WEBVTT - Morgan Stanley's Mike Wilson Talks 2025 Stocks, Volatility 0:00:02.400 --> 0:00:08.280 Bloomberg Audio Studios, podcasts, radio news. Joining us here at 0:00:08.320 --> 0:00:12.119 the table is Morgan Stanley, chief US equity strategist Mike Wilson. 0:00:12.520 --> 0:00:14.960 You know, people think of you as a bear also. 0:00:14.800 --> 0:00:17.720 Mike, and also very smart. 0:00:17.800 --> 0:00:20.560 So well, you're not really bearished this market, are you. 0:00:21.000 --> 0:00:22.680 Well, No, we haven't been for the better part of 0:00:22.720 --> 0:00:25.360 six or eight months. We took our targets up significantly 0:00:25.400 --> 0:00:27.560 in May, sort of in the idea that you know, 0:00:27.560 --> 0:00:28.920 we were going to kind of make it through there 0:00:28.960 --> 0:00:31.680 wasn't going to be a growth scare that it caused 0:00:31.840 --> 0:00:34.000 a hard landing, and also the Fed, you know, the 0:00:34.040 --> 0:00:36.199 Fed move fifty basis points. And then of course we 0:00:36.200 --> 0:00:38.080 had the election outcome. So like we've had a lot 0:00:38.080 --> 0:00:40.280 of good things that have happened over the course of 0:00:40.320 --> 0:00:41.760 like the last three or four months. So I would 0:00:41.800 --> 0:00:44.120 argue the markets have traded that really, really well, as 0:00:44.120 --> 0:00:44.960 they typically. 0:00:44.600 --> 0:00:45.680 Get ahead of those things. 0:00:45.960 --> 0:00:47.600 The question now, and I think we said on this 0:00:47.680 --> 0:00:49.920 program in October we said we think we could trade 0:00:49.960 --> 0:00:53.880 sixty one hundred on a definitive election outcome, and we 0:00:53.920 --> 0:00:56.280 got that. So now here we are sixty one hundred. 0:00:56.280 --> 0:00:59.440 Do we just revise our numbers higher? No, we're we 0:00:59.440 --> 0:01:02.480 think we're on for sixty five by n next year, 0:01:02.480 --> 0:01:05.200 assuming that things, you know, progressed the way that we expect, 0:01:05.200 --> 0:01:07.400 needing the base case of substances. We have our economic 0:01:07.440 --> 0:01:08.399 forecast for the FED. 0:01:09.000 --> 0:01:10.600 That's where that's where they're visibility. 0:01:10.600 --> 0:01:12.399 That's where the sort of risk is is that our 0:01:12.480 --> 0:01:15.560 forecast on the outcome is not what we expect it 0:01:15.600 --> 0:01:17.760 to be. And I think this year's next twelve months 0:01:17.840 --> 0:01:19.600 is going to be just like the last twelve months, 0:01:19.720 --> 0:01:23.440 where there's uncertainty at times around the growth outcome and 0:01:23.440 --> 0:01:26.520 any inflation outcome. But up thirty percent, well not up 0:01:26.560 --> 0:01:29.000 thirty but I mean it's but you know, the thing 0:01:29.080 --> 0:01:32.000 is the last twelve months, we got the earnings forecast 0:01:32.120 --> 0:01:35.720 exactly right, but we got underestimated was the multiple. 0:01:36.040 --> 0:01:37.360 And I don't think I was alone in that. 0:01:37.440 --> 0:01:39.560 I think I don't recall anyone telling me we're going 0:01:39.600 --> 0:01:41.720 to trade twenty two or twenty three times. But then 0:01:41.760 --> 0:01:44.680 when we get there, everyone just justifies it and says. 0:01:44.560 --> 0:01:46.920 It's okay, we can stay here or even go higher. 0:01:47.280 --> 0:01:51.240 So look, markets are a little bit diabolical. They trade ahead, 0:01:51.600 --> 0:01:54.440 and when you're trading the stock market or stocks, you 0:01:54.440 --> 0:01:55.960 need to think about what's going to be happening in 0:01:56.000 --> 0:01:58.760 six months now, what's happening today. And I think the 0:01:58.800 --> 0:02:00.840 first half of next year is where they uncertainty probably 0:02:00.920 --> 0:02:03.200 is going to increase, and then by the second half 0:02:03.240 --> 0:02:05.440 of next year things could clear. So it's going to 0:02:05.440 --> 0:02:08.720 be another I think, volatile year, plenty of training opportunity, 0:02:08.760 --> 0:02:10.680 plenty of dispersion in the stock market. That's what we 0:02:11.080 --> 0:02:13.079 kind of focus on, what to own, not how much 0:02:13.120 --> 0:02:14.560 to own, and that's the game. 0:02:14.600 --> 0:02:15.880 That's the game that we play. 0:02:15.919 --> 0:02:18.079 Well, let's swap through some of that volatility, because there's 0:02:18.120 --> 0:02:21.480 the absolute level right sixty five hundred year and twenty 0:02:21.520 --> 0:02:23.600 twenty five. It feels like a lot of Wall Street 0:02:23.639 --> 0:02:26.360 has coalesced around that number. But what does the path 0:02:26.480 --> 0:02:28.280 to get there look like? What do you see the 0:02:28.360 --> 0:02:30.800 road being over the next twelve months. 0:02:30.960 --> 0:02:33.480 So that assumes that the economy stays sort of, you know, 0:02:33.680 --> 0:02:37.000 below trend growth but healthy, so two percent real inflation 0:02:37.040 --> 0:02:39.519 continues to climb down but not you know, go in 0:02:39.560 --> 0:02:41.600 a way where its deflationary. So you have four to 0:02:41.639 --> 0:02:44.639 four four and a half percent nominal GDP growth, which 0:02:44.680 --> 0:02:46.800 gets you ten percent earnings growth. There there will be 0:02:46.800 --> 0:02:49.120 some operating leverage and then the multiple comes down a 0:02:49.160 --> 0:02:51.240 little bit, but not as much as what we would 0:02:51.240 --> 0:02:53.799 have thought this year, because look, that's just that's where 0:02:53.800 --> 0:02:55.799 we are. It's very hard to get the multiple to 0:02:55.840 --> 0:02:57.960 come down at the Fed's cutting rates and you have 0:02:58.320 --> 0:03:01.680 above trend ernie's growth, and that's we're forecasting once again, 0:03:02.040 --> 0:03:05.640 assuming soft landing. Okay, inflation continuents and the Fed can cut. 0:03:05.680 --> 0:03:08.160 I would say the biggest risk in that outcome is 0:03:08.200 --> 0:03:10.960 on the inflation side. We're seeing inflation pick up again 0:03:11.040 --> 0:03:14.120 because look, let's be honest, we financial conditions are very 0:03:14.160 --> 0:03:16.840 loose again, something that's the market itself. We have now 0:03:16.880 --> 0:03:19.840 animal spirits picking up because the election outcome and people 0:03:19.840 --> 0:03:23.440 are excited. That excitement has a negative consequence, which is 0:03:23.480 --> 0:03:25.080 that all of a sudden, inflation starts to pick up 0:03:25.120 --> 0:03:26.840 again and maybe the Fed can't cut. 0:03:26.880 --> 0:03:29.440 That to me is probably the biggest risk to the multiple, 0:03:29.639 --> 0:03:32.440 that the Fed can't cut as much as people are anticipating. 0:03:32.520 --> 0:03:34.800 In So I mean, and this may be a driver 0:03:34.920 --> 0:03:40.440 of that, But wouldn't bad certainty on tariffs, bad certainty 0:03:40.480 --> 0:03:44.440 on mass deportations, wouldn't that be bad news for the 0:03:44.440 --> 0:03:46.040 economy and for the market. 0:03:46.320 --> 0:03:48.360 So I mean that's once again going back to our 0:03:48.480 --> 0:03:50.760 view for next year. I think the risks are front 0:03:50.800 --> 0:03:52.880 end loaded. We're going to get a lot of announcements. 0:03:52.880 --> 0:03:55.360 Like I would say, the bad stuff comes early, the 0:03:55.400 --> 0:03:58.840 good stuff from the changeover around administration comes later, meaning 0:03:59.120 --> 0:04:00.600 you know, tariffs and immigration. 0:04:00.920 --> 0:04:02.720 You do think we'll get certainty because I feel like 0:04:02.960 --> 0:04:04.960 it's going to be a little bit like Lucy holding 0:04:05.000 --> 0:04:07.040 the football. You know, well, well Solan Trump loves to 0:04:07.040 --> 0:04:08.760 play that game. He just pulls it away every time 0:04:08.760 --> 0:04:09.360 you take a kick. 0:04:09.480 --> 0:04:10.280 Well, I think, I. 0:04:10.200 --> 0:04:12.760 Mean, look, policy, the way policy's made is you flow 0:04:12.840 --> 0:04:15.400 tribal loons. You see how the markets react, and then 0:04:15.400 --> 0:04:18.159 you're reflexive. I mean that's how I anticipate this to 0:04:18.200 --> 0:04:20.920 go down. And every time you get one of those 0:04:20.920 --> 0:04:23.279 sort of tribal loons and then policy actually has made 0:04:23.520 --> 0:04:25.919 you get more certainty. That doesn't mean the market's going 0:04:26.000 --> 0:04:27.680 to like it or love it. It just means we're 0:04:27.680 --> 0:04:29.280 gonna get more information as we go through. I mean, 0:04:29.400 --> 0:04:32.000 he hasn't even taken office yet, you know, so let's 0:04:32.040 --> 0:04:32.800 give it a little. 0:04:32.640 --> 0:04:33.680 Chance there to breathe. 0:04:34.240 --> 0:04:36.640 I would say, once again, I think that the sort 0:04:36.640 --> 0:04:40.160 of headwinds for the market are probably early policy changes, 0:04:40.520 --> 0:04:42.760 and then the good stuff, whether it's deregulation, maybe some 0:04:42.800 --> 0:04:47.080 government efficiency, maybe tax extensions or even further cuts, comes 0:04:47.160 --> 0:04:49.640 later in the year. So that's the setup for now, 0:04:50.160 --> 0:04:52.840 all subject to revision, of course, because there's a lot 0:04:52.839 --> 0:04:53.960 of other things going on as well. 0:04:54.160 --> 0:04:56.200 Yeah, a lot of big ifs there. But I do 0:04:56.279 --> 0:04:58.919 want to talk specifically about this month. You had a 0:04:58.960 --> 0:05:01.360 really interesting note out a couple days ago talking about 0:05:01.360 --> 0:05:04.920 how usually in December you see the small caps lead. 0:05:05.040 --> 0:05:07.320 That's not what we've seen. The rustle two thousand, that's 0:05:07.360 --> 0:05:10.039 actually down about three percent over the past two weeks, 0:05:10.040 --> 0:05:12.520 and it's been big tech that's been in charge. So 0:05:13.240 --> 0:05:15.640 what is different and do you see us reverting back 0:05:15.680 --> 0:05:17.320 to some of those historical patterns. 0:05:17.440 --> 0:05:19.960 So I think what happened is and this happens every year. 0:05:20.000 --> 0:05:22.400 We've seen we get the sort of small cap. 0:05:22.200 --> 0:05:24.000 Trade earlier and earlier every year. 0:05:24.040 --> 0:05:27.040 We also had the election, and we know from twenty 0:05:27.080 --> 0:05:29.000 sixteen's experience that we got we were going to get 0:05:29.000 --> 0:05:31.240 a big pop in sort of small business confidence. 0:05:31.400 --> 0:05:33.320 We since confirmed that earlier this week. 0:05:33.360 --> 0:05:35.400 That was the biggest increase we've seen in twenty five 0:05:35.480 --> 0:05:39.279 years small business confidence, so maybe the market kind of 0:05:39.279 --> 0:05:41.719 pre traded it. I still think the second half of 0:05:41.720 --> 0:05:45.440 this month we could see further outperformance from small caps 0:05:45.480 --> 0:05:47.880 and some cyclicals, just as you kind of mark that 0:05:48.000 --> 0:05:49.839 up into year end, and then I think you'll get 0:05:49.880 --> 0:05:53.040 a fade into January February. That's the way historically the 0:05:53.120 --> 0:05:55.000 last four or five years is trade or ten years. 0:05:55.040 --> 0:05:57.880 Really you get the small cap trade now earlier, and 0:05:57.920 --> 0:06:00.000 then you actually fade it at the beginning of the year. 0:06:00.240 --> 0:06:02.919 Here's two weeks of the major indexes. 0:06:02.960 --> 0:06:04.840 If you take it out to five years, you'll see 0:06:04.880 --> 0:06:08.799 the Russell two thousand has really underperformed, and the text docks, 0:06:08.800 --> 0:06:14.280 the Nasdaq has really outperformed. Does that a pattern hold indefinitely? 0:06:14.400 --> 0:06:16.040 Is this just how it is? 0:06:16.640 --> 0:06:18.400 Well, we've had that view for quite a while. 0:06:18.640 --> 0:06:21.279 We just upgrade, finally upgraded small caps this summer to 0:06:21.360 --> 0:06:21.840 a neutral. 0:06:21.960 --> 0:06:23.520 Like we're still neutral on a view. 0:06:23.839 --> 0:06:25.760 I think right now the market is still going to 0:06:25.800 --> 0:06:26.880 be it's somewhat narrow. 0:06:26.920 --> 0:06:28.360 I mean it's upgraded to a neutral. 0:06:28.360 --> 0:06:30.359 We upgraded to and we have a viewer writing in 0:06:30.440 --> 0:06:34.320 who wants to know what made you change your bearest stance? 0:06:34.400 --> 0:06:37.600 What was it that made you say, Okay, you know what, 0:06:37.720 --> 0:06:38.719 I'm thrown in the towel. 0:06:39.480 --> 0:06:40.520 We're bulled up. 0:06:40.680 --> 0:06:42.720 Well, I mean the data, I mean basically, I mean, 0:06:42.800 --> 0:06:45.520 I mean, I think it was pretty consensus a year 0:06:45.600 --> 0:06:48.000 year and a half ago that the FEDS hiking regime 0:06:48.120 --> 0:06:50.160 was going to lead to a hard landing and it 0:06:50.240 --> 0:06:51.720 never arrived. And there are a lot of it we 0:06:51.760 --> 0:06:53.960 can go into that. We weree a long note about 0:06:54.000 --> 0:06:55.360 what was different to cycle. 0:06:55.680 --> 0:06:55.920 Now. 0:06:56.080 --> 0:06:58.640 To be clear, I don't think the risk of a 0:06:58.640 --> 0:07:01.400 hard landing has been extinguished, and we're still late cycle, 0:07:01.680 --> 0:07:04.400 which is why we're treading narrow again. We're treating you know, 0:07:04.400 --> 0:07:06.720 people are going for the large cap quality stocks, which 0:07:06.760 --> 0:07:09.360 is why we don't want to go full overweight on 0:07:09.640 --> 0:07:11.200 small caps or low quality. 0:07:11.240 --> 0:07:13.080 We don't think this is the part of the cycle. Like, 0:07:13.120 --> 0:07:14.200 we're not out of the view that this. 0:07:14.200 --> 0:07:17.200 Is going to be some big ramp in the next year, 0:07:17.680 --> 0:07:20.640 that everything's changed, right, it's still a late sight of economy. 0:07:21.000 --> 0:07:23.920 You know, rates are still pretty high, we have you know, 0:07:23.960 --> 0:07:26.640 we have cost issues with some of the smaller businesses, 0:07:26.880 --> 0:07:29.760 and most consumers are still struggling. Okay, that's not a 0:07:30.200 --> 0:07:33.120 kind of environment where small caps or low quality stocks 0:07:33.160 --> 0:07:36.000 tend to outperform. The one last thing I'll say, though, 0:07:36.080 --> 0:07:39.280 which is I think a big missed thing that people misunderstand, 0:07:39.640 --> 0:07:42.440 is that most stocks, okay, not the big stocks, most 0:07:42.440 --> 0:07:46.680 stocks do better when inflation is actually accelerating. So if 0:07:46.720 --> 0:07:48.600 you go back and look like twenty twenty twenty one 0:07:48.880 --> 0:07:51.440 and even in twenty two, the average stock did better 0:07:51.440 --> 0:07:53.360 than the S and P five hundred when inflation was 0:07:53.400 --> 0:07:54.400 actually accelerating. 0:07:54.800 --> 0:07:57.720 Makes sense, though you want to hold stocks to hedge inflation, right, and. 0:07:57.680 --> 0:08:00.480 Earnings growth is better, So I do. I do think 0:08:00.560 --> 0:08:02.840 that next year. What could happen is we could have 0:08:02.880 --> 0:08:04.960 a correction in the first half of next year as 0:08:05.000 --> 0:08:08.680 perhaps inflation comes back, But that's an S and P event, 0:08:09.240 --> 0:08:11.560 and actually the average stock may not go down that much. 0:08:11.600 --> 0:08:14.480 That is an interesting kind of relative value trade that 0:08:14.520 --> 0:08:16.559 I think you know people who can do that should 0:08:16.560 --> 0:08:17.600 be thinking about right now. 0:08:17.720 --> 0:08:20.200 Interesting. So maybe a little bit cautious when it comes 0:08:20.200 --> 0:08:23.240 to the benchmark, but still opportunities to find at the 0:08:23.280 --> 0:08:25.840 single stock level in that scenario. But I do want 0:08:25.840 --> 0:08:28.760 to get your thoughts on how the different asset classes 0:08:28.800 --> 0:08:31.560 are talking to each other, because the bond market has 0:08:31.600 --> 0:08:34.000 been so volatile, especially if you take a look at 0:08:34.000 --> 0:08:35.960 the long end, it feels like the stock market may 0:08:35.960 --> 0:08:39.160 be some enthusiasm coming out, but it doesn't necessarily just 0:08:39.160 --> 0:08:42.040 seem to be rates driven. How do you see that 0:08:42.080 --> 0:08:45.280 relationship evolving in twenty twenty five, especially if that big 0:08:45.360 --> 0:08:47.920 risk comes to fruition and the Fed can't cut as 0:08:48.000 --> 0:08:49.280 much as expected. 0:08:49.440 --> 0:08:52.160 So the rate correlation with equities has flip flopped quite 0:08:52.200 --> 0:08:54.440 a bit, and earlier this year it was quite negative, 0:08:54.480 --> 0:08:56.520 meaning when rates went up, it was bad for stocks, 0:08:56.600 --> 0:08:59.440 and now really since the fall, that's why we pivoted 0:08:59.440 --> 0:09:03.280 more cycnically. Stocks are now positively correlated to rates, and 0:09:03.320 --> 0:09:05.640 we think the sweet spot for ten year yelds is 0:09:05.679 --> 0:09:08.319 four to four and a half percent. Like in that range, 0:09:08.679 --> 0:09:12.160 stocks can actually act okays as rates go higher. If 0:09:12.200 --> 0:09:14.560 we get through four and a half and if term 0:09:14.600 --> 0:09:17.560 premium starts to increase, which would be concerned about inflation, 0:09:18.480 --> 0:09:21.400 then you're going to see that correlation flip again. So we're, 0:09:21.559 --> 0:09:24.240 you know, like everybody else, we watch how markets are reacting. 0:09:24.240 --> 0:09:27.080 It's very reflexive, and but then we think once again 0:09:27.080 --> 0:09:28.360 that four to four and a half percent range is 0:09:28.400 --> 0:09:29.120 kind of a sweet spot. 0:09:29.240 --> 0:09:31.280 All right, Mike. It is always great to speak with you, 0:09:31.400 --> 0:09:32.560 especially on a Friday. 0:09:32.679 --> 0:09:36.679 Have a great week. Last night very very spooky. It's 0:09:36.720 --> 0:09:37.320 great to see you. 0:09:37.720 --> 0:09:40.400 That is Mike Wilson. He is Chief US Equity Strategist.