1 00:00:02,400 --> 00:00:08,280 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Joining us here at 2 00:00:08,320 --> 00:00:12,119 Speaker 1: the table is Morgan Stanley, chief US equity strategist Mike Wilson. 3 00:00:12,520 --> 00:00:14,960 Speaker 1: You know, people think of you as a bear also. 4 00:00:14,800 --> 00:00:17,720 Speaker 2: Mike, and also very smart. 5 00:00:17,800 --> 00:00:20,560 Speaker 1: So well, you're not really bearished this market, are you. 6 00:00:21,000 --> 00:00:22,680 Speaker 3: Well, No, we haven't been for the better part of 7 00:00:22,720 --> 00:00:25,360 Speaker 3: six or eight months. We took our targets up significantly 8 00:00:25,400 --> 00:00:27,560 Speaker 3: in May, sort of in the idea that you know, 9 00:00:27,560 --> 00:00:28,920 Speaker 3: we were going to kind of make it through there 10 00:00:28,960 --> 00:00:31,680 Speaker 3: wasn't going to be a growth scare that it caused 11 00:00:31,840 --> 00:00:34,000 Speaker 3: a hard landing, and also the Fed, you know, the 12 00:00:34,040 --> 00:00:36,199 Speaker 3: Fed move fifty basis points. And then of course we 13 00:00:36,200 --> 00:00:38,080 Speaker 3: had the election outcome. So like we've had a lot 14 00:00:38,080 --> 00:00:40,280 Speaker 3: of good things that have happened over the course of 15 00:00:40,320 --> 00:00:41,760 Speaker 3: like the last three or four months. So I would 16 00:00:41,800 --> 00:00:44,120 Speaker 3: argue the markets have traded that really, really well, as 17 00:00:44,120 --> 00:00:44,960 Speaker 3: they typically. 18 00:00:44,600 --> 00:00:45,680 Speaker 4: Get ahead of those things. 19 00:00:45,960 --> 00:00:47,600 Speaker 3: The question now, and I think we said on this 20 00:00:47,680 --> 00:00:49,920 Speaker 3: program in October we said we think we could trade 21 00:00:49,960 --> 00:00:53,880 Speaker 3: sixty one hundred on a definitive election outcome, and we 22 00:00:53,920 --> 00:00:56,280 Speaker 3: got that. So now here we are sixty one hundred. 23 00:00:56,280 --> 00:00:59,440 Speaker 3: Do we just revise our numbers higher? No, we're we 24 00:00:59,440 --> 00:01:02,480 Speaker 3: think we're on for sixty five by n next year, 25 00:01:02,480 --> 00:01:05,200 Speaker 3: assuming that things, you know, progressed the way that we expect, 26 00:01:05,200 --> 00:01:07,400 Speaker 3: needing the base case of substances. We have our economic 27 00:01:07,440 --> 00:01:08,399 Speaker 3: forecast for the FED. 28 00:01:09,000 --> 00:01:10,600 Speaker 4: That's where that's where they're visibility. 29 00:01:10,600 --> 00:01:12,399 Speaker 3: That's where the sort of risk is is that our 30 00:01:12,480 --> 00:01:15,560 Speaker 3: forecast on the outcome is not what we expect it 31 00:01:15,600 --> 00:01:17,760 Speaker 3: to be. And I think this year's next twelve months 32 00:01:17,840 --> 00:01:19,600 Speaker 3: is going to be just like the last twelve months, 33 00:01:19,720 --> 00:01:23,440 Speaker 3: where there's uncertainty at times around the growth outcome and 34 00:01:23,440 --> 00:01:26,520 Speaker 3: any inflation outcome. But up thirty percent, well not up 35 00:01:26,560 --> 00:01:29,000 Speaker 3: thirty but I mean it's but you know, the thing 36 00:01:29,080 --> 00:01:32,000 Speaker 3: is the last twelve months, we got the earnings forecast 37 00:01:32,120 --> 00:01:35,720 Speaker 3: exactly right, but we got underestimated was the multiple. 38 00:01:36,040 --> 00:01:37,360 Speaker 4: And I don't think I was alone in that. 39 00:01:37,440 --> 00:01:39,560 Speaker 3: I think I don't recall anyone telling me we're going 40 00:01:39,600 --> 00:01:41,720 Speaker 3: to trade twenty two or twenty three times. But then 41 00:01:41,760 --> 00:01:44,680 Speaker 3: when we get there, everyone just justifies it and says. 42 00:01:44,560 --> 00:01:46,920 Speaker 4: It's okay, we can stay here or even go higher. 43 00:01:47,280 --> 00:01:51,240 Speaker 3: So look, markets are a little bit diabolical. They trade ahead, 44 00:01:51,600 --> 00:01:54,440 Speaker 3: and when you're trading the stock market or stocks, you 45 00:01:54,440 --> 00:01:55,960 Speaker 3: need to think about what's going to be happening in 46 00:01:56,000 --> 00:01:58,760 Speaker 3: six months now, what's happening today. And I think the 47 00:01:58,800 --> 00:02:00,840 Speaker 3: first half of next year is where they uncertainty probably 48 00:02:00,920 --> 00:02:03,200 Speaker 3: is going to increase, and then by the second half 49 00:02:03,240 --> 00:02:05,440 Speaker 3: of next year things could clear. So it's going to 50 00:02:05,440 --> 00:02:08,720 Speaker 3: be another I think, volatile year, plenty of training opportunity, 51 00:02:08,760 --> 00:02:10,680 Speaker 3: plenty of dispersion in the stock market. That's what we 52 00:02:11,080 --> 00:02:13,079 Speaker 3: kind of focus on, what to own, not how much 53 00:02:13,120 --> 00:02:14,560 Speaker 3: to own, and that's the game. 54 00:02:14,600 --> 00:02:15,880 Speaker 4: That's the game that we play. 55 00:02:15,919 --> 00:02:18,079 Speaker 2: Well, let's swap through some of that volatility, because there's 56 00:02:18,120 --> 00:02:21,480 Speaker 2: the absolute level right sixty five hundred year and twenty 57 00:02:21,520 --> 00:02:23,600 Speaker 2: twenty five. It feels like a lot of Wall Street 58 00:02:23,639 --> 00:02:26,360 Speaker 2: has coalesced around that number. But what does the path 59 00:02:26,480 --> 00:02:28,280 Speaker 2: to get there look like? What do you see the 60 00:02:28,360 --> 00:02:30,800 Speaker 2: road being over the next twelve months. 61 00:02:30,960 --> 00:02:33,480 Speaker 3: So that assumes that the economy stays sort of, you know, 62 00:02:33,680 --> 00:02:37,000 Speaker 3: below trend growth but healthy, so two percent real inflation 63 00:02:37,040 --> 00:02:39,519 Speaker 3: continues to climb down but not you know, go in 64 00:02:39,560 --> 00:02:41,600 Speaker 3: a way where its deflationary. So you have four to 65 00:02:41,639 --> 00:02:44,639 Speaker 3: four four and a half percent nominal GDP growth, which 66 00:02:44,680 --> 00:02:46,800 Speaker 3: gets you ten percent earnings growth. There there will be 67 00:02:46,800 --> 00:02:49,120 Speaker 3: some operating leverage and then the multiple comes down a 68 00:02:49,160 --> 00:02:51,240 Speaker 3: little bit, but not as much as what we would 69 00:02:51,240 --> 00:02:53,799 Speaker 3: have thought this year, because look, that's just that's where 70 00:02:53,800 --> 00:02:55,799 Speaker 3: we are. It's very hard to get the multiple to 71 00:02:55,840 --> 00:02:57,960 Speaker 3: come down at the Fed's cutting rates and you have 72 00:02:58,320 --> 00:03:01,680 Speaker 3: above trend ernie's growth, and that's we're forecasting once again, 73 00:03:02,040 --> 00:03:05,640 Speaker 3: assuming soft landing. Okay, inflation continuents and the Fed can cut. 74 00:03:05,680 --> 00:03:08,160 Speaker 3: I would say the biggest risk in that outcome is 75 00:03:08,200 --> 00:03:10,960 Speaker 3: on the inflation side. We're seeing inflation pick up again 76 00:03:11,040 --> 00:03:14,120 Speaker 3: because look, let's be honest, we financial conditions are very 77 00:03:14,160 --> 00:03:16,840 Speaker 3: loose again, something that's the market itself. We have now 78 00:03:16,880 --> 00:03:19,840 Speaker 3: animal spirits picking up because the election outcome and people 79 00:03:19,840 --> 00:03:23,440 Speaker 3: are excited. That excitement has a negative consequence, which is 80 00:03:23,480 --> 00:03:25,080 Speaker 3: that all of a sudden, inflation starts to pick up 81 00:03:25,120 --> 00:03:26,840 Speaker 3: again and maybe the Fed can't cut. 82 00:03:26,880 --> 00:03:29,440 Speaker 4: That to me is probably the biggest risk to the multiple, 83 00:03:29,639 --> 00:03:32,440 Speaker 4: that the Fed can't cut as much as people are anticipating. 84 00:03:32,520 --> 00:03:34,800 Speaker 1: In So I mean, and this may be a driver 85 00:03:34,920 --> 00:03:40,440 Speaker 1: of that, But wouldn't bad certainty on tariffs, bad certainty 86 00:03:40,480 --> 00:03:44,440 Speaker 1: on mass deportations, wouldn't that be bad news for the 87 00:03:44,440 --> 00:03:46,040 Speaker 1: economy and for the market. 88 00:03:46,320 --> 00:03:48,360 Speaker 3: So I mean that's once again going back to our 89 00:03:48,480 --> 00:03:50,760 Speaker 3: view for next year. I think the risks are front 90 00:03:50,800 --> 00:03:52,880 Speaker 3: end loaded. We're going to get a lot of announcements. 91 00:03:52,880 --> 00:03:55,360 Speaker 3: Like I would say, the bad stuff comes early, the 92 00:03:55,400 --> 00:03:58,840 Speaker 3: good stuff from the changeover around administration comes later, meaning 93 00:03:59,120 --> 00:04:00,600 Speaker 3: you know, tariffs and immigration. 94 00:04:00,920 --> 00:04:02,720 Speaker 1: You do think we'll get certainty because I feel like 95 00:04:02,960 --> 00:04:04,960 Speaker 1: it's going to be a little bit like Lucy holding 96 00:04:05,000 --> 00:04:07,040 Speaker 1: the football. You know, well, well Solan Trump loves to 97 00:04:07,040 --> 00:04:08,760 Speaker 1: play that game. He just pulls it away every time 98 00:04:08,760 --> 00:04:09,360 Speaker 1: you take a kick. 99 00:04:09,480 --> 00:04:10,280 Speaker 4: Well, I think, I. 100 00:04:10,200 --> 00:04:12,760 Speaker 3: Mean, look, policy, the way policy's made is you flow 101 00:04:12,840 --> 00:04:15,400 Speaker 3: tribal loons. You see how the markets react, and then 102 00:04:15,400 --> 00:04:18,159 Speaker 3: you're reflexive. I mean that's how I anticipate this to 103 00:04:18,200 --> 00:04:20,920 Speaker 3: go down. And every time you get one of those 104 00:04:20,920 --> 00:04:23,279 Speaker 3: sort of tribal loons and then policy actually has made 105 00:04:23,520 --> 00:04:25,919 Speaker 3: you get more certainty. That doesn't mean the market's going 106 00:04:26,000 --> 00:04:27,680 Speaker 3: to like it or love it. It just means we're 107 00:04:27,680 --> 00:04:29,280 Speaker 3: gonna get more information as we go through. I mean, 108 00:04:29,400 --> 00:04:32,000 Speaker 3: he hasn't even taken office yet, you know, so let's 109 00:04:32,040 --> 00:04:32,800 Speaker 3: give it a little. 110 00:04:32,640 --> 00:04:33,680 Speaker 4: Chance there to breathe. 111 00:04:34,240 --> 00:04:36,640 Speaker 3: I would say, once again, I think that the sort 112 00:04:36,640 --> 00:04:40,160 Speaker 3: of headwinds for the market are probably early policy changes, 113 00:04:40,520 --> 00:04:42,760 Speaker 3: and then the good stuff, whether it's deregulation, maybe some 114 00:04:42,800 --> 00:04:47,080 Speaker 3: government efficiency, maybe tax extensions or even further cuts, comes 115 00:04:47,160 --> 00:04:49,640 Speaker 3: later in the year. So that's the setup for now, 116 00:04:50,160 --> 00:04:52,840 Speaker 3: all subject to revision, of course, because there's a lot 117 00:04:52,839 --> 00:04:53,960 Speaker 3: of other things going on as well. 118 00:04:54,160 --> 00:04:56,200 Speaker 2: Yeah, a lot of big ifs there. But I do 119 00:04:56,279 --> 00:04:58,919 Speaker 2: want to talk specifically about this month. You had a 120 00:04:58,960 --> 00:05:01,360 Speaker 2: really interesting note out a couple days ago talking about 121 00:05:01,360 --> 00:05:04,920 Speaker 2: how usually in December you see the small caps lead. 122 00:05:05,040 --> 00:05:07,320 Speaker 2: That's not what we've seen. The rustle two thousand, that's 123 00:05:07,360 --> 00:05:10,039 Speaker 2: actually down about three percent over the past two weeks, 124 00:05:10,040 --> 00:05:12,520 Speaker 2: and it's been big tech that's been in charge. So 125 00:05:13,240 --> 00:05:15,640 Speaker 2: what is different and do you see us reverting back 126 00:05:15,680 --> 00:05:17,320 Speaker 2: to some of those historical patterns. 127 00:05:17,440 --> 00:05:19,960 Speaker 3: So I think what happened is and this happens every year. 128 00:05:20,000 --> 00:05:22,400 Speaker 3: We've seen we get the sort of small cap. 129 00:05:22,200 --> 00:05:24,000 Speaker 4: Trade earlier and earlier every year. 130 00:05:24,040 --> 00:05:27,040 Speaker 3: We also had the election, and we know from twenty 131 00:05:27,080 --> 00:05:29,000 Speaker 3: sixteen's experience that we got we were going to get 132 00:05:29,000 --> 00:05:31,240 Speaker 3: a big pop in sort of small business confidence. 133 00:05:31,400 --> 00:05:33,320 Speaker 4: We since confirmed that earlier this week. 134 00:05:33,360 --> 00:05:35,400 Speaker 3: That was the biggest increase we've seen in twenty five 135 00:05:35,480 --> 00:05:39,279 Speaker 3: years small business confidence, so maybe the market kind of 136 00:05:39,279 --> 00:05:41,719 Speaker 3: pre traded it. I still think the second half of 137 00:05:41,720 --> 00:05:45,440 Speaker 3: this month we could see further outperformance from small caps 138 00:05:45,480 --> 00:05:47,880 Speaker 3: and some cyclicals, just as you kind of mark that 139 00:05:48,000 --> 00:05:49,839 Speaker 3: up into year end, and then I think you'll get 140 00:05:49,880 --> 00:05:53,040 Speaker 3: a fade into January February. That's the way historically the 141 00:05:53,120 --> 00:05:55,000 Speaker 3: last four or five years is trade or ten years. 142 00:05:55,040 --> 00:05:57,880 Speaker 3: Really you get the small cap trade now earlier, and 143 00:05:57,920 --> 00:06:00,000 Speaker 3: then you actually fade it at the beginning of the year. 144 00:06:00,240 --> 00:06:02,919 Speaker 4: Here's two weeks of the major indexes. 145 00:06:02,960 --> 00:06:04,840 Speaker 1: If you take it out to five years, you'll see 146 00:06:04,880 --> 00:06:08,799 Speaker 1: the Russell two thousand has really underperformed, and the text docks, 147 00:06:08,800 --> 00:06:14,280 Speaker 1: the Nasdaq has really outperformed. Does that a pattern hold indefinitely? 148 00:06:14,400 --> 00:06:16,040 Speaker 1: Is this just how it is? 149 00:06:16,640 --> 00:06:18,400 Speaker 4: Well, we've had that view for quite a while. 150 00:06:18,640 --> 00:06:21,279 Speaker 3: We just upgrade, finally upgraded small caps this summer to 151 00:06:21,360 --> 00:06:21,840 Speaker 3: a neutral. 152 00:06:21,960 --> 00:06:23,520 Speaker 4: Like we're still neutral on a view. 153 00:06:23,839 --> 00:06:25,760 Speaker 3: I think right now the market is still going to 154 00:06:25,800 --> 00:06:26,880 Speaker 3: be it's somewhat narrow. 155 00:06:26,920 --> 00:06:28,360 Speaker 4: I mean it's upgraded to a neutral. 156 00:06:28,360 --> 00:06:30,359 Speaker 1: We upgraded to and we have a viewer writing in 157 00:06:30,440 --> 00:06:34,320 Speaker 1: who wants to know what made you change your bearest stance? 158 00:06:34,400 --> 00:06:37,600 Speaker 1: What was it that made you say, Okay, you know what, 159 00:06:37,720 --> 00:06:38,719 Speaker 1: I'm thrown in the towel. 160 00:06:39,480 --> 00:06:40,520 Speaker 4: We're bulled up. 161 00:06:40,680 --> 00:06:42,720 Speaker 3: Well, I mean the data, I mean basically, I mean, 162 00:06:42,800 --> 00:06:45,520 Speaker 3: I mean, I think it was pretty consensus a year 163 00:06:45,600 --> 00:06:48,000 Speaker 3: year and a half ago that the FEDS hiking regime 164 00:06:48,120 --> 00:06:50,160 Speaker 3: was going to lead to a hard landing and it 165 00:06:50,240 --> 00:06:51,720 Speaker 3: never arrived. And there are a lot of it we 166 00:06:51,760 --> 00:06:53,960 Speaker 3: can go into that. We weree a long note about 167 00:06:54,000 --> 00:06:55,360 Speaker 3: what was different to cycle. 168 00:06:55,680 --> 00:06:55,920 Speaker 4: Now. 169 00:06:56,080 --> 00:06:58,640 Speaker 3: To be clear, I don't think the risk of a 170 00:06:58,640 --> 00:07:01,400 Speaker 3: hard landing has been extinguished, and we're still late cycle, 171 00:07:01,680 --> 00:07:04,400 Speaker 3: which is why we're treading narrow again. We're treating you know, 172 00:07:04,400 --> 00:07:06,720 Speaker 3: people are going for the large cap quality stocks, which 173 00:07:06,760 --> 00:07:09,360 Speaker 3: is why we don't want to go full overweight on 174 00:07:09,640 --> 00:07:11,200 Speaker 3: small caps or low quality. 175 00:07:11,240 --> 00:07:13,080 Speaker 4: We don't think this is the part of the cycle. Like, 176 00:07:13,120 --> 00:07:14,200 Speaker 4: we're not out of the view that this. 177 00:07:14,200 --> 00:07:17,200 Speaker 3: Is going to be some big ramp in the next year, 178 00:07:17,680 --> 00:07:20,640 Speaker 3: that everything's changed, right, it's still a late sight of economy. 179 00:07:21,000 --> 00:07:23,920 Speaker 3: You know, rates are still pretty high, we have you know, 180 00:07:23,960 --> 00:07:26,640 Speaker 3: we have cost issues with some of the smaller businesses, 181 00:07:26,880 --> 00:07:29,760 Speaker 3: and most consumers are still struggling. Okay, that's not a 182 00:07:30,200 --> 00:07:33,120 Speaker 3: kind of environment where small caps or low quality stocks 183 00:07:33,160 --> 00:07:36,000 Speaker 3: tend to outperform. The one last thing I'll say, though, 184 00:07:36,080 --> 00:07:39,280 Speaker 3: which is I think a big missed thing that people misunderstand, 185 00:07:39,640 --> 00:07:42,440 Speaker 3: is that most stocks, okay, not the big stocks, most 186 00:07:42,440 --> 00:07:46,680 Speaker 3: stocks do better when inflation is actually accelerating. So if 187 00:07:46,720 --> 00:07:48,600 Speaker 3: you go back and look like twenty twenty twenty one 188 00:07:48,880 --> 00:07:51,440 Speaker 3: and even in twenty two, the average stock did better 189 00:07:51,440 --> 00:07:53,360 Speaker 3: than the S and P five hundred when inflation was 190 00:07:53,400 --> 00:07:54,400 Speaker 3: actually accelerating. 191 00:07:54,800 --> 00:07:57,720 Speaker 1: Makes sense, though you want to hold stocks to hedge inflation, right, and. 192 00:07:57,680 --> 00:08:00,480 Speaker 3: Earnings growth is better, So I do. I do think 193 00:08:00,560 --> 00:08:02,840 Speaker 3: that next year. What could happen is we could have 194 00:08:02,880 --> 00:08:04,960 Speaker 3: a correction in the first half of next year as 195 00:08:05,000 --> 00:08:08,680 Speaker 3: perhaps inflation comes back, But that's an S and P event, 196 00:08:09,240 --> 00:08:11,560 Speaker 3: and actually the average stock may not go down that much. 197 00:08:11,600 --> 00:08:14,480 Speaker 3: That is an interesting kind of relative value trade that 198 00:08:14,520 --> 00:08:16,559 Speaker 3: I think you know people who can do that should 199 00:08:16,560 --> 00:08:17,600 Speaker 3: be thinking about right now. 200 00:08:17,720 --> 00:08:20,200 Speaker 2: Interesting. So maybe a little bit cautious when it comes 201 00:08:20,200 --> 00:08:23,240 Speaker 2: to the benchmark, but still opportunities to find at the 202 00:08:23,280 --> 00:08:25,840 Speaker 2: single stock level in that scenario. But I do want 203 00:08:25,840 --> 00:08:28,760 Speaker 2: to get your thoughts on how the different asset classes 204 00:08:28,800 --> 00:08:31,560 Speaker 2: are talking to each other, because the bond market has 205 00:08:31,600 --> 00:08:34,000 Speaker 2: been so volatile, especially if you take a look at 206 00:08:34,000 --> 00:08:35,960 Speaker 2: the long end, it feels like the stock market may 207 00:08:35,960 --> 00:08:39,160 Speaker 2: be some enthusiasm coming out, but it doesn't necessarily just 208 00:08:39,160 --> 00:08:42,040 Speaker 2: seem to be rates driven. How do you see that 209 00:08:42,080 --> 00:08:45,280 Speaker 2: relationship evolving in twenty twenty five, especially if that big 210 00:08:45,360 --> 00:08:47,920 Speaker 2: risk comes to fruition and the Fed can't cut as 211 00:08:48,000 --> 00:08:49,280 Speaker 2: much as expected. 212 00:08:49,440 --> 00:08:52,160 Speaker 3: So the rate correlation with equities has flip flopped quite 213 00:08:52,200 --> 00:08:54,440 Speaker 3: a bit, and earlier this year it was quite negative, 214 00:08:54,480 --> 00:08:56,520 Speaker 3: meaning when rates went up, it was bad for stocks, 215 00:08:56,600 --> 00:08:59,440 Speaker 3: and now really since the fall, that's why we pivoted 216 00:08:59,440 --> 00:09:03,280 Speaker 3: more cycnically. Stocks are now positively correlated to rates, and 217 00:09:03,320 --> 00:09:05,640 Speaker 3: we think the sweet spot for ten year yelds is 218 00:09:05,679 --> 00:09:08,319 Speaker 3: four to four and a half percent. Like in that range, 219 00:09:08,679 --> 00:09:12,160 Speaker 3: stocks can actually act okays as rates go higher. If 220 00:09:12,200 --> 00:09:14,560 Speaker 3: we get through four and a half and if term 221 00:09:14,600 --> 00:09:17,560 Speaker 3: premium starts to increase, which would be concerned about inflation, 222 00:09:18,480 --> 00:09:21,400 Speaker 3: then you're going to see that correlation flip again. So we're, 223 00:09:21,559 --> 00:09:24,240 Speaker 3: you know, like everybody else, we watch how markets are reacting. 224 00:09:24,240 --> 00:09:27,080 Speaker 3: It's very reflexive, and but then we think once again 225 00:09:27,080 --> 00:09:28,360 Speaker 3: that four to four and a half percent range is 226 00:09:28,400 --> 00:09:29,120 Speaker 3: kind of a sweet spot. 227 00:09:29,240 --> 00:09:31,280 Speaker 2: All right, Mike. It is always great to speak with you, 228 00:09:31,400 --> 00:09:32,560 Speaker 2: especially on a Friday. 229 00:09:32,679 --> 00:09:36,679 Speaker 4: Have a great week. Last night very very spooky. It's 230 00:09:36,720 --> 00:09:37,320 Speaker 4: great to see you. 231 00:09:37,720 --> 00:09:40,400 Speaker 2: That is Mike Wilson. He is Chief US Equity Strategist.