WEBVTT - Morgan Stanley Chief US Equity Strategist Mike Wilson Talks 0:00:02.520 --> 0:00:08.160 Bloomberg Audio Studios, podcasts, radio news, basically One Wall Street. 0:00:08.160 --> 0:00:09.840 At the moment, might Wilson of More Good Stand be 0:00:09.960 --> 0:00:12.440 taken a very constructive view on things, writing the rates 0:00:12.440 --> 0:00:14.960 of changes turned for the better on most fronts. This 0:00:15.080 --> 0:00:17.880 keeps us positive on us sequities on a twelve month basis, 0:00:17.920 --> 0:00:21.840 we expect pullbacks to be shallow and unsatisfying to those 0:00:21.920 --> 0:00:24.400 looking for a fatter pitch. Mike joined us now for 0:00:24.440 --> 0:00:26.520 more Mike, good morning, Good morning John. I love the 0:00:26.560 --> 0:00:28.760 reason no don't find SI. So let's talk about don't 0:00:28.760 --> 0:00:31.160 find one? What elements of the market move shouldn't we fight? 0:00:31.440 --> 0:00:32.760 Well, it's kind of what we're just talking about. 0:00:32.800 --> 0:00:35.640 I mean, the headlines remained very noisy and uncertain, and 0:00:35.680 --> 0:00:37.280 I think you know this has been the case for 0:00:37.320 --> 0:00:39.400 the whole year. Our view, as you know, has been 0:00:39.440 --> 0:00:41.599 a bit different. We came in thinking the first half 0:00:41.640 --> 0:00:44.000 would be tougher and the rate of change and a 0:00:44.040 --> 0:00:45.720 lot of things like earnings, re visions and some of 0:00:45.720 --> 0:00:47.960 the headline would be negative. And in fact that what 0:00:48.040 --> 0:00:50.960 we think happens. That all got priced in the week 0:00:51.000 --> 0:00:53.680 after Liberation Day, right, it was violent, it was a 0:00:53.720 --> 0:00:56.000 de leveraging and so now as we look at the 0:00:56.040 --> 0:00:59.000 data itself, it's all inflected higher and so, you know, 0:00:59.640 --> 0:01:02.440 don't everything, but ignoring the headlines is probably a good 0:01:02.440 --> 0:01:05.040 strategy and just focus on the data has turned up 0:01:05.360 --> 0:01:07.320 for the most part. And I think, you know, I 0:01:07.319 --> 0:01:09.520 don't know where the trade negotiations are going. Nobody does, 0:01:09.880 --> 0:01:11.440 but I think it's very unlikely we're going to go 0:01:11.480 --> 0:01:13.280 back to where we were, you know, a month and 0:01:13.319 --> 0:01:15.800 a half ago, like we bottomed in terms of the 0:01:16.240 --> 0:01:19.920 pain of that initial you know, announcement and how bad 0:01:19.920 --> 0:01:23.280 those tariffs were. So unless it really re escalates in 0:01:23.319 --> 0:01:26.240 a negative fashion, I don't think the trade issues is 0:01:26.280 --> 0:01:27.600 even going to be enough to kind of take the 0:01:27.640 --> 0:01:28.319 momentum out. 0:01:28.240 --> 0:01:29.080 Of this market right now. 0:01:29.160 --> 0:01:30.759 You know what the bad view sounds like. They would 0:01:30.760 --> 0:01:32.720 say that maybe some of the data, some of the 0:01:32.720 --> 0:01:35.120 earnings we've seen have been flattened by pull forward and 0:01:35.120 --> 0:01:36.800 we'll get the bill for that later this summer. Do 0:01:36.840 --> 0:01:38.319 you think we're priced for that kind of slowed down, 0:01:38.319 --> 0:01:40.360 that weakness we could see in a summer months. 0:01:40.520 --> 0:01:41.560 That's probably right. 0:01:41.640 --> 0:01:42.800 And when we had that view too, there was a 0:01:42.840 --> 0:01:44.440 pull forward and Q one Q we're not being better 0:01:44.480 --> 0:01:47.240 than they feared because you know, the numbers came down 0:01:47.240 --> 0:01:47.640 a bunch. 0:01:47.840 --> 0:01:48.760 I think the second. 0:01:48.560 --> 0:01:51.280 Quarter, though, is expected now to be weaker, so that's 0:01:51.280 --> 0:01:52.920 going to be the key. I think the biggest risk 0:01:52.960 --> 0:01:55.000 for the market's going to probably be either rates as 0:01:55.000 --> 0:01:56.360 we've talked about in the past, you know, north of 0:01:56.400 --> 0:01:57.440 four and a half percent. 0:01:57.400 --> 0:01:59.080 Or we do go an earning season. 0:01:59.400 --> 0:02:01.880 It's not as you know, people were hoping for, and 0:02:01.920 --> 0:02:04.240 we have maybe a five to seven percent correction, but 0:02:04.280 --> 0:02:07.200 that's not what people kind of want. People want a 0:02:07.320 --> 0:02:09.600 ten you know, another ten to fifteen percent draw down 0:02:09.960 --> 0:02:12.799 to get better, to get more exposure, and I just 0:02:12.800 --> 0:02:14.600 don't think you're going to get that. I mean, I've 0:02:14.600 --> 0:02:17.320 seen this a million times. You want it, but you're 0:02:17.360 --> 0:02:18.919 just going to have to have a shorter trigger finger. 0:02:19.320 --> 0:02:22.160 Well, you had seen retail largely buying the dip that 0:02:22.160 --> 0:02:25.200 that's who participated when you got those ruptures in April. 0:02:25.680 --> 0:02:27.560 If we're not going to get dips like that anymore, 0:02:27.600 --> 0:02:31.240 what is the willingness of institutions to continue to put 0:02:31.280 --> 0:02:33.280 money to work right now, especially they didn't even buy 0:02:33.320 --> 0:02:34.400 the pass dips we saw. 0:02:34.680 --> 0:02:37.399 Yeah, I think institutions have re risk, but there's still 0:02:37.440 --> 0:02:39.480 more to go. The one the area that I think 0:02:39.520 --> 0:02:41.320 that that you have to watch is the is the 0:02:41.360 --> 0:02:45.440 systematic strategies the CTAs that price willmentum money. We saw 0:02:45.480 --> 0:02:48.040 almost five hundred million dollars of de leveraging in that 0:02:48.120 --> 0:02:51.720 period of early March through mid April, and they've re 0:02:51.880 --> 0:02:55.080 risked maybe thirty forty percent of that. So that's another 0:02:55.160 --> 0:02:57.919 bid that's sort of it's not fundamentally driven, it's just 0:02:58.000 --> 0:02:58.760 price momentum. 0:02:59.000 --> 0:03:00.840 So that's that's going to be kind of underlying bid. 0:03:00.840 --> 0:03:02.720 And then I think, you know, most institutions have re 0:03:02.880 --> 0:03:05.280 risk but one thing I haven't talked about yet is 0:03:05.639 --> 0:03:08.280 it's people are still making the quality bet and we 0:03:08.360 --> 0:03:10.600 agree with that, meaning this isn't the beginning of a 0:03:10.680 --> 0:03:14.560 news cycle. It's once again an extension of the existing cycle. 0:03:14.960 --> 0:03:16.520 And the Fed's probably going to be cutting at some 0:03:16.520 --> 0:03:19.800 point later this year early next year, and that really 0:03:19.840 --> 0:03:22.800 behooves the large cap quality equities. 0:03:23.080 --> 0:03:27.000 Does it behoove companies specifically who can also weigh out 0:03:27.040 --> 0:03:29.040 some of the tariff uncertainty because this has been a 0:03:29.040 --> 0:03:31.480 big part of the narrative. Right no one's making decisions. 0:03:31.520 --> 0:03:34.400 Cap X is largely stalled unless your tech is there 0:03:34.440 --> 0:03:37.440 an element where even though we don't have terarras resolved 0:03:37.720 --> 0:03:39.720 that you get companies who just get on with it 0:03:39.800 --> 0:03:41.119 and start to put capital to work. 0:03:41.160 --> 0:03:42.320 Yeah, they got to run a business. 0:03:42.320 --> 0:03:45.040 And that's another reason why large cap quality businesses can 0:03:45.040 --> 0:03:47.520 do this. They can mitigate some of these risks, whether 0:03:47.560 --> 0:03:50.240 it's terriffs, whether it's you know, maybe a government cutting 0:03:50.240 --> 0:03:52.160 back on certain types of spending. And one of the 0:03:52.160 --> 0:03:53.920 things that is getting through this tax build that I 0:03:53.960 --> 0:03:57.000 think is still underappreciated is the tax incentives for. 0:03:57.120 --> 0:03:59.200 Cap X and R and D spending. 0:03:59.240 --> 0:04:01.320 We think that could add three to five percent to 0:04:01.520 --> 0:04:05.560 earnings growth or cash earnings for these large multinationals. That's 0:04:05.600 --> 0:04:07.720 a big tail in addition to the weaker dollars. So 0:04:07.880 --> 0:04:09.640 there's just a lot of tailwinds I see from an 0:04:09.640 --> 0:04:10.600 earning standpoint. 0:04:10.800 --> 0:04:12.480 And this is almost a perfect. 0:04:12.200 --> 0:04:15.400 Environment to climb the wall of worry because the economic data, 0:04:15.640 --> 0:04:19.480 the political geopolitical data is messy, it's noisy, it's scary sometimes, 0:04:19.680 --> 0:04:21.880 but as long as the revision factors for earnings are 0:04:21.880 --> 0:04:24.400 heading north, it's just hard for stacks to go down. 0:04:24.560 --> 0:04:26.480 When you say capecks, I just think of a handful 0:04:26.480 --> 0:04:28.960 of tech companies. Do you think it goes beyond just 0:04:29.000 --> 0:04:29.760 tank leadership. 0:04:29.839 --> 0:04:31.919 Oh absolutely. I think this is about capital goods. I 0:04:31.920 --> 0:04:35.000 think this is not just about AI capbacks. Also, one 0:04:35.000 --> 0:04:37.960 thing to just keep in mind, the IT cappacks that's 0:04:38.000 --> 0:04:41.120 been good the last several years has really been concentrated 0:04:41.240 --> 0:04:45.599 just in AI. Okay, the traditional kind of upgrades you 0:04:45.600 --> 0:04:48.359 see in the enterprise and in the household have not 0:04:48.440 --> 0:04:50.640 been happening because there was a giant pull forward, remember 0:04:50.680 --> 0:04:53.359 in twenty twenty and twenty twenty one for work from home. 0:04:53.600 --> 0:04:55.599 So if you actually look at the IT capback cycle 0:04:55.600 --> 0:04:57.560 from twenty two to twenty four, it was kind of 0:04:57.600 --> 0:04:59.880 a software session. And that's another part of our thea 0:05:00.160 --> 0:05:03.440 We've been going through these rolling recessions and look, to me, 0:05:03.520 --> 0:05:05.760 the big, the big catalyst to keep in mind for 0:05:05.920 --> 0:05:08.000 broadening out is going to be when the Fed starts 0:05:08.040 --> 0:05:10.640 to signal they're more dubbish. I don't know when that's 0:05:10.680 --> 0:05:12.520 going to be, but my guess is sometime in the 0:05:12.560 --> 0:05:14.720 third Court they're going to start to signal that, and 0:05:14.760 --> 0:05:16.360 that's when they're going to get more broadening out to 0:05:16.400 --> 0:05:17.200 the lower quality parts. 0:05:17.600 --> 0:05:20.239 Is the why matter? Do we need it because inflation 0:05:20.360 --> 0:05:22.240 is coming in? Or is it going to be because the 0:05:22.279 --> 0:05:23.400 labor market is cracking. 0:05:23.680 --> 0:05:26.240 Well, I mean, look at last fall, it was both right, 0:05:26.360 --> 0:05:29.080 the labor market was cracking last summer. As soon as 0:05:29.080 --> 0:05:31.240 they signaled they were ready to step in, the market 0:05:31.240 --> 0:05:33.599 went up anyway. So that's why I mean, I actually 0:05:33.600 --> 0:05:35.960 think of recession if we finally get the you know, 0:05:36.000 --> 0:05:38.919 broad recession labor cycle, I don't think the equity markets 0:05:38.960 --> 0:05:41.159 are going anywhere near the April lows because the FED 0:05:41.200 --> 0:05:44.039 will be able to act quickly, and we're like Pavlovian, right, 0:05:44.120 --> 0:05:47.080 And if retail is buying when the FED wasn't even. 0:05:46.920 --> 0:05:49.200 Cutting, if they are cutting, there's going to. 0:05:49.200 --> 0:05:51.520 Be a big bid there. So look, there's always risks 0:05:51.560 --> 0:05:53.440 in the market. There's always something to be worried about. 0:05:53.560 --> 0:05:55.479 There's always things to bearishan and there seems to be 0:05:55.480 --> 0:05:56.160 bullish on and. 0:05:56.080 --> 0:05:56.680 That's our job. 0:05:56.720 --> 0:05:58.640 And I think, you know, this year we've navigated that 0:05:58.640 --> 0:06:00.640 pretty well, being in the right place. And I think 0:06:00.640 --> 0:06:02.400 we're going to continue to have to shift what we 0:06:02.440 --> 0:06:04.200 want to own, not so much how much you want 0:06:04.200 --> 0:06:04.440 to own. 0:06:04.560 --> 0:06:06.920 You've acknowledged the one thing that could be a handwind 0:06:06.920 --> 0:06:09.360 for equities as interest rates. He wrote about it over 0:06:09.400 --> 0:06:12.279 the weekend. What is it about four fifty that's challenging 0:06:12.360 --> 0:06:14.840 to this equity market because based on the running we've 0:06:14.839 --> 0:06:16.360 seen over the past few weeks, we don't see much 0:06:16.360 --> 0:06:17.039 of a challenge. 0:06:17.160 --> 0:06:18.799 Well, it's stabilized at four fifty. 0:06:18.920 --> 0:06:21.800 So we've identified this level like almost two years ago, 0:06:21.920 --> 0:06:25.000 and it's been like a charm. I mean, as soon 0:06:25.000 --> 0:06:26.880 as you cross four to fifty in the upside, the 0:06:26.880 --> 0:06:30.480 correlation between stocks and rates goes negative and vice versa. 0:06:30.600 --> 0:06:32.400 Now, I do think that we kind of went. 0:06:32.320 --> 0:06:35.080 To four seventy in the April period and then they 0:06:35.120 --> 0:06:35.880 calm down again. 0:06:35.960 --> 0:06:38.359 I think the market is getting comfortable that they have 0:06:38.600 --> 0:06:39.719 enough tools. 0:06:39.400 --> 0:06:41.520 Because you know, the Treasury Secretary has talked about that 0:06:41.920 --> 0:06:44.280 to keep it four to fifty or below if they 0:06:44.320 --> 0:06:46.159 need to, And I think we talked about this last 0:06:46.160 --> 0:06:48.320 time I was here. Four to seventy five is like 0:06:48.360 --> 0:06:51.200 the worst place because that's where markets get really nervous. 0:06:51.440 --> 0:06:54.839 Five percent I actually get bullish because then I know 0:06:55.279 --> 0:06:57.320 that they're going to come and intervene with either liquidity 0:06:57.320 --> 0:06:59.520 injections or they're going to use these other tools that 0:06:59.560 --> 0:07:02.480 the Treasure secretaries talked about. So we're you know, we're 0:07:02.600 --> 0:07:05.680 we're optimistic that that could be managed and in other words, 0:07:05.720 --> 0:07:08.159 that risk could be a risk for five or seven percent, 0:07:08.440 --> 0:07:10.520 but ultimately that risk will get managed to do you. 0:07:10.440 --> 0:07:12.520 Get clients, hosk, can you now about the dead oceans? 0:07:12.800 --> 0:07:14.840 Asking the equities trying to just about the dead oceans 0:07:14.880 --> 0:07:16.040 that take place in the week. 0:07:16.000 --> 0:07:17.800 Well, I really ask the equity folks. But I mean 0:07:17.840 --> 0:07:20.440 people do ask about it, for sure. I mean, and 0:07:20.520 --> 0:07:23.960 once again we have seen many auctions, soft auctions for 0:07:23.960 --> 0:07:26.360 the last two or three years, we've seen this occur 0:07:26.680 --> 0:07:27.920 and then they get control of it. 0:07:27.960 --> 0:07:28.239 Again. 0:07:28.720 --> 0:07:30.360 I don't want to dismiss the risk from the back 0:07:30.480 --> 0:07:33.920 end of the market that is still to me. The risk, 0:07:34.000 --> 0:07:37.120 I mean is the risk not only for markets. It's 0:07:37.160 --> 0:07:40.120 the risk for the US, Like we have too much 0:07:40.160 --> 0:07:43.160 debt and this is a focus. And if we don't 0:07:43.520 --> 0:07:45.600 I mean, ultimately, if we don't you know, cut the 0:07:45.640 --> 0:07:47.920 budget over time, like and maybe the market is now 0:07:47.920 --> 0:07:50.280 giving them a lead like okay, we'll give you twelve months, 0:07:50.560 --> 0:07:53.320 you know, but if we don't get serious about you know, 0:07:53.520 --> 0:07:56.480 budget reconciliation and actually reducing the size of the budget 0:07:56.480 --> 0:07:58.640 over time, this is an issue that's going to stay 0:07:58.680 --> 0:07:59.000 with us. 0:07:59.320 --> 0:08:01.800 Mike Wilson more than Stantley. Three words over the weekend. 0:08:02.040 --> 0:08:04.440 Don't fight it. Don't fight this market, Mike, Thank you, sir. 0:08:04.560 --> 0:08:05.320 I appreciate it.