WEBVTT - Morgan Stanley's Mike Wilson Talks Earnings, Fed and Market Risks

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Let's make some sense of this market. We are very

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<v Speaker 2>pleased to be joined now by Mike Wilson, the chief

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<v Speaker 2>US equity strategist at Morgan Stanley. Great to have you

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<v Speaker 2>back with us on daybreak, Mike, on a morning after

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<v Speaker 2>big tech earnings, a morning where crude oil is trading

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<v Speaker 2>close to wartime highs, morning where the Fed maybe thinking

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<v Speaker 2>about what it wants to do in terms of policy

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<v Speaker 2>for the rest of this year. Where should the investor

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<v Speaker 2>focus be this morning?

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<v Speaker 1>Good morning, Thank good morning, Nathan. I look, I think

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<v Speaker 1>the market is doing a very good job of trying

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<v Speaker 1>to digest all of these, you know, different variables. But

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<v Speaker 1>at the end of the day, you know, as we

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<v Speaker 1>you know, we focus on earnings as always probably the

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<v Speaker 1>most important variable, assuming that you know, the interest rate

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<v Speaker 1>environment is stable, and I think that's where we are.

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<v Speaker 1>So I find it very interesting you kind of pointed

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<v Speaker 1>this out. I mean, the the S and B five hundred,

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<v Speaker 1>it is close to highs, and so is oil. I mean,

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<v Speaker 1>Brent Oyle went to one hundred and twenty six dollars overnight.

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<v Speaker 1>I mean that's fifty percent higher than it was a

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<v Speaker 1>few weeks ago when the SMP was making its low.

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<v Speaker 1>So you know, my view has been, we've been writing

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<v Speaker 1>about this for a while, is that basically that the

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<v Speaker 1>equity market has moved past the war. That doesn't mean

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<v Speaker 1>the war is over, still not a concern, but for

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<v Speaker 1>now it has compartmentalized that and said we're moving forward

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<v Speaker 1>and we're focused on earnings, and this is earning season.

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<v Speaker 1>And last night we had the four you know, the

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<v Speaker 1>four big hyperscalers in area we've been very bullish on

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<v Speaker 1>the last three or four weeks, put up really good

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<v Speaker 1>numbers again and that's just you know, the market will

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<v Speaker 1>not deny that. And so yeah, two of the names

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<v Speaker 1>are down in the pre market, two of the names

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<v Speaker 1>are up, but they've all rallied substantially in the last

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<v Speaker 1>four weeks. And it's not just about the hyperscalers. It's

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<v Speaker 1>about the earnings picture across the market. I mean, many,

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<v Speaker 1>many sectors now are participating in what we've been calling

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<v Speaker 1>a rolling recovery from a year ago. And I think

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<v Speaker 1>that aspect of you know, the economy and what's going

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<v Speaker 1>on in the real world is still being underestimated by

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<v Speaker 1>a lot of investors because they've been distracted by these

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<v Speaker 1>other events. But at the end of the day, back

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<v Speaker 1>market's going to you know, trade off of earnings and

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<v Speaker 1>earnings growth, assuming you know, policy is somewhat predictable and stable.

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<v Speaker 1>So we can talk about the fit a little bit

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<v Speaker 1>more in a minute, but that's my general take.

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<v Speaker 2>Well, I want to talk a little bit more about

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<v Speaker 2>the volatility and the commodities market as well. Obviously we've

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<v Speaker 2>seen a lot of that and the big spike as

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<v Speaker 2>you mentioned overnight as well. If we do see crude

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<v Speaker 2>oil and commodities in general at these kind of sustained

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<v Speaker 2>elevated levels, does that have an impact on the earnings outlook?

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<v Speaker 1>It will, And I think, I mean that's the you know,

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<v Speaker 1>sixty four trillion dollar question is you know, how long

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<v Speaker 1>will it take for oil prices to subside and get

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<v Speaker 1>to a level that's manageable. One hundred and twenty six

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<v Speaker 1>dollars is not manageable. That will have a probably at

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<v Speaker 1>least a ten percent hit to earnings growth in the US.

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<v Speaker 1>We've calculated that, you know, the one. The other thing

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<v Speaker 1>think about the US is somewhat insulated you know from

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<v Speaker 1>this uh you know, from this conflict from geographically and

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<v Speaker 1>we have our own oil supply. It doesn't mean the

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<v Speaker 1>oil prices won't rise here too, But you know, there

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<v Speaker 1>is going to be a bid for US assets over

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<v Speaker 1>international assets if this thing persists. If oil prices stay

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<v Speaker 1>at these levels for another three or four months, Yeah,

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<v Speaker 1>the stock market's going to trade lower for sure. But

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<v Speaker 1>I'm saying I was saying earlier, is the market is

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<v Speaker 1>assuming maybe right, maybe wrong, that this will end up

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<v Speaker 1>resolving itself over the summer.

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<v Speaker 2>Let's talk about Fed policy. Obviously we got the the

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<v Speaker 2>no change as expected from the Fed. You talk about

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<v Speaker 2>an assumption that FED policy stays stable. How strong is

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<v Speaker 2>that assumption? With worsh coming in and J. Powell staying on.

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<v Speaker 1>Yeah, I think this deserves a bit more attention, and

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<v Speaker 1>perhaps it's it's getting And we've written about this too,

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<v Speaker 1>that of all the you know, we've gone through a

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<v Speaker 1>lot this year, right, We've had the AI disruption in

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<v Speaker 1>terms of the labor markets. We've had obviously the private

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<v Speaker 1>credit concerns and now war and you know we've we've

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<v Speaker 1>written about this that the transition at the Federal Reserve

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<v Speaker 1>is is a is a big deal potentially because it

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<v Speaker 1>creates a lot of uncertainty, and we you know, we

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<v Speaker 1>kind of got some more of that yesterday. J Powell is,

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<v Speaker 1>you know, leaving his post as a chair. He says,

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<v Speaker 1>it's you stay on. I think that's a piece of uncertainty.

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<v Speaker 1>You know what what is that going to do to

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<v Speaker 1>the committee and the new chairs ability to kind of

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<v Speaker 1>navigate a you know, and and manage that committee's voice.

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<v Speaker 1>So that's that's a that's a potential risk. And you know,

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<v Speaker 1>there's this presumption that you know, Kevin Wosh is going

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<v Speaker 1>to come in and cut rates because President Trump is

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<v Speaker 1>telling him to. And you know, Kevin Walsh kind of

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<v Speaker 1>pushed back on that is confirmation hearing, and I take

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<v Speaker 1>him to it as his word, and quite frankly, we

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<v Speaker 1>don't really need to cut rates at the moment. So

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<v Speaker 1>what the market's been doing is repricing this this probability

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<v Speaker 1>of rate cuts coming in this year. And right now

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<v Speaker 1>the market is pricing in no rate cuts for this year,

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<v Speaker 1>and that's a big change from a few months ago.

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<v Speaker 1>That's fine, assuming they don't have to move to rate heights.

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<v Speaker 1>The other variable that I think is worth considering is that,

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<v Speaker 1>you know, Kevin Warsh has talked about being a balance

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<v Speaker 1>sheet hawk, meaning he doesn't want the balance sheet to

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<v Speaker 1>be so big, and that liquidity, you know, has provided

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<v Speaker 1>a lot of elixir for markets in the last several years.

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<v Speaker 1>So if he's true to his word there, to me,

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<v Speaker 1>that's the potential bigger risk for markets. I don't think

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<v Speaker 1>that's a risk this year. I don't think he's going

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<v Speaker 1>to do anything, but that's something I think about for

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<v Speaker 1>twenty twenty seven. And finally, I would say every time

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<v Speaker 1>a new FED chair person comes into the role, the

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<v Speaker 1>market typically tests that person. You know, they want to

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<v Speaker 1>see how they communicate, they want to see how they

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<v Speaker 1>know react to things, and so we could just see

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<v Speaker 1>higher volatility and I wouldn't be surprised when the back

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<v Speaker 1>end kind of moves out to see how they want

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<v Speaker 1>to try and deal with that. They may try and

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<v Speaker 1>test them with you know, other you know, maybe challenging

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<v Speaker 1>certain other parts of the market to see how they

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<v Speaker 1>deal with that, and that volatility probably going to be

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<v Speaker 1>at this until until Kevin Warrish is firmly in the

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<v Speaker 1>seat and he's probably had a meeting or two