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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Bringing in now Mike Wilson,

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Speaker 1: the chief US equity strategist at Morgan Stanley, as we

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Speaker 1: continue to monitor a market that shows no sign of

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Speaker 1: stopping when it comes to setting records at the index level. Mike,

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Speaker 1: good morning. We just heard from Karen forty sixth record

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Speaker 1: of the year for the S and P five hundred.

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Speaker 1: Despite all the risks that we talk about throughout the year.

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Speaker 1: What are you looking at this morning as we watch

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Speaker 1: this market continue to trade at record highs.

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Speaker 2: Yeah, good morning, Nathan, Well look at me.

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Speaker 3: This, This, I guess was our bulcase and we laid

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Speaker 3: it out back in May and our meteor update. You know,

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Speaker 3: this isn't necessarily a popular view, but you know, we remain,

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Speaker 3: we believe we remain in this fiscally dominant world where

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Speaker 3: you know, fiscal policy remains very generous, and you know,

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Speaker 3: they found ways to finance that in a way that

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Speaker 3: does not disrupt the bond market, so that you know,

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Speaker 3: liquidity is very robust and multiples continue to expand. I

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Speaker 3: think one thing that doesn't get discussed much is that

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Speaker 3: almost all of the you know, return in the last

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Speaker 3: year has been driven by multiple expansion as opposed to

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Speaker 3: higher earning revisions. Now we've rolled forward earning revisions. But

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Speaker 3: you know generally that the earning sesspice for twenty twenty

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Speaker 3: four have come down this year, and they're starting to

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Speaker 3: come down after twenty twenty five.

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Speaker 2: But hey, who am I to say that the market's overvalued?

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Speaker 3: And you know, the thing that's really going on now

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Speaker 3: is we have coordinated or I don't know it's coordinated,

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Speaker 3: but we have basically most major central banks are now

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Speaker 3: easing policy. Even the Bank of Japan has kind of

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Speaker 3: backed off it's tightening campaign after the wobble we had

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Speaker 3: this summer, and now we have China joining the party

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Speaker 3: with its own policy initiatives, both on the monetary and

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Speaker 3: the fiscal side.

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Speaker 2: So it's a it's a.

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Speaker 3: Policy driven rally, and it's very robust, and it's even

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Speaker 3: riddening out now. So multiples are now twenty two times

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Speaker 3: at the index level, which you've only seen a couple

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Speaker 3: of times in history. But that will continue until basically

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Speaker 3: either you get something a real shock on the economic

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Speaker 3: front or you know, fundamentally speaking, or you get a

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Speaker 3: restriction on the liquidity front.

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Speaker 2: And just one last statistic there.

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Speaker 3: So we look at money supply growth globally in US dollars,

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Speaker 3: so US dollar liquidity, and that bottomed, you know, almost

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Speaker 3: two years ago and is now growing again very robustly

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Speaker 3: at about eight percent. And it's really shot up in

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Speaker 3: the last month and a half. And that's mostly due

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Speaker 3: to China and Japan starting to expand their bannl sheet

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Speaker 3: and the weaker dollar. So one other thing that could

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Speaker 3: cause them the rally to you know, kind of slow

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Speaker 3: down is that the dollar where to strengthen again, and

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Speaker 3: that's starting to happen. That's probably the one thing that

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Speaker 3: we're watching now that could kind of throw a wrench

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Speaker 3: into this pace of of the new records every day.

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Speaker 1: To take your point, Mike about whether this is a

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Speaker 1: fiscally driven rally, does that raise a question for you

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Speaker 1: about whether things could change depending on the outcome of

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Speaker 1: the election next month, whether fiscal policy could change depending

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Speaker 1: on Kamala Harris or Donald Trump becoming the next president,

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Speaker 1: or a change in power on Capitol Hill.

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Speaker 3: I don't think so, you know, neither party has really

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Speaker 3: shown any you know, willingness or ability to slow the

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Speaker 3: freight train on fiscal spend. I think The bigger concern

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Speaker 3: is how do they fund it, you know, and they've

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Speaker 3: they've been very creative over the last year and a half.

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Speaker 3: Of course, people have talked about the reverse repo facility.

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Speaker 3: We've discussed that at length, and we think that was

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Speaker 3: a very creative way to.

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Speaker 2: Help fund the government.

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Speaker 3: They've funded it at the front end, and for now,

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Speaker 3: the bond market seems to be okay with that.

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Speaker 2: I don't know if the election is going to be

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Speaker 2: is going to be.

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Speaker 3: The trigger for a while, all of a sudden, the

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Speaker 3: bond market, you know, starts to worry about the sustainability

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Speaker 3: of these fiscal deficits.

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Speaker 2: Okay, I mean, I mean, I don't think there's a big.

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Speaker 3: Difference between the two candidates or congressional who's running Congress

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Speaker 3: to say that that's going to stop. I think the

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Speaker 3: big risk, as it typically is when the bond markets

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Speaker 3: starts pushing back on the size of these deficits, and

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Speaker 3: that you know, who knows what that will be. And

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Speaker 3: maybe they can pull it off, Maybe we can inflate

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Speaker 3: our way out, and we can we can get better

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Speaker 3: growth next year.

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Speaker 2: We'll see.

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Speaker 3: But that's the game that we're playing, and right now,

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Speaker 3: that's that's a bull market.

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Speaker 1: And the time we have left, Mike, I want to

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Speaker 1: get your view on earning season as well as the

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Speaker 1: focus is going to turn back to the big banks

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Speaker 1: and the idea of companies raising their guidance a lot

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Speaker 1: more than a lot of strategists, at least according to

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Speaker 1: Bloomberg Intelligence data, are predicting. Here is Wall Street underestimating

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Speaker 1: earnings or are the companies over promising? Got about a

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Speaker 1: minute left.

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Speaker 2: Probably somewhere in between.

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Speaker 3: I mean, you know, historically speaking, bottoms up estimates do

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Speaker 3: come down over time they manage those earnings. We're seeing

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Speaker 3: the same thing in the third cour order this. You know,

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Speaker 3: this season of earnings have come down significantly, but as

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Speaker 3: you roll forward, you know, the marketcount of.

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Speaker 2: Looks past that.

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Speaker 3: So you know we're probably slightly below you know, estimates

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Speaker 3: for the fourth quarter as well as for twenty twenty five.

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Speaker 3: I don't think that's wildly out of consensus, although I

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Speaker 3: think we're below the Street in terms of top down forecasts.

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Speaker 2: But look, I mean, as long as ournis are growing and.

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Speaker 3: There's liquidity, I don't think that necessarily derails us what

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Speaker 3: we think is the most interesting thing to be talking about.

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Speaker 2: Forget the index is what's going on under the surface.

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Speaker 3: We have been overweight defensive stocks most of the year

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Speaker 3: and that worked out extremely well. We downgraded that about

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Speaker 3: three months ago or three weeks ago, and then we

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Speaker 3: upgraded cyclicals a week ago, and that probably is where

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Speaker 3: we're spending most of our time is trying to find

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Speaker 3: out how to beat the S and P five hundred

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Speaker 3: rather than trying to figure out the direction of the

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Speaker 3: S and P five hundred.

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Speaker 2: And right now it's you know, cyclical stocks.

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Speaker 3: Are having a bit of a rebound, led by financials,

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Speaker 3: some of the industrial areas, and maybe even some of

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Speaker 3: the commodity space. So that to me is the story

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Speaker 3: now is like where do I own? Not how much

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Speaker 3: do I own?

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Speaker 2: And right now it looks to be the Cyffroult for

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Speaker 2: having a bit of a remap.

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Speaker 1: Really appreciate your time Mike this morning. Thanks so much

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Speaker 1: for being with us. Mike Wilson there a chief US

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Speaker 1: equity strategist at Morgan Stanley