Speaker 1: Morgan Stanley's Mike Wilson writes in this the data tell
Speaker 1: us growth and inflation are slowing directionally, and the FED
Speaker 1: will be easing this year as a result. Under such conditions,
Speaker 1: quality growth outperforms when in doubt, it pays to go
Speaker 1: with the highest probability winner. In this case, it's high
Speaker 1: quality growth. Mike com police to say, joins us. Now
Speaker 1: for more. Mike, it's going to see you.
Speaker 2: Yeah, great to see you guys.
Speaker 1: Good morning, fantastic. Have you with us around the table.
Speaker 1: We'll get to stocks in a second. I want to
Speaker 1: talk about the outlook. A convictionless outlook was a theme
Speaker 1: in a recent note of yours. How convictionless are things
Speaker 1: right now?
Speaker 3: Well, look, we just we spend time with clients all
Speaker 3: the time, that's what we do for a living.
Speaker 2: And I would just say that, you know, we had this.
Speaker 3: Big rally after you know, the pivot, and I would
Speaker 3: say it started with the Treasury squeeze when they said
Speaker 3: they're an issue less coupon. So it was really a
Speaker 3: duration rally that then fed into a stock rally. And
Speaker 3: so now evaluations are stressed again and people are looking
Speaker 3: around going Okay, what's next what's the next catalyst. I
Speaker 3: think there's going to be a couple of things that
Speaker 3: will determine the direction. Number one, what is the how
Speaker 3: much deceleration do we get?
Speaker 2: Okay?
Speaker 3: What is the come back to this banking question? I
Speaker 3: think that's like to me, that issue is not a
Speaker 3: systemic issue.
Speaker 2: What it is is.
Speaker 3: A weight on growth and credit growth, Okay, Like the
Speaker 3: regional banking system is just not lending at the same
Speaker 3: rate that they were because they're constrained.
Speaker 2: And that's been our.
Speaker 3: View all along, which means quality stocks will continue to
Speaker 3: do better.
Speaker 2: Right.
Speaker 3: The companies that are relying on that kind of funding
Speaker 3: are going to continue to see that's a paperweight for them.
Speaker 3: And I think that's the main takeaway from the banking situation.
Speaker 3: And then, of course new themes will evolve. Last year
Speaker 3: was about two main themes, right, it was about GLPS
Speaker 3: and AI. So can those two themes continue to drive
Speaker 3: you know, the stock market? Yeah, to some degree, but
Speaker 3: it's probably going to morph a bit and then there'll
Speaker 3: be new themes, and I think that's what that's what
Speaker 3: investors are looking for now, looking for new themes to
Speaker 3: kind of latch onto in a world that's going to
Speaker 3: remain macro uncertain, is why.
Speaker 1: I always saying, can you identify any themes run now?
Speaker 3: Well, I mean I think the AI theme is the one.
Speaker 3: Instead of enablers, we're going to adopters, right, So that's
Speaker 3: that's probably the biggest thing we have as a firm.
Speaker 3: The GOLP one is sort of positive and negative as
Speaker 3: we've seen, and that's so that's a great thing for
Speaker 3: long short investors.
Speaker 2: And then I'm wondering if we're going to get some.
Speaker 3: Growth out of the international markets finally, you know international
Speaker 3: you know, economies have not really recovered from the pandemic
Speaker 3: yet for the most part, and I think that's a wildcard.
Speaker 2: So if that were to happen, that could.
Speaker 3: Be a great thing for em It could be a
Speaker 3: theme for things that are levered more to global growth
Speaker 3: as opposed to just the US, which has really been
Speaker 3: the only engine of growth.
Speaker 4: Since you say that you fly around and you talk
Speaker 4: with clients, I was just noticing some of your recent travels.
Speaker 4: You're recently in Miami. I'm at you getting a lot
Speaker 4: of points by the way. You talked about the AI stock,
Speaker 4: saying I think it's the magnificent four now and it's
Speaker 4: related to earnings.
Speaker 1: Who are the magnificent four? Who gets dropped?
Speaker 2: Yeah?
Speaker 3: Well, I mean I think it's where I talking about
Speaker 3: specific names, but I think it's obvious people have been
Speaker 3: talking about this too. I'm not the only one, right,
Speaker 3: we're seeing you you can identify which stocks have fallen off.
Speaker 3: But when we look at his earnings, okay, and I
Speaker 3: would say, there's a magneficent one quite frankly that.
Speaker 2: Has real top line acceleration growth. Everybody knows what it is,
Speaker 2: and then the other ones are been more cost cutting stories,
Speaker 2: right Nvidia.
Speaker 3: Yeah, And my sense is, my sense is that what
Speaker 3: we're going to say here is a broadening out in
Speaker 3: quality growth. In other words, and we do our screens
Speaker 3: on quality growth, only twenty seven percent of that basket
Speaker 3: is in it. Another ten or twelve percent is in
Speaker 3: comm services. So there's another sixty to seventy percent of
Speaker 3: the S and P five hundred that kind of qualify
Speaker 3: for that high quality growth bucket. And that's what should happen.
Speaker 3: We should broaden out if we have a soft landing
Speaker 3: that doesn't have other issues. And that's that's the other
Speaker 3: thing that we've been really trying to help clients with
Speaker 3: is give them a framework on the macro.
Speaker 2: That's what we do. And so here's the Here are
Speaker 2: the three buckets.
Speaker 3: Okay, soft landing, we're decelerating growth and decelerating inflation.
Speaker 2: That's kind of what we had last year.
Speaker 3: It's high quality growth, a soft landing with accelerating growth
Speaker 3: and maybe stickier inflation. And that's the environment where you
Speaker 3: can see a broadening out perhaps the lower quality areas.
Speaker 2: And then the third scenario is still hard landing.
Speaker 3: I mean, we can't eliminate that, and I think that's
Speaker 3: that's going to be how you know, that's going to
Speaker 3: determine how you position your portfolio from from a stock.
Speaker 4: Standpoint, how do you hedge if you are cautious and
Speaker 4: there is this uncertainty? Is it energy stocks, is it
Speaker 4: more duration sensitive stocks? How do you even understand what
Speaker 4: it means to hedge when you have such bipolar types
Speaker 4: of outcomes.
Speaker 2: Diversification, You've got to be diversified, now, you know. One
Speaker 2: of things we talked about this conference.
Speaker 3: As well, which didn't make the headlines, is this idea
Speaker 3: that we finally have very attractive real rates and anominal
Speaker 3: rates to some degree. So from a portfolio construction standpoint. Okay,
Speaker 3: this is the first time in fifteen years where you
Speaker 3: can actually bonds actually provide their diversification benefit. And we
Speaker 3: saw that yesterday right bonds rallied stocks were down, So
Speaker 3: you know that's we're very bullish. We've been bullish on
Speaker 3: duration since four ninety on a ten year I mean,
Speaker 3: so here we are whatever, it's probably not as good
Speaker 3: a value, but in the event that this something systemic
Speaker 3: does happen, there's another shock to the economy that bond
Speaker 3: portfolio now is that the yields are high enough where
Speaker 3: they can actually provide some diversification to your equity risk,
Speaker 3: which means you can take equity risk still.
Speaker 2: Up the quality curve.
Speaker 3: Okay, so it's a diversification between stocks and bonds, and
Speaker 3: then understanding what within the equity market you feel more
Speaker 3: comfortable with.
Speaker 2: If look, if things.
Speaker 3: Get better on the economic front and we see better growth,
Speaker 3: then we can go out the risk curve inequities. We
Speaker 3: can take more equity risk as long as we have
Speaker 3: that duration benefit.
Speaker 1: On the bond side, you mentioned that changing theme from
Speaker 1: AI enable us to adopt us. What should I be
Speaker 1: looking for adopters? What does that mean, what does that look.
Speaker 3: Like, Well, looks more non tech, right, So who are
Speaker 3: going to be the early adopters within you know, the
Speaker 3: adoption of tech AI as a cost benefit as well
Speaker 3: as driving new growth.
Speaker 2: Now, I know we've written about this already. We think
Speaker 2: it's more of a twenty.
Speaker 3: Five story, Okay, like the productivity story is really twenty five.
Speaker 3: So we're not that bullish on earnings this year. Relatives
Speaker 3: of the streets streets at like two forty four. Bottoms up,
Speaker 3: we're two thirty. That's the typical parent. That will probably
Speaker 3: come down to our two thirty. But then for next
Speaker 3: year we have two sixty six, a sixteen percent growth,
Speaker 3: and a lot of that's going to be driven by
Speaker 3: productivity improvements as this is adopted. I don't think this
Speaker 3: is a second court you know, first, second, third quarter,
Speaker 3: even fourth quarter. It's going to take a little bit
Speaker 3: of time. But our analysts we've were to report recently
Speaker 3: bottoms up report identifying potential winners in that and the
Speaker 3: market will probably start to sniff that out sometime during
Speaker 3: the year. They're not going to wait all the way
Speaker 3: until twenty twenty five. But that's that runs the gamut
Speaker 3: of industries away from tech.
Speaker 1: Are they labor intensive industries?
Speaker 2: It can be.
Speaker 3: It can be a labor intensive but it can also
Speaker 3: be growth drivers. I mean, like if you use AI
Speaker 3: to you know, as an effective way of marketing, like
Speaker 3: as a cheaper way of marketing to get new customers.
Speaker 3: I mean, we don't know yet. This is this is
Speaker 3: what's exciting about it. It's also uncertain. There's also gonna
Speaker 3: be a lot of losers.
Speaker 2: Okay.
Speaker 3: Now, one of the things that worries me a little
Speaker 3: bit about AI in the short term, We've seen a
Speaker 3: lot of layoffs recently within the tech sector. So you know,
Speaker 3: maybe they're maybe these guys are already seeing the benefits
Speaker 3: and they're able to remove headcounts.
Speaker 2: So, you know, the labor.
Speaker 3: Market, I think there's various views in the labor market.
Speaker 3: I mean, you know, our view is slowing, it's weakening,
Speaker 3: a lot of government jobs, a lot of healthcare social
Speaker 3: worker type jobs which are somewhat government related. And if
Speaker 3: companies get a fish, this could be an interesting catalyst
Speaker 3: actually for more layoffs potentially.
Speaker 2: So it's it's going to be uncertain, right, Okay.
Speaker 4: I just have to ask this because I get messages
Speaker 4: all the time, you're such a downer. Why are you
Speaker 4: so pessimistic when you go around and you're talking to
Speaker 4: different clients, how much pushback do you get to just
Speaker 4: sort of a more realistic view of the potential risks
Speaker 4: given that only the rosiest seem to have come to pass.
Speaker 3: Well, Look, I mean our clients are active managers, right,
Speaker 3: so they're not worried about the S and P.
Speaker 2: Five hundred. They're trying to find what works.
Speaker 3: I mean, you know for all of the headlines we
Speaker 3: get around the S and P. Five hundred, mean what
Speaker 3: we usually talk to clients about our individual sectors.
Speaker 2: And stocks and like what's going to work?
Speaker 3: And so like last year we get a you know,
Speaker 3: an F on SMP, but we get probably an AARB
Speaker 3: on being in the right places in the market.
Speaker 2: And you know, that's our job.
Speaker 3: And then that's and that's what active managers are trying
Speaker 3: to do.
Speaker 2: So you know, you don't have to be super bear super.
Speaker 2: It's not about being bullish or bearish.
Speaker 3: It's about being bullish in certain parts of the market
Speaker 3: and opportunity and being cautious or concerned about others. And
Speaker 3: and look, last year was a was a really great
Speaker 3: stock picking market that most stocks. You know, up until
Speaker 3: October twenty seventh, we're had a tough time and then
Speaker 3: we had this little rally at end of the year. And
Speaker 3: we've been very consistent about this over the last twelve
Speaker 3: to eighteen months. As you guys know, I mean, we
Speaker 3: don't think the trade is to then you go to
Speaker 3: the lower quality bucket, okay, to go for the low
Speaker 3: quality cyclicals, and like that's a recession trade. We're not
Speaker 3: in a recession. You know, you need a clearing event.
Speaker 3: That was our call in twenty twenty. Then that worked
Speaker 3: really really well. Don't overthink it, right, you need to
Speaker 3: buy the high quality growth stocks.
Speaker 2: And it's not all mag seven all right.
Speaker 3: There are other there are other businesses that have those
Speaker 3: characteristics who are maybe not as appreciated.
Speaker 1: It's the mac ful, It's the mac won Lasa making friends.
Speaker 1: I love how you did that well. And if you
Speaker 1: get the feedback that I get, people hate and Anya
Speaker 1: for being clue me. Oh yeah, yeah all the time.
Speaker 1: It's okay.
Speaker 4: I mean, honestly, I actually don't think I'm all that clueing.
Speaker 1: But sometimes no, it's so Brami none, it's so that
Speaker 1: brand is so unfit. I'm greact my wolfs, and you're
Speaker 1: gonna stick with us. From Moke, standing from place to
Speaker 1: say