaker 1: the market is pricing in no rate cuts for this year,
Speaker 1: and that's a big change from a few months ago.
Speaker 1: That's fine, assuming they don't have to move to rate heights.
Speaker 1: The other variable that I think is worth considering is that,
Speaker 1: you know, Kevin Warsh has talked about being a balance
Speaker 1: sheet hawk, meaning he doesn't want the balance sheet to
Speaker 1: be so big, and that liquidity, you know, has provided
Speaker 1: a lot of elixir for markets in the last several years.
Speaker 1: So if he's true to his word there, to me,
Speaker 1: that's the potential bigger risk for markets. I don't think
Speaker 1: that's a risk this year. I don't think he's going
Speaker 1: to do anything, but that's something I think about for
Speaker 1: twenty twenty seven. And finally, I would say every time
Speaker 1: a new FED chair person comes into the role, the
Speaker 1: market typically tests that person. You know, they want to
Speaker 1: see how they communicate, they want to see how they
Speaker 1: know react to things, and so we could just see
Speaker 1: higher volatility and I wouldn't be surprised when the back
Speaker 1: end kind of moves out to see how they want
Speaker 1: to try and deal with that. They may try and
Speaker 1: test them with you know, other you know, maybe challenging
Speaker 1: certain other parts of the market to see how they
Speaker 1: deal with that, and that volatility probably going to be
Speaker 1: at this until until Kevin Warrish is firmly in the
Speaker 1: seat and he's probably had a meeting or two