WEBVTT - Morgan Stanley Chief US Equity Strategist Mike Wilson Talks AI Research on Wall Street 0:00:02.480 --> 0:00:07.000 Bloomberg Audio Studios, podcasts, radio news. 0:00:07.800 --> 0:00:10.719 Mike Wilson joins us here, chief US Equity Strategists and 0:00:10.800 --> 0:00:15.440 CIO at a little shop called Morgan Stanley. I started 0:00:15.880 --> 0:00:19.160 yesterday was my fortieth anniversary on Global Wall Street, and 0:00:19.840 --> 0:00:22.880 throughout my entire career, Morgan Stanley has, in my opinion, 0:00:22.960 --> 0:00:27.200 the best tech research on Global Wall Street. You think 0:00:27.200 --> 0:00:29.440 about Mary Meeker, Frank Quatron on the banking side and 0:00:29.440 --> 0:00:31.320 all that kind of stuff. Mike, what are you guys 0:00:31.400 --> 0:00:35.479 saying about AI these days? How was? What's that's the 0:00:35.479 --> 0:00:39.479 theme arguably of our career more than Internet. What are 0:00:39.479 --> 0:00:40.239 you guys saying about that? 0:00:40.479 --> 0:00:42.400 Yeah, I mean it's it's it's more of the same. 0:00:42.440 --> 0:00:44.279 So I mean a little known fact. I guess as 0:00:44.479 --> 0:00:47.960 I started the I was the original tech sales tech 0:00:48.040 --> 0:00:50.760 you know, desk analysts in the nineties, and so I 0:00:50.800 --> 0:00:53.640 saw front row seat to the whole all good boom 0:00:53.680 --> 0:00:54.280 and bust of that. 0:00:55.080 --> 0:00:57.680 Henry Blodgett, who Frank Quatrone. 0:00:57.800 --> 0:01:00.240 Yeah, I mean, so all these names and everything else. 0:01:00.280 --> 0:01:03.920 So anyways, the point is that this is just another Capex, 0:01:04.080 --> 0:01:06.479 This is just a this is the next tech cycle, okay, 0:01:06.520 --> 0:01:08.160 And so there are a lot of similarities. There are 0:01:08.200 --> 0:01:10.720 a lot of differences, but we're we're in the mix. 0:01:10.760 --> 0:01:11.760 That we're in the middle of it right now, and 0:01:11.760 --> 0:01:13.920 that's what we've been saying, and that continues. And the 0:01:13.920 --> 0:01:15.840 reason why I feel confident it's not at the end 0:01:15.840 --> 0:01:18.160 of the road yet is because the capital markets are 0:01:18.160 --> 0:01:20.560 still funding this and the companies are being rewarded for it. 0:01:20.640 --> 0:01:22.880 Meaning and we look at this carefully. You know, capex 0:01:22.959 --> 0:01:26.000 to sales ratio is a factor is being rewarded in 0:01:26.040 --> 0:01:28.240 the marketplace, Okay. In other words, if you're spending more, 0:01:28.400 --> 0:01:30.960 the stock goes up. Now, eventually that will start. There'll 0:01:30.959 --> 0:01:33.040 start to be a head wind and we'll figure out 0:01:33.080 --> 0:01:34.960 when that is and when that starts to happen. You 0:01:34.959 --> 0:01:36.560 got to worry. The other thing I would be paying 0:01:36.560 --> 0:01:40.840 attention to is credit spreads, right, And so for some companies, 0:01:40.840 --> 0:01:43.200 their credit spreads have blown out or cdss have gone 0:01:43.240 --> 0:01:46.000 up because at the margin we're seeing at the margins, 0:01:46.080 --> 0:01:48.360 some companies are not being rewarded for higher cappacks now 0:01:48.360 --> 0:01:51.520 because they're viewed as a loser. Okay, but that broadly speaking, 0:01:51.560 --> 0:01:53.880 that's not the case yet. So there's usually early warning signs. 0:01:53.880 --> 0:01:55.560 There's canaries in the coal mine and tell you, Okay, 0:01:55.560 --> 0:01:58.360 they're overspending. I'll say this. This is probably not a 0:01:58.360 --> 0:02:01.080 house for you, but it's my view. There's one chance 0:02:01.120 --> 0:02:03.320 there's gonna be mal investment here. Okay, yeah, just like 0:02:03.320 --> 0:02:06.320 every major camp except but that's not a crazy statement. Okay, 0:02:06.360 --> 0:02:09.040 it's different in fracking. It's no different in railroads, no 0:02:09.040 --> 0:02:12.480 different electricity cycles. So but we're we're probably not there yet. 0:02:12.480 --> 0:02:13.560 We don't know. And the other thing to keep in 0:02:13.639 --> 0:02:15.760 mind is that the marginal cost of compute, the marginal 0:02:15.760 --> 0:02:18.839 cost of the product itself, has to go to zero 0:02:19.080 --> 0:02:19.680 for it to work. 0:02:19.840 --> 0:02:20.560 It will go to zero. 0:02:20.600 --> 0:02:23.160 There'll be all you could eat plan. So, but we're 0:02:23.160 --> 0:02:25.560 in that transition period. You know, there's going to be 0:02:25.800 --> 0:02:27.480 I think we're now in the transition from the picks 0:02:27.520 --> 0:02:30.679 and shovels to the adopters. We're seeing, like actual adopters 0:02:30.680 --> 0:02:33.480 of the technology are becoming more efficient, you know, driving revenue, 0:02:33.520 --> 0:02:36.440 not just cutting costs by hiring fewer people. That transition 0:02:36.480 --> 0:02:39.280 could last probably several years, and then ultimately, you know, 0:02:39.360 --> 0:02:41.080 we'll have we'll have the other side of it. 0:02:41.160 --> 0:02:44.480 By the way, Jim Chainos was on with Tom and 0:02:44.520 --> 0:02:48.760 Scarlett last Friday on Bloomberg Money, their new program every 0:02:48.760 --> 0:02:51.800 Friday at noon, And of course he's a short seller 0:02:51.800 --> 0:02:54.000 and he's talking his book to some extent, but he 0:02:54.080 --> 0:02:56.040 did say that, you know, during the dot com era, 0:02:56.160 --> 0:02:59.840 at the tail end, earnings were up thirty percent and 0:03:00.919 --> 0:03:03.800 the next year they were down forty because people were 0:03:03.840 --> 0:03:06.400 putting in these massive orders due to a huge Capex 0:03:06.520 --> 0:03:08.960 ramp up, and then all of a sudden they disappeared. 0:03:09.520 --> 0:03:11.240 How do you know when we're going to get there? 0:03:11.280 --> 0:03:14.680 Because I know you look at forward earnings and earnings 0:03:14.720 --> 0:03:17.600 revisions that are still are they still to the upside? 0:03:17.680 --> 0:03:19.720 Yeah? So we are seeing a peak rate of change 0:03:19.720 --> 0:03:22.640 though in a revision breath in a lot of different areas. 0:03:22.680 --> 0:03:24.480 And you know one of those is semiconductors where we 0:03:24.480 --> 0:03:25.880 haven't seen it roll over, but it's at such a 0:03:25.919 --> 0:03:28.679 high level it can't sustain. So think about this. Since 0:03:29.480 --> 0:03:32.320 chat chipet was announced in I guess November twenty two, 0:03:32.400 --> 0:03:37.240 now we've had three decent corrections in this bull cycle 0:03:37.240 --> 0:03:39.680 of Campex. Three different times we've seen these stocks go 0:03:39.720 --> 0:03:42.120 down thirty to fifty percent. So we can have a 0:03:42.160 --> 0:03:44.600 thirty to fifty percent draw down and still have the 0:03:44.640 --> 0:03:47.440 long cycle intact, and that's what I expect to see, 0:03:47.840 --> 0:03:50.240 you know, I suspect we'll see another one of those scares. 0:03:50.680 --> 0:03:54.200 And by the way, you know in March the memory 0:03:54.200 --> 0:03:56.840 stacks were down thirty to forty percent should have bottom, 0:03:56.880 --> 0:03:59.520 and then they went out five times. So you know, 0:03:59.640 --> 0:04:01.720 like trying to trade that back and forth is for 0:04:01.800 --> 0:04:04.120 the for the pros only, you know, we try to 0:04:04.120 --> 0:04:06.040 do that a little bit, but like for the average person. 0:04:06.080 --> 0:04:07.880 So I don't think it's the end. But but boy, 0:04:08.000 --> 0:04:09.960 I mean you to think that you can't have these 0:04:09.960 --> 0:04:13.200 big kind of you know, cycnical resets, it's pretty naive. 0:04:13.720 --> 0:04:15.440 Morgan Stanley Equity trading desk. 0:04:16.040 --> 0:04:17.520 Serious people, they know what they're doing. 0:04:17.560 --> 0:04:20.040 Serious people. Man, I traded against them for years. I'm 0:04:20.040 --> 0:04:22.400 not sure I ever made it good on that. Hey, Mike, 0:04:22.720 --> 0:04:27.440 when you see meg IPOs like SpaceX, like anthropic, like 0:04:27.520 --> 0:04:30.200 open ayiic coming, does that tell you anything about the 0:04:30.240 --> 0:04:31.239 market in general? 0:04:31.600 --> 0:04:33.720 Well, the appetite is still there. I mean, like that's 0:04:33.760 --> 0:04:36.280 what I said earlier, Like, you know, the market is 0:04:36.320 --> 0:04:39.080 absorbing a lot of paper. And it's not just in equities, 0:04:39.080 --> 0:04:39.760 by the way, it's in the. 0:04:39.760 --> 0:04:41.640 Credit I mean video came out with a bond. 0:04:41.839 --> 0:04:44.560 I mean, we've seen massive credit offerings, which means what 0:04:44.720 --> 0:04:48.240 it means that the market is funding these expenditures. It's 0:04:48.320 --> 0:04:50.440 it's unlikely these companies are going to raise the money 0:04:50.440 --> 0:04:52.680 and not spend it, okay. So that's why you're very 0:04:52.720 --> 0:04:55.560 so excited about semi conductors. But to your point, Matt earlier, like, 0:04:55.720 --> 0:04:58.080 you know, the market's not dumb okay like and people say, oh, 0:04:58.120 --> 0:05:01.000 this is what happened in the news today. I mean, 0:05:01.400 --> 0:05:02.800 do I care if I'm an equity guye do I 0:05:02.800 --> 0:05:04.840 really care? Not really, because it's usually the market singing 0:05:04.920 --> 0:05:07.120 six months in advance. And that's why we look at 0:05:07.120 --> 0:05:10.200 these indicators like revision breath because they're lead their canary 0:05:10.240 --> 0:05:11.840 that tells me things are accelerating. I mean, one of 0:05:11.839 --> 0:05:13.760 the reasons we got so bullish last year we were 0:05:13.760 --> 0:05:16.520 debating this on on the on the other show, is 0:05:16.720 --> 0:05:18.640 we saw the revision bread just going and we had 0:05:18.640 --> 0:05:21.800 a different view, but that was our we're almost cheating, right. 0:05:21.800 --> 0:05:24.760 We can see like in three months, which can happen 0:05:24.800 --> 0:05:27.200 to actual earnings. It's it's a tell. And so that's 0:05:27.200 --> 0:05:29.760 why I'm so focused right now that we're such at 0:05:29.800 --> 0:05:32.520 such high levels on rate to change, then it has 0:05:32.600 --> 0:05:34.240 to come off a bit. But I don't think it's 0:05:34.279 --> 0:05:36.200 the end. It's a it's a reset, a little bit 0:05:36.240 --> 0:05:37.360 on the on the rate to change. 0:05:37.400 --> 0:05:41.240 By the way, I normally anchor Bloomberg Open Interest, which 0:05:41.360 --> 0:05:44.719 airs on Bloomberg Television weekdays from nine am to eleven am. 0:05:44.839 --> 0:05:47.080 Are you doing that today or Mike Wilson frequent guest, Yeah, 0:05:47.080 --> 0:05:49.560 I'm doing that today as well. But radio, well, I 0:05:49.600 --> 0:05:52.159 prefer radio, to be honest, I doubled I listened to 0:05:52.160 --> 0:05:54.600 this program every every day, so it's a real honor 0:05:54.640 --> 0:05:57.720 to be on with you. Lou Wang from Bloomberg News 0:05:57.760 --> 0:06:00.800 were a great piece last week. I think about all 0:06:00.920 --> 0:06:03.520 of the equity coming to market in the next two years. 0:06:04.040 --> 0:06:06.440 JP Morgan estimates one and a half trillion dollars of 0:06:06.480 --> 0:06:08.840 net equity coming to market, as opposed to the last 0:06:08.920 --> 0:06:12.120 twenty years we've seen twelve trillion dollars taken out of 0:06:12.160 --> 0:06:17.279 the market through corporate buybacks. Is that about face concerning 0:06:17.360 --> 0:06:17.640 to you? 0:06:18.200 --> 0:06:20.440 Yeah, I mean once again that can lead to correction. 0:06:20.640 --> 0:06:23.200 So I mean we've been very focused in the last 0:06:23.560 --> 0:06:26.360 two months. As you read our research, you'll know, like 0:06:26.440 --> 0:06:29.480 on liquidity. Okay. So and by the way, earlier this 0:06:29.560 --> 0:06:32.720 year people were kind of bearish on the economy, embarish 0:06:32.800 --> 0:06:36.039 on that basically that things were going to be softer 0:06:36.120 --> 0:06:38.480 on earnings. That turned out to be true. But what 0:06:38.480 --> 0:06:40.280 they should have been focused on was that the FED 0:06:40.400 --> 0:06:42.719 was kind of transitioning. They were going from being less 0:06:42.760 --> 0:06:45.880 dubbish on rate guidance but then more dubbish on liquidity. 0:06:46.279 --> 0:06:49.440 So that actually helped stocks to bottom in March. I'll 0:06:49.440 --> 0:06:51.279 just tell you right now that that liquidity picture is 0:06:51.279 --> 0:06:54.200 actually somewhat deteriorating now. So today's meeting with the new 0:06:54.200 --> 0:06:55.919 FED chair is going to be important to say, Okay, well, 0:06:55.960 --> 0:06:57.360 how are you going to think about the r ANDP, 0:06:57.640 --> 0:07:00.640 the reserve management programer purchases, and how you're going to 0:07:00.680 --> 0:07:03.760 think about, you know, managing kind of liquidity picture in 0:07:03.800 --> 0:07:07.200 the face of liquidity being sucked out of the marketplace. 0:07:07.560 --> 0:07:11.200 And there's three draws on liquidity now. One is all 0:07:11.240 --> 0:07:14.680 this issuance both in equity and fixed income. The other 0:07:14.760 --> 0:07:18.240 one is is on the economy itself. Right, the economy 0:07:18.240 --> 0:07:20.480 itself is absorbing capital in the way that we haven't seen. 0:07:20.560 --> 0:07:23.320 So the other big change matt from not just the 0:07:23.360 --> 0:07:26.640 fact that we're seeing net issuance perhaps, but we're also 0:07:26.680 --> 0:07:29.040 seeing net consumption of liquidity in the real economy. We 0:07:29.080 --> 0:07:31.400 have been investing for twenty years right in a world 0:07:31.400 --> 0:07:34.120 of financial oppression, so that just means it's more volatile. 0:07:34.280 --> 0:07:36.680 They're going to get this more volatile world, but it 0:07:36.920 --> 0:07:39.360 also leads to higher nominalo GDP growth. That's why I'm 0:07:39.360 --> 0:07:41.520 not worried about earnings growth at all. I'm worried about 0:07:41.560 --> 0:07:43.640 the multiple and these sort of draw downs that you 0:07:43.680 --> 0:07:46.160 get because of this volatility on liquidity and then the 0:07:46.160 --> 0:07:47.680 pequated change on revisions.