Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Wealgan Stanley's Mike Wilson rising impoor cost exposure for S
Speaker 2: and P five hundred industries. It's more limited thus far,
Speaker 2: given the combination of the countries in scope and the
Speaker 2: exemption seemingly still in place. Mike John is SNAW Football Mike,
Speaker 2: Good morning, morning John. Have we actually been tested? That's
Speaker 2: the question I've got for you, based on the note
Speaker 2: you put out over the weekend.
Speaker 1: Yeah.
Speaker 3: I think we keep getting tested back and forth, And
Speaker 3: I think Amrie did a brilliant job of kind of
Speaker 3: describing yesterday as just another example the president controlling the
Speaker 3: narrative back and forth, you know, maybe the timelines now,
Speaker 3: I mean he lets things go even shorter than he
Speaker 3: comes back in reverses, And I totally agree. I think
Speaker 3: it's about trial balloons. It's no different than FED policy makers.
Speaker 3: It's no different than other policy makers coming in and
Speaker 3: they trial ballooned to see how it will impact the market.
Speaker 3: So have we been tested? Yeah, We've been tested severely.
Speaker 3: In the first three or four months of the year,
Speaker 3: we had a bear market stockture down thirty five to
Speaker 3: forty percent over the prior year. So, I mean, we
Speaker 3: had a bear market, and so now are looking for
Speaker 3: the I go, well, you missed the bear market.
Speaker 1: We had it.
Speaker 3: You know, we bottomed in April, and all the indicators
Speaker 3: we look at from a ready to change standpoint, if
Speaker 3: inflected sharply. That's what we wrote about our mid year update,
Speaker 3: and it's even surprised us to the upside. I mean,
Speaker 3: the arn answer vision breadth is explosive, and so you
Speaker 3: just can't deny that. You can't deny the fact that
Speaker 3: companies are good at mitigating terrors. For example, import prices
Speaker 3: really aren't up that much. So the question is who's
Speaker 3: eating these terrors? That's the big question. I hear now
Speaker 3: from clients like, well, we're collecting all these terrors, but
Speaker 3: where where are they? Some of them are on the
Speaker 3: balance shese of companies that hasn't flowed through the cost
Speaker 3: of goods sold yet, some of them are from exporters.
Speaker 3: They've discounted their pricing. They're eating the terrors, and then
Speaker 3: some it's going to get passed on to the consumer.
Speaker 3: That's to be determined still, And so as we've been saying,
Speaker 3: the third quarter is probably the quarter of risk where
Speaker 3: you'll see some of this flow through to the cost
Speaker 3: of goods sold. I don't think this is, you know,
Speaker 3: a massive correction. It's a five seven percent correction for
Speaker 3: some companies that could be bigger. But this is the
Speaker 3: quarter of risk for where the terrorists will start to
Speaker 3: hit and then but the markets are you thinking about?
Speaker 3: This is a temporary impact and twenty six now Ernie'
Speaker 3: grows standpoint is looking better.
Speaker 2: Is that a correction you'd be looking to buy?
Speaker 1: Then?
Speaker 3: Absolutely, we're looking to I mean, I'm hoping we get
Speaker 3: a pullback to some degree. I think a lot of
Speaker 3: clients are looking for a pullback of some kind. They've
Speaker 3: been surprised we haven't gotten one. But this is what
Speaker 3: the beginning of a new bowl market looks like.
Speaker 1: Right.
Speaker 3: It's just explosive. It doesn't let people in, right. The
Speaker 3: rate of change is accelerating beyond what you expected. So
Speaker 3: it's just I think the pullbacks will be short and shallow.
Speaker 3: Maybe there'll be another surprise, another test of some kind
Speaker 3: that will cause something more severe. But I really can't
Speaker 3: see more than a five or ten percent correction given
Speaker 3: what I see now in the landscape.
Speaker 4: When you think of tariffs, though, I think you're talking
Speaker 4: about the visa the country tariffs, right, the reciprocal what
Speaker 4: about the sectoral tariffs? Does that make it more complicated?
Speaker 1: Absolutely?
Speaker 3: I mean, and that's one of the reason why I
Speaker 3: think a lot of investors have thrown up their hands
Speaker 3: and the market is kind of looking past this.
Speaker 1: Because there's so many carbauts.
Speaker 3: I mean, even the USMCA, right, the exclusions, and that's
Speaker 3: what we've word about this weekend. So a lot of
Speaker 3: the tariffs on China go you know, they go through
Speaker 3: backdoor through Mexico. Well, a lot of that's been excluded,
Speaker 3: so the twenty five percent tariff doesn't even end up
Speaker 3: hitting that.
Speaker 1: And then we have the two two exclusions.
Speaker 3: We just saw that now you know, you can sell
Speaker 3: semiconnectors into China again. So like there's these carve outs
Speaker 3: and it's very confusing. My base case view and has
Speaker 3: been this all year, is ultimately I think that what
Speaker 3: they're going for is a ten percent import tax, basically
Speaker 3: a consumption tax, and that's where we're going to land
Speaker 3: rit large. Now we're not quite there right now if
Speaker 3: you do the math, it's like sixteen seventeen percent. But ultimately,
Speaker 3: if we get to a ten percent import tax. Companies
Speaker 3: can deal with that. You raise three to four hundred
Speaker 3: million dollars in revenue per year. I mean, it's not
Speaker 3: a bad it's not a bad strategy.
Speaker 4: Does the One Big Beautiful Bill tax cuts offset that
Speaker 4: import tax?
Speaker 3: Well, that's exactly the strategy, which is that you're instead
Speaker 3: of taxing companies and private companies and individuals, you're sharing
Speaker 3: the tax now through exporters, importers, and consumers and then
Speaker 3: let the market figure that out, like figure out where the.
Speaker 1: Tax can get allocated.
Speaker 3: So what we're moving from is an economy where capital
Speaker 3: has been allocated by government to an economy where capital
Speaker 3: is being allocated by private corporation. That's the beauty of
Speaker 3: the Big Beautiful Bill is that you're basically shifting the
Speaker 3: economy mix from a publicly driven economy to a privately
Speaker 3: driven economy.
Speaker 1: SOMEBOE we talked about six eight months ago.
Speaker 4: But is there a fiscal impulse given the fact that
Speaker 4: really the crux of the One Big Beautiful Bill is
Speaker 4: an extension of current policy.
Speaker 3: That's right, So there's no incremental fiscal in the traditional
Speaker 3: way you think about it. However, there's a massive positive
Speaker 3: impact to cash earnings for corporations and an incentive structure
Speaker 3: to start investing something that companies have not been doing
Speaker 3: for the last three or four years is investing in capex.
Speaker 3: The bill basically encourages them to spend money in capital
Speaker 3: goods in R and D, something that we need to
Speaker 3: do to grow down the road.
Speaker 2: Let's build on some of this. She talked about the
Speaker 2: broad based earnings revisions. Is that more than just AI,
Speaker 2: more than just big tech? Where are you seeing that?
Speaker 3: So it's been led by the mag seven so to speak,
Speaker 3: But no, it's actually fairly brought now. It is a
Speaker 3: larger company driven sort of revision factor. So the small
Speaker 3: the small companies still aren't seeing it yet. That's what
Speaker 3: we've been underweight. We've remained underweight with the smaller BIS say,
Speaker 3: is now that could change if the FED starts cutting rates.
Speaker 3: That's something we're thinking about for twenty twenty six. But
Speaker 3: it is a fairly broad expansion. It's financials, it's industrials,
Speaker 3: it's some of the software stack which was kind of
Speaker 3: left behind over the last year year and a half.
Speaker 1: So it is it is broadening out.
Speaker 3: And this is I think a function of Look, there's
Speaker 3: been there is pent up demand in the economy, there
Speaker 3: is pent up capex in the economy, and somebody's incentives. Now,
Speaker 3: some of these tax changes, I think do give clarity
Speaker 3: to companies now saying Okay, we can move forward with
Speaker 3: our business. The legislative agenda is done. Now we now
Speaker 3: we can look forward for at least three years, maybe
Speaker 3: not beyond that, but at least for the next three years,
Speaker 3: and we got to get out with our life.
Speaker 2: What are the kind of companies you like at the moment.
Speaker 3: Industrials and financials really are the two areas we've been
Speaker 3: really focused on. And software because I think a lot
Speaker 3: of folks are too bearish on software.
Speaker 1: I understand why. I mean AI, you know, coding and
Speaker 1: all that.
Speaker 3: But at the end of the day, this is the
Speaker 3: part of the tech cycle where you've done the compute
Speaker 3: and now the application layer has to get built so
Speaker 3: that you know, dummies like me on tech can actually
Speaker 3: use this technology and become more productive.
Speaker 2: One of them will can POSSI the Hudson down the
Speaker 2: Hudson in downtown New York, and I look across the
Speaker 2: river to back office city compliance. All of those workers
Speaker 2: that are working for these major financial institutions and forgive
Speaker 2: me because many of them are watching right now and
Speaker 2: this might be a rather brutal conversation. How close are
Speaker 2: we to seeing some big cuts to the amount of
Speaker 2: people to work at these institutions?
Speaker 3: Well, I mean, compliance is definitely one area that will
Speaker 3: be hit not only from AI but also from just
Speaker 3: a change in regulatory environment. Potentially, we don't really know.
Speaker 3: We're not seeing it yet. Okay, I would say that
Speaker 3: the AI concern about employment I think is real. We're
Speaker 3: seeing it. Here's here's the lead indicator. So the largest
Speaker 3: companies who are very fascial with data Okay, you're Nvidios,
Speaker 3: your metas, etc. Are showing the ability to use this data. Microsoft, right,
Speaker 3: They're laying off people more and more because they're able
Speaker 3: to use this data.
Speaker 1: So the question is can.
Speaker 3: That translate into the average company in the economy to
Speaker 3: be determined, But you know, I think that, like I
Speaker 3: don't want to make a statement here, that's not great
Speaker 3: for employees necessarily, but man, if you think about what
Speaker 3: it does for S and P earnings, well, this is
Speaker 3: it might.
Speaker 1: Really really positive.
Speaker 3: That's why the multiple keeps expanding because that's what it's
Speaker 3: looking forward.
Speaker 2: To the conversation for further down the road, and this
Speaker 2: is the next several years, you can have this really
Speaker 2: strange dynamic where the labor market data stinks, but the
Speaker 2: yearnings coming out of these companies might be really powerful.
Speaker 2: I just wonder how far you can push that, How
Speaker 2: far can we push that.
Speaker 3: Well, we're going to find out, I think, because I
Speaker 3: think companies or US companies are really good at cutting costs,
Speaker 3: whether it's employees or you know, other types of expenses,
Speaker 3: and so I mean that's what they're that's what they're
Speaker 3: going to do because we're still in kind of a
Speaker 3: slow growth top line environment, so companies have to become
Speaker 3: more efficient. Plus they have to offset some of these
Speaker 3: other things like terrafs and things like that.
Speaker 1: So but companies will figure that out.
Speaker 3: That's why the market continues to go for the high
Speaker 3: quality businesses. One other thing that we haven't talked about
Speaker 3: yet is last week's Supreme Court ruling I think was
Speaker 3: really fascinating with respect to the government's ability to do
Speaker 3: these reductions in force you know from the DOGE.
Speaker 1: And this this this could be.
Speaker 3: Also quite interesting development where this is like the return
Speaker 3: of DOGE. Because I would say most people are disappointed
Speaker 3: that those wasn't allowed to kind of complete the deal.
Speaker 1: They were kind of blocked. They weren't able to kind
Speaker 1: of reduce government headcount.
Speaker 3: And maybe this ruling by the Supreme Court allows those
Speaker 3: to kind of return and we could see headcount reduction
Speaker 3: in government, which is another type of a slowdown in labor,
Speaker 3: which won't affect the market. Right, That's not great for
Speaker 3: government employees necessarily, but that will liberate Okay, you know
Speaker 3: kind of the private economy.
Speaker 1: Once again, two parts.
Speaker 4: Of these conversations. When you talk about the fact that
Speaker 4: more capital being allocated to the private sector, not the
Speaker 4: US government. But if you have companies laying off people
Speaker 4: because of AI, who has to step in to help
Speaker 4: what potentially could be high unemployment rates.
Speaker 2: It's going to be the US government.
Speaker 3: Yeah, well, I would hope that, you know, instead of
Speaker 3: laying people off, you just make them more productive. I
Speaker 3: mean ultimately, so everyone says yeah, but I mean that
Speaker 3: at the end of the day, if you look at
Speaker 3: the private economy for the last three years, this is
Speaker 3: something that doesn't get a lot of airtime. The private
Speaker 3: labor force has not really ground the most part. Okay,
Speaker 3: it's been a government heavy healthcare, heavy education like state
Speaker 3: and local jobs, and so the private economy has been
Speaker 3: operating with fewer employees already.
Speaker 1: This is not a new deal.
Speaker 3: I mean, companies once again are really good at being
Speaker 3: more efficient. So you know, my hope would be that
Speaker 3: we could just grow with fewer people. By the way,
Speaker 3: we have less immigrants now right because of the shutdown
Speaker 3: the border, so we kind of need this.
Speaker 1: We need to fill that.
Speaker 3: Gap of making the people who are in America more
Speaker 3: productive and so we can grow the economy.
Speaker 2: Mike Wilson smile is always good to see you. Thank you, sir,