WEBVTT - Morgan Stanley's Mike Wilson Talks Market Outlook 0:00:00.080 --> 0:00:01.640 Firmly focused on stocks. 0:00:01.680 --> 0:00:04.400 He's one of the last bears remaining down on Wall Street. 0:00:04.400 --> 0:00:08.119 Morgan Stanley's CIO and chief US equity strategist, Mike Wilson 0:00:08.400 --> 0:00:11.039 joins us at the desk this morning, and Mike's great 0:00:11.039 --> 0:00:12.600 to have you to kick off the program. Thanks so 0:00:12.680 --> 0:00:15.800 much for coming in to be our first guest. What 0:00:15.840 --> 0:00:18.880 do you think about the valuations? I showed just a 0:00:18.920 --> 0:00:22.119 moment ago if you type e c SU on the 0:00:22.160 --> 0:00:25.319 Bloomberg term release THEE economic surprises and they continue to 0:00:25.360 --> 0:00:26.560 come out to the downside. 0:00:26.760 --> 0:00:26.960 Yeah. 0:00:27.080 --> 0:00:30.680 Look, we're in this period where bad is good for multiples, right, 0:00:30.760 --> 0:00:33.120 So slower growth, as long as it's not a recession, 0:00:33.240 --> 0:00:36.120 brings down inflation expectations, which allows the FED to cut 0:00:36.120 --> 0:00:38.519 and that's what the market has been anticipating now for 0:00:38.560 --> 0:00:41.520 almost a year now. They've been wrong about the number 0:00:41.520 --> 0:00:44.240 of cuts. But the conclusion the equity market is making 0:00:44.320 --> 0:00:45.479 right now is that, well, there's not going to be 0:00:45.479 --> 0:00:48.160 a hike, and we know the direction of travel is down. 0:00:48.360 --> 0:00:51.440 That's fine, so long as that negative growth surprise doesn't 0:00:51.440 --> 0:00:53.640 turned into a hard landing, and right now that's not 0:00:53.680 --> 0:00:56.360 the case. Now the labor market is showing signs of weakness, 0:00:56.360 --> 0:00:59.760 but not to the degree that would freak out equity markets. 0:00:59.720 --> 0:01:01.680 And what's going on is the markets that are very 0:01:01.680 --> 0:01:04.360 efficient right now, they're basically putting money to work in 0:01:04.440 --> 0:01:07.760 high quality growth stocks. They're paying up for anything that 0:01:07.800 --> 0:01:12.040 has growth because that's what the market needs. Growth is scarce, 0:01:12.560 --> 0:01:14.400 so you know, people are saying, well that market share 0:01:14.400 --> 0:01:16.600 broad it's not going to broaden out that this continues. 0:01:16.840 --> 0:01:18.800 But it also doesn't mean that we're going to collapse 0:01:19.280 --> 0:01:21.320 until there's either evidence that we're going to be hard 0:01:21.400 --> 0:01:24.240 landing or there's evidence that we're going to reaccelerate, and 0:01:24.280 --> 0:01:26.319 then the FED can't cut and rates go higher. 0:01:26.360 --> 0:01:27.280 So we're stuck. 0:01:27.280 --> 0:01:29.480 We're stuck in this sort of environment that really a 0:01:29.520 --> 0:01:32.440 lot of active managers don't like because it's narrow. It's 0:01:32.440 --> 0:01:34.839 hard to pick stocks again, and it's hard. 0:01:34.680 --> 0:01:36.200 To outperform, hard to outperform. 0:01:36.240 --> 0:01:37.720 It sounds like what you're saying, though, is that at 0:01:37.800 --> 0:01:41.280 the benchmark level that narrow breath, it doesn't necessarily mean 0:01:41.319 --> 0:01:43.360 that it returns will be waged down. 0:01:43.560 --> 0:01:45.720 No, not necessarily, And we did some work on this 0:01:45.720 --> 0:01:47.600 the last couple of weeks. It shows that when breath 0:01:47.680 --> 0:01:49.680 is this bad, and by the way it's historically bad, 0:01:50.440 --> 0:01:52.840 it's a fifty to fifty chance that it's bad, and 0:01:52.840 --> 0:01:54.600 it's fifty to fifty chance that it's good for the 0:01:54.640 --> 0:01:58.320 overall SMP five hundred index. And so we play this 0:01:58.400 --> 0:02:01.160 game until it ends in the game will change. The 0:02:01.240 --> 0:02:03.080 question is is it going to be a situation where 0:02:03.120 --> 0:02:07.320 you have everything gets corrected lower or can it broaden 0:02:07.360 --> 0:02:11.840 out to small caps, to more cyclical stocks, to other 0:02:11.919 --> 0:02:15.120 assets that you don't have a multiple forty fifty times Mike. 0:02:15.160 --> 0:02:19.079 You've written recently also that investors are increasingly becoming concerned 0:02:19.080 --> 0:02:22.840 about higher rates, perhaps even a rate hike down the corner. 0:02:22.960 --> 0:02:26.120 You look at this year and expectations for September, for example, 0:02:26.160 --> 0:02:28.640 but then you look on a longer horizon and the 0:02:28.720 --> 0:02:33.160 worries about fiscal spending here spending from either a future 0:02:33.160 --> 0:02:37.080 Biden administration or a future Trump administration. How much worry 0:02:37.240 --> 0:02:39.600 do investors really have under the surface and how could 0:02:39.639 --> 0:02:42.360 that throw the entire storyline off course? 0:02:42.720 --> 0:02:43.240 Right now? 0:02:43.320 --> 0:02:45.560 That concern is not there, okay, And the way we 0:02:45.639 --> 0:02:48.600 measure that concern is the term premium. So rates have 0:02:48.680 --> 0:02:51.519 gone up this year from January, and it didn't affect 0:02:51.560 --> 0:02:54.880 the overall market multiples because it was not about term premium, 0:02:54.880 --> 0:02:57.440 meaning concern about fiscal prompt you know, sort of spending. 0:02:57.760 --> 0:03:01.400 It was about growth being better and frankly, inflation being better. 0:03:01.400 --> 0:03:03.920 Now there's a misnomer out there that higher inflation is 0:03:03.960 --> 0:03:04.720 bad for stocks. 0:03:04.720 --> 0:03:05.120 Not true. 0:03:05.440 --> 0:03:09.000 Higher inflation is good for smaller stocks, it's good for 0:03:09.080 --> 0:03:11.160 the average stock. What we have right now is we 0:03:11.160 --> 0:03:14.280 have a disinflationary boom, which really means that. 0:03:14.360 --> 0:03:15.680 The few stocks benefits. 0:03:15.720 --> 0:03:18.359 So I don't think it's a risk now, but with 0:03:18.400 --> 0:03:20.640 our election, with the elections overseas that are going on, 0:03:20.800 --> 0:03:23.600 and one pointly just the fiscal spending that's going on, 0:03:23.680 --> 0:03:25.880 regardless of the outcome of the elections, I think it 0:03:25.919 --> 0:03:28.320 could come back into play later this year. One thing 0:03:28.360 --> 0:03:31.400 we're watching very closely is how they're funding the government. Okay, 0:03:31.680 --> 0:03:33.520 so we have the reverse repo, which is pretty well 0:03:33.560 --> 0:03:34.320 understood at this point. 0:03:34.320 --> 0:03:35.400 It's about four to four hunred and. 0:03:35.360 --> 0:03:37.560 Fifty billion dollars that they can They can use that 0:03:37.680 --> 0:03:39.000 to fund bill issuance. 0:03:39.040 --> 0:03:40.640 Effectively, they still have a. 0:03:40.600 --> 0:03:43.400 Fairly large Treasury General account, so if they need to 0:03:43.440 --> 0:03:45.400 tap into that because they don't want to issue as 0:03:45.480 --> 0:03:47.640 much paper. They can do that, and then and they 0:03:47.680 --> 0:03:50.080 still have you know, the FED, which is going to 0:03:50.120 --> 0:03:54.240 start curtailing QT now, which is effectively QE, right, if 0:03:54.240 --> 0:03:57.400 they start reinvesting, which is what the end of QT is, 0:03:57.720 --> 0:04:00.720 that's about you know, six seven hundred billion dollars annually 0:04:00.720 --> 0:04:03.640 of bond purchases, So they have the liquidity provisions in 0:04:03.680 --> 0:04:05.440 place at least to the end of the year, I 0:04:05.440 --> 0:04:07.760 would argue, and then we'll see, So twenty five could 0:04:07.800 --> 0:04:09.880 be a bigger challenge for that term premium. 0:04:09.920 --> 0:04:11.520 Do they have to go the other way? Does the 0:04:11.560 --> 0:04:12.840 FED have to go the other way? 0:04:13.880 --> 0:04:17.160 If Trump wins in November, because he's talking about massive 0:04:17.839 --> 0:04:21.719 tariffs on the Chinese, he's talking about deporting millions of 0:04:21.720 --> 0:04:24.800 people from the US obviously shutting down the border. That's 0:04:24.800 --> 0:04:27.360 all incredibly inflationary, right, or it could be, at least 0:04:27.360 --> 0:04:28.640 according to Larry Summers. 0:04:28.400 --> 0:04:29.039 Yeah, it could be. 0:04:29.440 --> 0:04:31.039 I think the FED is going to be patient on 0:04:31.080 --> 0:04:33.920 that because look, I mean, these things all lag. Even 0:04:33.960 --> 0:04:36.719 if those things happen, it won't take place until the 0:04:36.760 --> 0:04:39.359 first second quarter of next year, and then the impact 0:04:39.400 --> 0:04:41.520 on the actual data will be a year from now. 0:04:41.800 --> 0:04:43.640 So I think the FED is probably going is on 0:04:43.800 --> 0:04:46.360 track now. I think they want to cut rates. They 0:04:46.360 --> 0:04:48.880 want to cut rates more than twenty five or fifty 0:04:48.960 --> 0:04:51.920 because the curve is inverted by a significant amount, So. 0:04:52.279 --> 0:04:54.080 The twenty five basis points doesn't do a lot. 0:04:54.200 --> 0:04:56.760 I don't think twenty five to fifty basis points change. 0:04:56.839 --> 0:04:59.559 Is this dynamic that we're seeing in the equity market, 0:04:59.600 --> 0:05:03.320 meaning the kind of scarcity of growth paying up for 0:05:03.440 --> 0:05:05.720 growth in a way that we've been seeing. Now, if 0:05:05.720 --> 0:05:07.240 we were to get one hundred basis points to one 0:05:07.320 --> 0:05:09.800 hundred and fifty basis points of because without hard landing, 0:05:10.240 --> 0:05:13.560 then we could maybe see some rotation away from these leaders. 0:05:13.920 --> 0:05:14.440 Well, we'll see. 0:05:14.440 --> 0:05:16.840 Of course, so far the data hasn't even allowed them 0:05:16.839 --> 0:05:19.280 to do twenty five basis points, so we'll see if 0:05:19.279 --> 0:05:20.280 that starts to cooperate. 0:05:20.320 --> 0:05:21.400 I do want to talk about. 0:05:21.160 --> 0:05:23.520 Earning Season because in addition to the show launch, we 0:05:23.520 --> 0:05:25.960 also do have Earning Season kick off this week, and 0:05:26.000 --> 0:05:27.560 I was taking a look. If you take a look 0:05:27.600 --> 0:05:30.960 at expectations for twelve month forward earnings, they're at all 0:05:31.000 --> 0:05:33.720 time highs right now. I mean, how high is the 0:05:33.760 --> 0:05:36.320 bar for corporate America and can it actually meet that? 0:05:36.560 --> 0:05:40.880 Essentially an interesting kind of observation, because the reality is, yes, 0:05:41.120 --> 0:05:43.400 forward twelve month numbers are going up, but they're going 0:05:43.440 --> 0:05:45.039 up because we're moving out in time. 0:05:45.440 --> 0:05:46.240 And I would argue that. 0:05:46.200 --> 0:05:49.800 Twenty twenty five estimates are no one's even really done 0:05:49.800 --> 0:05:53.360 the math on that. No one has really actually calculated two. 0:05:53.680 --> 0:05:56.080 No one's estimating twenty twenty five. All they're doing is 0:05:56.279 --> 0:05:58.840 estimating the next two quarters and then rolling forward to 0:05:58.920 --> 0:06:01.280 some sort of growth rate. So I would argue that 0:06:01.279 --> 0:06:04.359 earning vestment has been coming down on a quarterly basis, 0:06:04.400 --> 0:06:08.120 Like for the last eighteen months, each coreter gets revised lower, 0:06:08.360 --> 0:06:10.800 they jump over the lowered bar. And that's exactly how 0:06:10.839 --> 0:06:12.800 we're set up for this quarter again, which is that 0:06:12.920 --> 0:06:13.920 earning has been coming down. 0:06:14.080 --> 0:06:16.120 They'll probably meet the expectations beat them. 0:06:16.400 --> 0:06:18.360 And this is where I think we could start to 0:06:18.400 --> 0:06:21.039 see twenty five estimates come down. Typically in the second 0:06:21.080 --> 0:06:23.800 half of the year, the market and analysts start to 0:06:23.800 --> 0:06:26.240 look ahead and say, actually, twenty five, we're going to 0:06:26.320 --> 0:06:28.479 have to revise this. And the wild card is the 0:06:28.760 --> 0:06:30.800 starts with the fourth quarter of this year. That's the 0:06:30.839 --> 0:06:34.040 big hockey stick of expectations. That's where the expectations get challenging. 0:06:34.360 --> 0:06:36.359 And the question is can companies manage that in a 0:06:36.400 --> 0:06:38.479 smooth way between here and the end of the year. 0:06:38.520 --> 0:06:41.560 We were talking a little bit earlier about earning Ceason, Mike, 0:06:41.760 --> 0:06:44.720 and we have this situation where you have high hies, 0:06:44.800 --> 0:06:50.320 high expectations. How much can these companies start to deliver here? 0:06:50.400 --> 0:06:52.200 How much of an issue are they going to have 0:06:52.240 --> 0:06:53.400 if they don't well. 0:06:53.440 --> 0:06:55.760 I think this is one area where you know, once again, 0:06:55.800 --> 0:06:59.000 bad is bad, Okay, So I would argue that weaker 0:06:59.040 --> 0:07:02.760 economic data is potentially good for multiples generally, at least 0:07:02.760 --> 0:07:04.560 if you're delivering on the earnings. But if you have 0:07:04.600 --> 0:07:06.600 bad earnings reports, you're gonna get punished. And that's been 0:07:06.640 --> 0:07:08.840 consistent all year, which is why the average stock is 0:07:08.839 --> 0:07:11.360 down this year. The average company has not had good 0:07:11.400 --> 0:07:12.200 earnings results. 0:07:12.480 --> 0:07:13.960 That's a good point to make, Mike, by the way, 0:07:13.960 --> 0:07:16.400 because we talk about you know, Jess Metton from our 0:07:16.400 --> 0:07:19.320 equity team writes about this earnings expansion that we're in 0:07:19.360 --> 0:07:22.760 three quarters in a row of growth, but it's only seven, eight, 0:07:22.840 --> 0:07:25.840 maybe ten companies. The other four hundred and ninety in 0:07:25.840 --> 0:07:27.800 the S and P are not doing well. So what 0:07:27.920 --> 0:07:30.400 has to happen for them to grow? 0:07:30.560 --> 0:07:32.320 To increase their earnings to do well. 0:07:32.360 --> 0:07:32.560 Yeah. 0:07:32.560 --> 0:07:34.280 Well, first of all, it's more than seven companies, but 0:07:34.280 --> 0:07:35.960 it's not more than probably thirty or forty. So it's 0:07:35.960 --> 0:07:37.480 a narrow it's like a fifty to fifty on us 0:07:37.480 --> 0:07:40.040 is where I would characterize it. Now, what needs to 0:07:40.080 --> 0:07:43.080 happen once again, We need the FED to cut like meaningfully. 0:07:43.080 --> 0:07:44.760 We need a curve to re steep in. We need 0:07:44.840 --> 0:07:46.559 cost to capital we come down. We need the labor 0:07:46.560 --> 0:07:48.840 markets to loosen up in a way where you know, 0:07:48.880 --> 0:07:51.400 over these smaller businesses can actually hire people at a 0:07:51.400 --> 0:07:53.600 reasonable price. Any pricing power to come back. One thing 0:07:53.640 --> 0:07:56.640 that gets overlooked is companies are losing pricing power now. 0:07:56.880 --> 0:07:59.840 So while we're all rooting for lower inflation once again, 0:08:00.120 --> 0:08:02.880 weaker inflation is not great for earnings. You know, small 0:08:02.880 --> 0:08:06.240 cap businesses, small cap companies like Brussel two thousand typically 0:08:06.320 --> 0:08:10.240 only does well coming out of a recession coming out 0:08:10.240 --> 0:08:12.720 of a new cycle. Why because race are low, curve 0:08:12.800 --> 0:08:15.840 is fully steepened, access to capital is abundant, and they 0:08:15.840 --> 0:08:16.760 have operating leverage. 0:08:16.760 --> 0:08:18.480 Again, that's just not where we are. 0:08:18.600 --> 0:08:21.280 So we need races to come down as number one, 0:08:21.360 --> 0:08:24.320 or we need some sort of exogenous positive shock on 0:08:24.360 --> 0:08:28.120 the growth side that doesn't lead to an inflationary problem. 0:08:28.520 --> 0:08:29.960 So you tell me where that's coming from. 0:08:30.000 --> 0:08:31.440 I think it's going to be a chance to challenge, 0:08:31.440 --> 0:08:34.400 and that's why we're not going to fight this trend. 0:08:34.400 --> 0:08:37.720 I mean, the momentum is so strong, because it's right now. 0:08:38.000 --> 0:08:40.839 What worries me is that that momentum is so strong 0:08:40.840 --> 0:08:43.520 and people have a lot more exposure to high multiple 0:08:43.520 --> 0:08:45.400 stocks than they think they do, and if you have 0:08:45.440 --> 0:08:48.560 an event that's unpredictable, then you could have a real 0:08:48.640 --> 0:08:51.240 reset on evaluation of ten to fifteen percent. I think 0:08:51.400 --> 0:08:53.880 the chance of a ten percent correction is highly likely 0:08:54.160 --> 0:08:57.000 sometime between now and the election, not just because of 0:08:57.000 --> 0:09:00.280 the election, but because uncertainty is going to prevail for 0:09:00.320 --> 0:09:02.640 a lot of different reasons. Earnings reasons, you know, election 0:09:02.760 --> 0:09:04.960 outcome reasons, some of the things you mentioned earlier on 0:09:05.040 --> 0:09:08.640 taris potentially immigration, fed policy still remains uncertain. 0:09:08.920 --> 0:09:10.960 So yeah, I think the third quarter typically is that 0:09:11.080 --> 0:09:12.280 period and it is going. 0:09:12.200 --> 0:09:13.880 To be chopping now. We're hopefully that's going to create 0:09:13.880 --> 0:09:16.880 some opportunity. But like right here, evaluations to me like 0:09:17.280 --> 0:09:18.400 very very unexciting. 0:09:18.800 --> 0:09:20.840 And it's a great point too, on you might be 0:09:20.920 --> 0:09:23.160 more exposed to tech than you think, especially if you're 0:09:23.160 --> 0:09:24.719 sitting in the S and P five hundred, which is 0:09:24.760 --> 0:09:27.439 what thirty percent tech or so I do want to 0:09:27.480 --> 0:09:30.760 actually talk about how all this rolls into price targets. 0:09:30.760 --> 0:09:32.560 And typically at this point I would ask you what 0:09:32.640 --> 0:09:34.960 your year end S and P five hundred forecast is. 0:09:35.000 --> 0:09:37.520 But I know that you've backed away from those sorts 0:09:37.559 --> 0:09:39.240 of calls. And it was interesting if you take a 0:09:39.240 --> 0:09:42.240 look at Friday, we got some news from Piper Sandler 0:09:42.280 --> 0:09:44.400 saying that they're actually going to drop their S and 0:09:44.440 --> 0:09:48.040 P five hundred forecasts, that basically it's bad practice. And 0:09:48.040 --> 0:09:50.640 when you think about that, I mean, are we starting 0:09:50.640 --> 0:09:52.800 to see the beginning of the end of these big 0:09:52.880 --> 0:09:54.760 bold S and P five hundred forecasts? 0:09:54.800 --> 0:09:56.559 Well, no, what we did is we rolled forward to 0:09:56.559 --> 0:09:59.160 our forecast twelve months in May, so we take away 0:09:59.160 --> 0:10:01.280 our year end target and look, the first thing I 0:10:01.320 --> 0:10:03.559 would say is S and P targets at a certain 0:10:03.600 --> 0:10:05.800 time and price is kind of silly. But what I 0:10:05.840 --> 0:10:07.920 would tell you is that the risk reward from here, 0:10:08.000 --> 0:10:09.680 we think is lower, like over the next four to 0:10:09.679 --> 0:10:11.280 six months, for the same reason I just mentioned, we 0:10:11.280 --> 0:10:13.400 have volatility probably picking up in the third quarter. I 0:10:13.400 --> 0:10:15.800 would say you're upside your luckihood of upset between now 0:10:15.800 --> 0:10:18.160 and your end is very low, much lower than normal. 0:10:18.280 --> 0:10:20.200 I'd call it twenty twenty five percent. That markets are 0:10:20.280 --> 0:10:23.880 higher between now and year end. Okay, specific target, I 0:10:23.920 --> 0:10:25.880 don't know, but let's say it's down ten percent or so. 0:10:26.280 --> 0:10:27.480 Then we would get interested. 0:10:27.640 --> 0:10:29.200 Then we'd be interested to say, Okay, maybe there's some 0:10:29.240 --> 0:10:32.199 things happening at the index level. Where the opportunity remains 0:10:32.280 --> 0:10:35.480 is at the stock level, at the factor level. Okay, 0:10:35.520 --> 0:10:37.760 And in that regard, we still like sort of growth, 0:10:37.800 --> 0:10:41.080 but not just quality quality growth, but like you know, 0:10:41.240 --> 0:10:44.000 quality in general, archcap, good balance sheets, companies that can 0:10:44.000 --> 0:10:46.640 deliver on earnings, and that momentum will continue. It's just 0:10:46.640 --> 0:10:48.480 hard to find companies that are cheap. So if they 0:10:48.480 --> 0:10:50.240 were to come in ten percent, then we probably get 0:10:50.280 --> 0:10:51.000 interested in Hey. 0:10:50.920 --> 0:10:54.480 Mike Elfin in the room here, theory of strategy, you 0:10:54.559 --> 0:10:57.720 just lost your perhaps your biggest competitor on wall streets 0:10:57.720 --> 0:11:01.120 had stepped down from his post at JP Morgan. Does 0:11:01.160 --> 0:11:05.120 that put pressure on you to really move forward with 0:11:05.480 --> 0:11:06.560 cautionary tales? 0:11:06.640 --> 0:11:06.840 Here? 0:11:06.880 --> 0:11:08.880 There are just fewer bears on Wall Street. 0:11:09.080 --> 0:11:11.280 Yeah, I mean, and look, I would say we kind 0:11:11.280 --> 0:11:13.800 of you know, pivoted on that already the beginning of 0:11:13.800 --> 0:11:16.480 the year. We sort of moved away from being too bearish. 0:11:16.520 --> 0:11:18.520 But at the end of the day, it's a tough gig, 0:11:18.679 --> 0:11:21.160 you know, I mean, trying to predict, you know, once 0:11:21.160 --> 0:11:23.160 again S and P five hundred certain And that's not 0:11:23.160 --> 0:11:25.360 an excuse. That's what we get paid to do. Sometimes 0:11:25.400 --> 0:11:27.520 we get it right, sometimes we get it wrong. And look, 0:11:27.520 --> 0:11:29.079 doesn't put any pressure. IM going to do my job 0:11:29.080 --> 0:11:31.840 any different, right, just like being wrong doesn't make me 0:11:31.880 --> 0:11:34.319 feel pressure. Oh but now I have to change my 0:11:34.440 --> 0:11:37.560 view completely. The way we get paid by clients, institutional 0:11:37.559 --> 0:11:40.880 clients is to give them a good analysis, a good framework, 0:11:40.880 --> 0:11:43.000 so that they can make their decisions on how I 0:11:43.040 --> 0:11:43.920 should be investing in. 0:11:43.960 --> 0:11:45.439 That process will never change. 0:11:45.559 --> 0:11:47.360 Well, you've done that for us, so we really appreciate 0:11:47.360 --> 0:11:49.600 you coming in, Mike. Thanks so much. Mike Wilson. 0:11:49.840 --> 0:11:53.160 There Morgan Stanley's CIO and chief US Equity Strategies