WEBVTT - Morgan Stanley's Mike Wilson on Tariffs and Earnings

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<v Speaker 1>Morgan Stanley strategist Mike Wilson cutting is twenty twenty five

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<v Speaker 1>earnings per share forecast for the S and P five

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<v Speaker 1>hundred firms to two hundred and fifty seven dollars from

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<v Speaker 1>two hundred and seventy one because of the tariff uncertainty.

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<v Speaker 1>And I'm happy to say Mike Wilson joining Bloomberg Day

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<v Speaker 1>Break right now to discuss Mike. Let me first of all,

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<v Speaker 1>good morning, thanks for being here. Let's start with the

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<v Speaker 1>earning season. I got to wonder if we're going to

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<v Speaker 1>learn more from the numbers or from the commentary and

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<v Speaker 1>the forecasts or lack of forecasts.

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<v Speaker 2>Well, good morning, Yeah, we'll learn something. I think what

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<v Speaker 2>we're going to learn is that there's still a lot

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<v Speaker 2>of uncertainty. And I want to back up a second.

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<v Speaker 2>You know, we did cut our numbers, but it wasn't

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<v Speaker 2>just because of terriffs. I mean, and this is a

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<v Speaker 2>theme or you know, a thesis we've had for a while.

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<v Speaker 2>You know, we think there's a lot more going on

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<v Speaker 2>than just terroriffs that have been weighing on you know,

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<v Speaker 2>growth outlooks, this and this you know correction that we've

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<v Speaker 2>been involved in has been is very well advanced. Would

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<v Speaker 2>say one of the biggest headwinds that doesn't get a

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<v Speaker 2>lot of airtime is the fact that AI cap X,

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<v Speaker 2>you know, is under pressure and this idea that you

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<v Speaker 2>know they're getting the return on AI is just not there,

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<v Speaker 2>and that's been a huge driver of growth. The other

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<v Speaker 2>other things that are going on, of course, is that

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<v Speaker 2>you know, physcal spending is under pressure, and then just

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<v Speaker 2>the stock market itself, when you know when it's correcting

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<v Speaker 2>here is putting pressure on asset prices in that wealth effect.

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<v Speaker 2>That's been a huge tailwind for the last several years.

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<v Speaker 2>So you know, the overall economy itself has not been

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<v Speaker 2>that healthy in the United States for quite a while,

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<v Speaker 2>and the earnings picture has not really supported the asset

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<v Speaker 2>price inflation that we've been seeing, and of course the

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<v Speaker 2>Fed not cutting rates anymore. So there's a lot going

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<v Speaker 2>on besides just tariffs. To me, tariffs are almost the

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<v Speaker 2>last piece of the earnings and that's why we decided

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<v Speaker 2>to do it now, is like that's the cherry on

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<v Speaker 2>top almost to this slowdown that's going on. And the

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<v Speaker 2>question is is that tip us over into session? Right?

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<v Speaker 2>So does a two fifty seven look something worse. And

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<v Speaker 2>that's what we're trying to figure out during earning season

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<v Speaker 2>is our company is now going to take action meeting,

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<v Speaker 2>you know, layoff employees and we have a labor cycle finally,

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<v Speaker 2>and I don't know if we're going to get clarity

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<v Speaker 2>on that, but that's what I want to be looking for.

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<v Speaker 1>And also on the policy front, tax cuts, because it

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<v Speaker 1>sounds like in Washington as these negotiations take place, looking

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<v Speaker 1>for pay for is I'm not so sure this is

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<v Speaker 1>a certainty that we're going to see corporate tax cuts.

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<v Speaker 2>Well, that's right. I mean, I think what they're trying

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<v Speaker 2>to negotiate with with Congress now is really just an

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<v Speaker 2>extension of the tax cuts that were put in place,

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<v Speaker 2>you know, I guess seven years ago now. So I'm

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<v Speaker 2>not anticipating additional tax cuts, but boy, if we don't

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<v Speaker 2>get an extension on those tax cuts, that's you know,

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<v Speaker 2>that's going to really hammer earnings for next year. In

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<v Speaker 2>twenty twenty six.

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<v Speaker 1>We heard the news this morning China ordering its airlines

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<v Speaker 1>not to take any further deliveries of Boeing. I got

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<v Speaker 1>to wonder what goes through your mind as you see

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<v Speaker 1>this across the tape and the daily flow of evolving

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<v Speaker 1>trade policy. Does it provide any clarity or does it

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<v Speaker 1>add to the swirl of uncertainty? It all seems very

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<v Speaker 1>ad hoc.

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<v Speaker 2>Well, that's right, I mean, and you know this is

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<v Speaker 2>going to be messy. I mean, China clearly is not,

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<v Speaker 2>you know, bowing down in terms of you know, agreeing

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<v Speaker 2>to everything the United States wants. And that was always

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<v Speaker 2>going to be the case. Is that. I think the

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<v Speaker 2>you know, the tariffs on on China that you know

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<v Speaker 2>that those never came off, you know, even during the

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<v Speaker 2>Biden administration. So that's that's a That's just the one

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<v Speaker 2>that's going to be the most contentious for sure. I mean,

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<v Speaker 2>we're going to have negotiations with various countries over the

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<v Speaker 2>next ninety days, and I don't think anybody expects China

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<v Speaker 2>to come running to the table to negotiate. I mean,

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<v Speaker 2>that was always going to be the most contentious one,

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<v Speaker 2>and this is just more evidence of that.

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<v Speaker 1>Well, what's the message from foreign exchange in the body market?

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<v Speaker 1>Can we infer anything with respect to foreign capital inflows

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<v Speaker 1>into the US?

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<v Speaker 2>Well? Number one, I think it confirms what we knew

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<v Speaker 2>at the end of last year, which is that foreigners

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<v Speaker 2>probably have way too many assets in the United States

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<v Speaker 2>to begin with. You know, I think and that we're

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<v Speaker 2>not the only ones talking about this. But you know,

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<v Speaker 2>when you look at the S and P five hundred

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<v Speaker 2>making up seventy percent of the MSCI global you know,

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<v Speaker 2>people talking about US exceptionalism that if it was you know, preordained,

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<v Speaker 2>you know, I mean, that was going to happen inevitably.

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<v Speaker 2>And I think this development is only accelerating that. Our

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<v Speaker 2>work and you know, talking to dealers and everything else,

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<v Speaker 2>you know, suggests that we're not seeing outright selling of

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<v Speaker 2>treasuries from foreign governments. But let's be clear, foreign governments

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<v Speaker 2>have not been net buyers of treasuries for quite a

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<v Speaker 2>long time. I think the I think the movement in

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<v Speaker 2>currencies is probably more function of stocks than it is treasuries.

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<v Speaker 2>We we have seen flows move from the United States

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<v Speaker 2>to these other regions, particularly Europe and back to China

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<v Speaker 2>to some degree. Those have been the two biggest beneficiary

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<v Speaker 2>of maybe US asset prices coming down, and this idea

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<v Speaker 2>of too much capital concentration in the United States. The

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<v Speaker 2>question now is have we adjusted enough, you know, has

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<v Speaker 2>that happened? Have we seen it and I would just

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<v Speaker 2>point out again and this process started really three four

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<v Speaker 2>or five months ago, and you know, we're probably a

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<v Speaker 2>good way down that road. We are still somewhat barished

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<v Speaker 2>on the US dollar because US dollar is overvalued, and

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<v Speaker 2>it's not just a function of flows, but that will

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<v Speaker 2>accelerate the adjustment process.

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<v Speaker 1>What's the signal for equities for bottom.

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<v Speaker 2>Well for US And we spent a lot of time

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<v Speaker 2>on this, you know, like I said, we think this

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<v Speaker 2>correction is well advanced in terms of time and price,

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<v Speaker 2>and so what we're looking for is a retest probably

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<v Speaker 2>of those lows we saw last week. It doesn't mean

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<v Speaker 2>you have to go all the way back down there,

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<v Speaker 2>but like Monday to me was a classic capitulation day.

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<v Speaker 2>We see it in all the data, massive volume. It

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<v Speaker 2>was almost a panic, and that means that's probably going

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<v Speaker 2>to be the momentum low for this correction, which is

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<v Speaker 2>now officially sort of a bear market anyway you slice it.

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<v Speaker 2>And so usually when you have a bear market, you know,

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<v Speaker 2>capitulation like that, it takes time to heal. And so

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<v Speaker 2>what we're looking for is sort of backing and filling,

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<v Speaker 2>you know, chopping market for the next month or two

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<v Speaker 2>at least maybe it goes further than that, and then

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<v Speaker 2>on a retest, we want to see lower momentum and

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<v Speaker 2>we want to see, you know, certain things start to

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<v Speaker 2>outperform at the bottom, and we're just not there yet.

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<v Speaker 2>So we're prepared for another thirty sixty days minimum of

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<v Speaker 2>high volatility and a lot of price a lot of

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<v Speaker 2>price movement. But I'm not in the camp that we

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<v Speaker 2>still can't see something positive by the end of the year,

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<v Speaker 2>where like we've had all the growth negative impacts now

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<v Speaker 2>and then the growth post the things that they're going

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<v Speaker 2>to be doing to start to show up at the

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<v Speaker 2>end of the year, and the markets will the markets

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<v Speaker 2>will figure that out right