Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Joining us here at
Speaker 1: the table is Morgan Stanley, chief US equity strategist Mike Wilson.
Speaker 1: You know, people think of you as a bear also.
Speaker 2: Mike, and also very smart.
Speaker 1: So well, you're not really bearished this market, are you.
Speaker 3: Well, No, we haven't been for the better part of
Speaker 3: six or eight months. We took our targets up significantly
Speaker 3: in May, sort of in the idea that you know,
Speaker 3: we were going to kind of make it through there
Speaker 3: wasn't going to be a growth scare that it caused
Speaker 3: a hard landing, and also the Fed, you know, the
Speaker 3: Fed move fifty basis points. And then of course we
Speaker 3: had the election outcome. So like we've had a lot
Speaker 3: of good things that have happened over the course of
Speaker 3: like the last three or four months. So I would
Speaker 3: argue the markets have traded that really, really well, as
Speaker 3: they typically.
Speaker 4: Get ahead of those things.
Speaker 3: The question now, and I think we said on this
Speaker 3: program in October we said we think we could trade
Speaker 3: sixty one hundred on a definitive election outcome, and we
Speaker 3: got that. So now here we are sixty one hundred.
Speaker 3: Do we just revise our numbers higher? No, we're we
Speaker 3: think we're on for sixty five by n next year,
Speaker 3: assuming that things, you know, progressed the way that we expect,
Speaker 3: needing the base case of substances. We have our economic
Speaker 3: forecast for the FED.
Speaker 4: That's where that's where they're visibility.
Speaker 3: That's where the sort of risk is is that our
Speaker 3: forecast on the outcome is not what we expect it
Speaker 3: to be. And I think this year's next twelve months
Speaker 3: is going to be just like the last twelve months,
Speaker 3: where there's uncertainty at times around the growth outcome and
Speaker 3: any inflation outcome. But up thirty percent, well not up
Speaker 3: thirty but I mean it's but you know, the thing
Speaker 3: is the last twelve months, we got the earnings forecast
Speaker 3: exactly right, but we got underestimated was the multiple.
Speaker 4: And I don't think I was alone in that.
Speaker 3: I think I don't recall anyone telling me we're going
Speaker 3: to trade twenty two or twenty three times. But then
Speaker 3: when we get there, everyone just justifies it and says.
Speaker 4: It's okay, we can stay here or even go higher.
Speaker 3: So look, markets are a little bit diabolical. They trade ahead,
Speaker 3: and when you're trading the stock market or stocks, you
Speaker 3: need to think about what's going to be happening in
Speaker 3: six months now, what's happening today. And I think the
Speaker 3: first half of next year is where they uncertainty probably
Speaker 3: is going to increase, and then by the second half
Speaker 3: of next year things could clear. So it's going to
Speaker 3: be another I think, volatile year, plenty of training opportunity,
Speaker 3: plenty of dispersion in the stock market. That's what we
Speaker 3: kind of focus on, what to own, not how much
Speaker 3: to own, and that's the game.
Speaker 4: That's the game that we play.
Speaker 2: Well, let's swap through some of that volatility, because there's
Speaker 2: the absolute level right sixty five hundred year and twenty
Speaker 2: twenty five. It feels like a lot of Wall Street
Speaker 2: has coalesced around that number. But what does the path
Speaker 2: to get there look like? What do you see the
Speaker 2: road being over the next twelve months.
Speaker 3: So that assumes that the economy stays sort of, you know,
Speaker 3: below trend growth but healthy, so two percent real inflation
Speaker 3: continues to climb down but not you know, go in
Speaker 3: a way where its deflationary. So you have four to
Speaker 3: four four and a half percent nominal GDP growth, which
Speaker 3: gets you ten percent earnings growth. There there will be
Speaker 3: some operating leverage and then the multiple comes down a
Speaker 3: little bit, but not as much as what we would
Speaker 3: have thought this year, because look, that's just that's where
Speaker 3: we are. It's very hard to get the multiple to
Speaker 3: come down at the Fed's cutting rates and you have
Speaker 3: above trend ernie's growth, and that's we're forecasting once again,
Speaker 3: assuming soft landing. Okay, inflation continuents and the Fed can cut.
Speaker 3: I would say the biggest risk in that outcome is
Speaker 3: on the inflation side. We're seeing inflation pick up again
Speaker 3: because look, let's be honest, we financial conditions are very
Speaker 3: loose again, something that's the market itself. We have now
Speaker 3: animal spirits picking up because the election outcome and people
Speaker 3: are excited. That excitement has a negative consequence, which is
Speaker 3: that all of a sudden, inflation starts to pick up
Speaker 3: again and maybe the Fed can't cut.
Speaker 4: That to me is probably the biggest risk to the multiple,
Speaker 4: that the Fed can't cut as much as people are anticipating.
Speaker 1: In So I mean, and this may be a driver
Speaker 1: of that, But wouldn't bad certainty on tariffs, bad certainty
Speaker 1: on mass deportations, wouldn't that be bad news for the
Speaker 1: economy and for the market.
Speaker 3: So I mean that's once again going back to our
Speaker 3: view for next year. I think the risks are front
Speaker 3: end loaded. We're going to get a lot of announcements.
Speaker 3: Like I would say, the bad stuff comes early, the
Speaker 3: good stuff from the changeover around administration comes later, meaning
Speaker 3: you know, tariffs and immigration.
Speaker 1: You do think we'll get certainty because I feel like
Speaker 1: it's going to be a little bit like Lucy holding
Speaker 1: the football. You know, well, well Solan Trump loves to
Speaker 1: play that game. He just pulls it away every time
Speaker 1: you take a kick.
Speaker 4: Well, I think, I.
Speaker 3: Mean, look, policy, the way policy's made is you flow
Speaker 3: tribal loons. You see how the markets react, and then
Speaker 3: you're reflexive. I mean that's how I anticipate this to
Speaker 3: go down. And every time you get one of those
Speaker 3: sort of tribal loons and then policy actually has made
Speaker 3: you get more certainty. That doesn't mean the market's going
Speaker 3: to like it or love it. It just means we're
Speaker 3: gonna get more information as we go through. I mean,
Speaker 3: he hasn't even taken office yet, you know, so let's
Speaker 3: give it a little.
Speaker 4: Chance there to breathe.
Speaker 3: I would say, once again, I think that the sort
Speaker 3: of headwinds for the market are probably early policy changes,
Speaker 3: and then the good stuff, whether it's deregulation, maybe some
Speaker 3: government efficiency, maybe tax extensions or even further cuts, comes
Speaker 3: later in the year. So that's the setup for now,
Speaker 3: all subject to revision, of course, because there's a lot
Speaker 3: of other things going on as well.
Speaker 2: Yeah, a lot of big ifs there. But I do
Speaker 2: want to talk specifically about this month. You had a
Speaker 2: really interesting note out a couple days ago talking about
Speaker 2: how usually in December you see the small caps lead.
Speaker 2: That's not what we've seen. The rustle two thousand, that's
Speaker 2: actually down about three percent over the past two weeks,
Speaker 2: and it's been big tech that's been in charge. So
Speaker 2: what is different and do you see us reverting back
Speaker 2: to some of those historical patterns.
Speaker 3: So I think what happened is and this happens every year.
Speaker 3: We've seen we get the sort of small cap.
Speaker 4: Trade earlier and earlier every year.
Speaker 3: We also had the election, and we know from twenty
Speaker 3: sixteen's experience that we got we were going to get
Speaker 3: a big pop in sort of small business confidence.
Speaker 4: We since confirmed that earlier this week.
Speaker 3: That was the biggest increase we've seen in twenty five
Speaker 3: years small business confidence, so maybe the market kind of
Speaker 3: pre traded it. I still think the second half of
Speaker 3: this month we could see further outperformance from small caps
Speaker 3: and some cyclicals, just as you kind of mark that
Speaker 3: up into year end, and then I think you'll get
Speaker 3: a fade into January February. That's the way historically the
Speaker 3: last four or five years is trade or ten years.
Speaker 3: Really you get the small cap trade now earlier, and
Speaker 3: then you actually fade it at the beginning of the year.
Speaker 4: Here's two weeks of the major indexes.
Speaker 1: If you take it out to five years, you'll see
Speaker 1: the Russell two thousand has really underperformed, and the text docks,
Speaker 1: the Nasdaq has really outperformed. Does that a pattern hold indefinitely?
Speaker 1: Is this just how it is?
Speaker 4: Well, we've had that view for quite a while.
Speaker 3: We just upgrade, finally upgraded small caps this summer to
Speaker 3: a neutral.
Speaker 4: Like we're still neutral on a view.
Speaker 3: I think right now the market is still going to
Speaker 3: be it's somewhat narrow.
Speaker 4: I mean it's upgraded to a neutral.
Speaker 1: We upgraded to and we have a viewer writing in
Speaker 1: who wants to know what made you change your bearest stance?
Speaker 1: What was it that made you say, Okay, you know what,
Speaker 1: I'm thrown in the towel.
Speaker 4: We're bulled up.
Speaker 3: Well, I mean the data, I mean basically, I mean,
Speaker 3: I mean, I think it was pretty consensus a year
Speaker 3: year and a half ago that the FEDS hiking regime
Speaker 3: was going to lead to a hard landing and it
Speaker 3: never arrived. And there are a lot of it we
Speaker 3: can go into that. We weree a long note about
Speaker 3: what was different to cycle.
Speaker 4: Now.
Speaker 3: To be clear, I don't think the risk of a
Speaker 3: hard landing has been extinguished, and we're still late cycle,
Speaker 3: which is why we're treading narrow again. We're treating you know,
Speaker 3: people are going for the large cap quality stocks, which
Speaker 3: is why we don't want to go full overweight on
Speaker 3: small caps or low quality.
Speaker 4: We don't think this is the part of the cycle. Like,
Speaker 4: we're not out of the view that this.
Speaker 3: Is going to be some big ramp in the next year,
Speaker 3: that everything's changed, right, it's still a late sight of economy.
Speaker 3: You know, rates are still pretty high, we have you know,
Speaker 3: we have cost issues with some of the smaller businesses,
Speaker 3: and most consumers are still struggling. Okay, that's not a
Speaker 3: kind of environment where small caps or low quality stocks
Speaker 3: tend to outperform. The one last thing I'll say, though,
Speaker 3: which is I think a big missed thing that people misunderstand,
Speaker 3: is that most stocks, okay, not the big stocks, most
Speaker 3: stocks do better when inflation is actually accelerating. So if
Speaker 3: you go back and look like twenty twenty twenty one
Speaker 3: and even in twenty two, the average stock did better
Speaker 3: than the S and P five hundred when inflation was
Speaker 3: actually accelerating.
Speaker 1: Makes sense, though you want to hold stocks to hedge inflation, right, and.
Speaker 3: Earnings growth is better, So I do. I do think
Speaker 3: that next year. What could happen is we could have
Speaker 3: a correction in the first half of next year as
Speaker 3: perhaps inflation comes back, But that's an S and P event,
Speaker 3: and actually the average stock may not go down that much.
Speaker 3: That is an interesting kind of relative value trade that
Speaker 3: I think you know people who can do that should
Speaker 3: be thinking about right now.
Speaker 2: Interesting. So maybe a little bit cautious when it comes
Speaker 2: to the benchmark, but still opportunities to find at the
Speaker 2: single stock level in that scenario. But I do want
Speaker 2: to get your thoughts on how the different asset classes
Speaker 2: are talking to each other, because the bond market has
Speaker 2: been so volatile, especially if you take a look at
Speaker 2: the long end, it feels like the stock market may
Speaker 2: be some enthusiasm coming out, but it doesn't necessarily just
Speaker 2: seem to be rates driven. How do you see that
Speaker 2: relationship evolving in twenty twenty five, especially if that big
Speaker 2: risk comes to fruition and the Fed can't cut as
Speaker 2: much as expected.
Speaker 3: So the rate correlation with equities has flip flopped quite
Speaker 3: a bit, and earlier this year it was quite negative,
Speaker 3: meaning when rates went up, it was bad for stocks,
Speaker 3: and now really since the fall, that's why we pivoted
Speaker 3: more cycnically. Stocks are now positively correlated to rates, and
Speaker 3: we think the sweet spot for ten year yelds is
Speaker 3: four to four and a half percent. Like in that range,
Speaker 3: stocks can actually act okays as rates go higher. If
Speaker 3: we get through four and a half and if term
Speaker 3: premium starts to increase, which would be concerned about inflation,
Speaker 3: then you're going to see that correlation flip again. So we're,
Speaker 3: you know, like everybody else, we watch how markets are reacting.
Speaker 3: It's very reflexive, and but then we think once again
Speaker 3: that four to four and a half percent range is
Speaker 3: kind of a sweet spot.
Speaker 2: All right, Mike. It is always great to speak with you,
Speaker 2: especially on a Friday.
Speaker 4: Have a great week. Last night very very spooky. It's
Speaker 4: great to see you.
Speaker 2: That is Mike Wilson. He is Chief US Equity Strategist.