1 00:00:02,720 --> 00:00:07,240 Speaker 1: Bloomberg Audio Studios, podcasts, radio news. 2 00:00:08,000 --> 00:00:11,400 Speaker 2: Let's discuss now with Morgan Stanley, Cheap US equity strategists 3 00:00:11,400 --> 00:00:14,520 Speaker 2: and CIO Mike Wilson. And Mike, it didn't feel like 4 00:00:14,560 --> 00:00:17,520 Speaker 2: things were that fragile in May, a gain of six 5 00:00:17,560 --> 00:00:19,760 Speaker 2: point two percent on the S and P five hundred, 6 00:00:19,800 --> 00:00:21,800 Speaker 2: despite what we were just talking about in the last flock, 7 00:00:22,079 --> 00:00:25,079 Speaker 2: all this uncertainty that's out there, all this caution from 8 00:00:25,120 --> 00:00:27,760 Speaker 2: Corporate America. What do you make of where we stand 9 00:00:27,840 --> 00:00:28,240 Speaker 2: right now? 10 00:00:28,280 --> 00:00:30,479 Speaker 1: Well, I would say the fragility got priced. You know, 11 00:00:30,520 --> 00:00:32,879 Speaker 1: we had a big sell off twenty percent sell off 12 00:00:32,920 --> 00:00:35,519 Speaker 1: plus thirty thirty five percent in most stocks. And I 13 00:00:35,520 --> 00:00:37,800 Speaker 1: think that the fragility now has moved to the bomb market, 14 00:00:37,880 --> 00:00:39,960 Speaker 1: you know, like that's where the main concern is now, 15 00:00:40,040 --> 00:00:42,320 Speaker 1: whether it's the global bomb market with jgb's you know, 16 00:00:42,560 --> 00:00:44,199 Speaker 1: kind of getting out of bounds and of course now 17 00:00:44,240 --> 00:00:46,640 Speaker 1: with you know, term premium in the US treasury market, 18 00:00:46,800 --> 00:00:49,040 Speaker 1: I think that's where the risk is the greatest. The 19 00:00:49,080 --> 00:00:52,400 Speaker 1: growth fears have subsided because look, we did take the 20 00:00:52,440 --> 00:00:56,120 Speaker 1: off ramp on the tariff concerns, and and from my perspective, 21 00:00:56,160 --> 00:00:59,160 Speaker 1: I mean like we were probably weeks away from having 22 00:00:59,200 --> 00:01:01,800 Speaker 1: a recession if those one hundred and forty percent plus 23 00:01:01,840 --> 00:01:04,160 Speaker 1: tariffs has stayed on, I don't think there's any you know, 24 00:01:04,200 --> 00:01:06,720 Speaker 1: it's very little doubt that corporates would have had to 25 00:01:06,720 --> 00:01:09,920 Speaker 1: take action with the labor cycle. But now that it's 26 00:01:09,920 --> 00:01:12,000 Speaker 1: backed off and the stock market's up. You know who 27 00:01:12,000 --> 00:01:15,400 Speaker 1: watches stocks more than me and us? CEOs? Yeah, okay, 28 00:01:15,560 --> 00:01:19,399 Speaker 1: so stock market recovers Loosen's financial conditions. They say, you 29 00:01:19,400 --> 00:01:22,480 Speaker 1: know what, hold off on the layoffs because things may 30 00:01:22,520 --> 00:01:25,400 Speaker 1: be turning around. And I think we bought ourselves quite 31 00:01:25,440 --> 00:01:27,160 Speaker 1: a bit of time, and that's why the markets responded 32 00:01:27,200 --> 00:01:29,360 Speaker 1: to that. I don't think it's unusual. You know, CEOs 33 00:01:29,440 --> 00:01:31,639 Speaker 1: rarely admit that to us. That's why I was laughing. 34 00:01:31,680 --> 00:01:33,680 Speaker 3: And they always say, I don't watch the stock on 35 00:01:33,720 --> 00:01:35,840 Speaker 3: the day to day basis, but of course they do. 36 00:01:37,800 --> 00:01:40,319 Speaker 3: Like you think that the bottom is in and that 37 00:01:40,360 --> 00:01:41,920 Speaker 3: the second half is going to be better, or at 38 00:01:41,959 --> 00:01:44,120 Speaker 3: least you said started the year saying the second half 39 00:01:44,160 --> 00:01:45,520 Speaker 3: is going to be better than the first half. Do you 40 00:01:45,560 --> 00:01:48,760 Speaker 3: still think that. I mean, obviously we came down a lot, 41 00:01:48,800 --> 00:01:52,120 Speaker 3: but we came back a lot, and now we're, you know, 42 00:01:52,160 --> 00:01:53,400 Speaker 3: flirting with six thousand again. 43 00:01:53,440 --> 00:01:56,600 Speaker 1: That's right. Markets and economies are reflexive. Okay, we know that, 44 00:01:56,720 --> 00:01:58,480 Speaker 1: and you know, I think we have a unique view 45 00:01:58,480 --> 00:02:00,440 Speaker 1: coming into this year. Our view is that things already 46 00:02:00,440 --> 00:02:03,600 Speaker 1: slowing dramatically, and particularly on earnings. Arning's revision breath was 47 00:02:03,680 --> 00:02:06,800 Speaker 1: rolling over, the AI story was losing steam, okay, But 48 00:02:06,880 --> 00:02:09,400 Speaker 1: all of those things now have bottomed from a rate 49 00:02:09,440 --> 00:02:12,000 Speaker 1: of change standpoint, and that's what Stock's care about. That 50 00:02:12,080 --> 00:02:14,200 Speaker 1: was the focus of our mid year outlook was that 51 00:02:14,520 --> 00:02:17,320 Speaker 1: the rate of change is now bottomed, bottomed in economic 52 00:02:17,440 --> 00:02:20,920 Speaker 1: terms and in fiscal monetary policy. I think is bottomed 53 00:02:20,960 --> 00:02:24,000 Speaker 1: in terms of the most hackeys we're going to see, 54 00:02:24,360 --> 00:02:26,560 Speaker 1: and that is all going to now lead to a 55 00:02:26,560 --> 00:02:28,320 Speaker 1: better rate of change in the second half, which the 56 00:02:28,320 --> 00:02:29,679 Speaker 1: stock market is already discounting. 57 00:02:30,280 --> 00:02:33,200 Speaker 3: Bank of America says the latest turn by the Trump 58 00:02:33,200 --> 00:02:37,359 Speaker 3: administration to favor tax cuts and lower tariffs could spell 59 00:02:37,600 --> 00:02:40,760 Speaker 3: trouble for markets. The flip and US economic strategy could 60 00:02:40,760 --> 00:02:44,440 Speaker 3: incentivize traders to ditch bonds and pile back into AI 61 00:02:44,800 --> 00:02:48,800 Speaker 3: and crypto trades, which would risk inflating a market bubble. 62 00:02:49,240 --> 00:02:52,560 Speaker 3: According to the team led by Michael Hartnett, are we 63 00:02:52,680 --> 00:02:56,280 Speaker 3: already back to a bubble. We're here with Morgan Stanley's 64 00:02:56,280 --> 00:03:01,400 Speaker 3: Mike Wilson. That seems wow, that's a that's an interesting call. 65 00:03:01,440 --> 00:03:02,920 Speaker 3: That's a way to get noticed on a Friday. 66 00:03:03,680 --> 00:03:06,560 Speaker 1: I mean, bubbles are you know, apparently every year now 67 00:03:06,600 --> 00:03:09,400 Speaker 1: and certain things. I mean, I do agree with Michael 68 00:03:09,720 --> 00:03:12,320 Speaker 1: in the premise. Okay, we've been in an environment for 69 00:03:12,560 --> 00:03:17,240 Speaker 1: I would say, POSTGFC where policy has sort of elicited 70 00:03:17,639 --> 00:03:21,000 Speaker 1: you know, mini bubbles in certain assets. The money moves 71 00:03:21,040 --> 00:03:23,800 Speaker 1: to the hot kind of toy, whatever it might be. 72 00:03:24,880 --> 00:03:26,760 Speaker 1: But it's nothing like the late nineteen nineties. Like I 73 00:03:26,760 --> 00:03:29,120 Speaker 1: don't think what we're seeing in AI anything like the 74 00:03:29,200 --> 00:03:31,040 Speaker 1: late nineteen nineties. It's just not as broad. I mean, 75 00:03:31,200 --> 00:03:33,720 Speaker 1: there are four large companies spending all the money. There 76 00:03:33,720 --> 00:03:36,200 Speaker 1: are maybe eight to ten big beneficiaries of that spending. 77 00:03:36,520 --> 00:03:39,000 Speaker 1: That's it was like a mini bubble. We talked about 78 00:03:39,000 --> 00:03:40,000 Speaker 1: that at the end of last year. One of the 79 00:03:40,000 --> 00:03:41,880 Speaker 1: reasons we were a little bit more negative on some 80 00:03:41,920 --> 00:03:43,880 Speaker 1: of those stocks coming into the year was because there 81 00:03:43,920 --> 00:03:46,440 Speaker 1: was a deceleration and growth. But it's not like in 82 00:03:46,440 --> 00:03:49,120 Speaker 1: the nineteen nineties when you had every enterprise over spending 83 00:03:49,160 --> 00:03:52,960 Speaker 1: on equipment, you had this huge IT spending bubble. So 84 00:03:53,400 --> 00:03:56,160 Speaker 1: I don't agree that we're in a bubble, but I 85 00:03:56,200 --> 00:03:59,600 Speaker 1: do think the policy we've chosen, okay, which is to 86 00:04:00,240 --> 00:04:02,560 Speaker 1: kind of at every sign of trouble come in and 87 00:04:02,880 --> 00:04:05,640 Speaker 1: stop it, it does elicit that type of behavior where 88 00:04:05,720 --> 00:04:08,400 Speaker 1: that's why you get this chasing going on, because you know, 89 00:04:09,000 --> 00:04:12,000 Speaker 1: by the dip is a function of that policy that 90 00:04:12,040 --> 00:04:13,280 Speaker 1: we've been doing for fifteen years. 91 00:04:13,400 --> 00:04:15,680 Speaker 2: Yeah, and I mean largely if you take a look 92 00:04:15,680 --> 00:04:18,120 Speaker 2: over the grand scope of time, by the dip has 93 00:04:18,160 --> 00:04:19,880 Speaker 2: worked because socks go up. 94 00:04:19,800 --> 00:04:20,679 Speaker 1: In the long run. 95 00:04:20,720 --> 00:04:22,400 Speaker 2: But I take your point. It kind of feels like 96 00:04:22,400 --> 00:04:25,200 Speaker 2: bubbles in the eye of the beholder here. But I 97 00:04:25,560 --> 00:04:29,200 Speaker 2: am curious where you think we go from here, especially when. 98 00:04:29,120 --> 00:04:30,400 Speaker 1: It comes to the AI trade. 99 00:04:30,400 --> 00:04:32,440 Speaker 2: That narrative had been out there that you know, it 100 00:04:32,480 --> 00:04:34,240 Speaker 2: was getting kind of tired. There was a lot of 101 00:04:34,440 --> 00:04:38,719 Speaker 2: existential worries over deep seak and cheaper models coming in exactly. 102 00:04:38,760 --> 00:04:41,279 Speaker 2: But it feels like, especially with these in video results 103 00:04:41,320 --> 00:04:43,600 Speaker 2: that were this week, somehow it feels like a long 104 00:04:43,640 --> 00:04:47,080 Speaker 2: time ago, we're still putting our foot on the gas here. 105 00:04:47,360 --> 00:04:49,240 Speaker 1: Well, what I would say is that the AI is 106 00:04:49,279 --> 00:04:53,480 Speaker 1: transitioning from the infrastructure place. Okay, so the investment cycle 107 00:04:53,760 --> 00:04:56,200 Speaker 1: to the adopter phase, and that's what we've been talking 108 00:04:56,200 --> 00:04:58,200 Speaker 1: about for the last six months is now we're now, okay, 109 00:04:58,200 --> 00:04:59,920 Speaker 1: we have the compute power. It's built. There's gonna be 110 00:04:59,960 --> 00:05:02,560 Speaker 1: mo to be built. But that initial surge is kind 111 00:05:02,560 --> 00:05:04,400 Speaker 1: of done, and now it's going to continue but at 112 00:05:04,400 --> 00:05:07,800 Speaker 1: a slower pace. And now the fun part starts. Let's 113 00:05:07,800 --> 00:05:11,599 Speaker 1: build the application layer. Let's build the killer applications that 114 00:05:11,720 --> 00:05:14,320 Speaker 1: then can make you know, we could diffuse the technology 115 00:05:14,360 --> 00:05:16,960 Speaker 1: into the economy. You know, the price is coming down. 116 00:05:17,400 --> 00:05:20,120 Speaker 1: That's when technology takes off. That's the that is the 117 00:05:20,279 --> 00:05:24,760 Speaker 1: essence of More's law and tech diffusion. That's when you 118 00:05:24,760 --> 00:05:27,239 Speaker 1: can actually get the productivity benefits. And so we've always 119 00:05:27,240 --> 00:05:28,680 Speaker 1: had the view that twenty five was going to be 120 00:05:29,160 --> 00:05:31,280 Speaker 1: in terms of the productivity, but twenty six and twenty 121 00:05:31,320 --> 00:05:33,560 Speaker 1: seven is when we think that productivity benefit can start 122 00:05:33,600 --> 00:05:34,080 Speaker 1: to come through. 123 00:05:34,400 --> 00:05:36,680 Speaker 3: Is that what drives us to sixty five hundred. I 124 00:05:36,720 --> 00:05:40,320 Speaker 3: mean that combined with the fact that tariffs turn out 125 00:05:40,320 --> 00:05:42,880 Speaker 3: to be not so bad at least at these levels, 126 00:05:43,000 --> 00:05:46,440 Speaker 3: and no one cares if we blow out the deficit 127 00:05:46,480 --> 00:05:47,799 Speaker 3: another couple trillion dollars. 128 00:05:47,920 --> 00:05:50,520 Speaker 1: Well, it's another part of our rate of change argument, right, 129 00:05:50,560 --> 00:05:52,920 Speaker 1: so that AI now is moving to focus on the 130 00:05:53,000 --> 00:05:55,320 Speaker 1: rate of change. That's the title of your note exactly. 131 00:05:55,400 --> 00:05:57,839 Speaker 1: And so like AI was a negative in terms of 132 00:05:58,000 --> 00:06:01,400 Speaker 1: ROE and return on investment capital, it was a cost. 133 00:06:01,839 --> 00:06:04,000 Speaker 1: And now the rate of change on AI from a 134 00:06:04,000 --> 00:06:06,960 Speaker 1: broader market perspective is turning into a tailwind for margins 135 00:06:06,960 --> 00:06:10,080 Speaker 1: and productivity. And that's what the market is. That's another 136 00:06:10,240 --> 00:06:13,400 Speaker 1: factor in our more positive view over the next twelve months. 137 00:06:13,640 --> 00:06:15,800 Speaker 2: Well, I actually want to go back to the bond market, 138 00:06:15,839 --> 00:06:18,279 Speaker 2: speaking of the deficit. You know, you mentioned before the 139 00:06:18,320 --> 00:06:21,040 Speaker 2: break that things are actually looking a little bit fragile, 140 00:06:21,200 --> 00:06:23,600 Speaker 2: not so much in the equity market, but perhaps the 141 00:06:23,640 --> 00:06:26,599 Speaker 2: bond market. And I'm curious, in your rule as chief 142 00:06:26,760 --> 00:06:30,400 Speaker 2: US equity strategists, how much time are you spending looking 143 00:06:30,440 --> 00:06:31,359 Speaker 2: at the tenure yield? 144 00:06:31,480 --> 00:06:32,800 Speaker 1: Well, I spent a lot of time looking at the 145 00:06:32,839 --> 00:06:35,120 Speaker 1: ten year in any environment, because it is the pricing 146 00:06:35,160 --> 00:06:38,040 Speaker 1: mechanism for all assets. You know, as we've said for 147 00:06:38,160 --> 00:06:40,560 Speaker 1: years now, four to fifty is kind of that crossover point, 148 00:06:40,600 --> 00:06:42,960 Speaker 1: and it still continues to be a crossover point when 149 00:06:43,000 --> 00:06:44,960 Speaker 1: you get north of four fifty and a ten year 150 00:06:45,320 --> 00:06:48,520 Speaker 1: you start to see negative correlation to equity multiples. Okay, 151 00:06:48,520 --> 00:06:50,839 Speaker 1: so we're right around that level. And by the way, 152 00:06:50,880 --> 00:06:53,760 Speaker 1: I'm pretty sure the authorities know that as well, so 153 00:06:53,920 --> 00:06:55,960 Speaker 1: they try to defend those levels. I don't think we're 154 00:06:56,000 --> 00:06:57,960 Speaker 1: going to see a real defense. 155 00:06:57,680 --> 00:07:00,960 Speaker 3: Authorities meeting the FED, you know, all of it, Fed treasurysury, 156 00:07:01,360 --> 00:07:03,039 Speaker 3: not Congress. 157 00:07:03,080 --> 00:07:05,520 Speaker 1: Congress is a different animal, you know, and I've made 158 00:07:05,560 --> 00:07:08,599 Speaker 1: this statement before. It's may controversial. I believe Treasury is 159 00:07:08,600 --> 00:07:10,840 Speaker 1: somewhat captured by Congress or they got to fund it, 160 00:07:11,000 --> 00:07:12,920 Speaker 1: and the FED is somewhat captured by Treasury. They got 161 00:07:12,960 --> 00:07:15,400 Speaker 1: to help out, so they work. You know, it's sort 162 00:07:15,400 --> 00:07:17,679 Speaker 1: of it starts with the spending and then it trickles 163 00:07:17,720 --> 00:07:19,720 Speaker 1: down and so, you know, I don't think we're going 164 00:07:19,800 --> 00:07:22,240 Speaker 1: to see an aggressive action until we get to fire. 165 00:07:22,280 --> 00:07:24,080 Speaker 1: If we get to five percent. We said this last time, 166 00:07:24,480 --> 00:07:26,320 Speaker 1: going to five percent is gonna be bad for stocks 167 00:07:26,320 --> 00:07:28,800 Speaker 1: in the short term. However, if we get to five percent, 168 00:07:29,360 --> 00:07:32,920 Speaker 1: I'm pretty confident they're going to intervene well, and that 169 00:07:32,960 --> 00:07:34,400 Speaker 1: will be positive for better worse. 170 00:07:34,400 --> 00:07:36,760 Speaker 2: It feels like we are just glued to four and 171 00:07:36,800 --> 00:07:38,960 Speaker 2: a half percent we just tog around in a range 172 00:07:39,000 --> 00:07:41,160 Speaker 2: around until we get over it, until we get when 173 00:07:41,160 --> 00:07:43,400 Speaker 2: we watch, but then we go back down and we're 174 00:07:43,400 --> 00:07:44,920 Speaker 2: back at four and a half percent at least. That's 175 00:07:44,960 --> 00:07:47,160 Speaker 2: been the story of the past couple months. So I'm like, 176 00:07:47,360 --> 00:07:48,320 Speaker 2: what do you make of that? 177 00:07:48,560 --> 00:07:50,560 Speaker 1: Well, I would say the other side of that too, 178 00:07:50,680 --> 00:07:53,040 Speaker 1: is like, let's not ignore what's going on in Japan, okay. 179 00:07:53,200 --> 00:07:55,640 Speaker 1: So you know they've been they're way ahead of us 180 00:07:55,720 --> 00:07:58,240 Speaker 1: in terms of using you know, the money printer to 181 00:07:58,760 --> 00:08:00,880 Speaker 1: kind of backstop bomb market doing it for thirty years, 182 00:08:00,960 --> 00:08:03,320 Speaker 1: right and qwe they were the originators of that, and 183 00:08:03,400 --> 00:08:05,679 Speaker 1: we followed suit. And so now the question is, okay, 184 00:08:05,840 --> 00:08:08,600 Speaker 1: now they have inflation, Okay, in the end, by the way, 185 00:08:09,000 --> 00:08:11,200 Speaker 1: is you know a big part of that. So the 186 00:08:11,280 --> 00:08:13,760 Speaker 1: question is can they control the yend's movement. I don't 187 00:08:13,760 --> 00:08:15,520 Speaker 1: know if they're more focused on the end going south 188 00:08:15,560 --> 00:08:18,280 Speaker 1: of one forty okay, or they're more focused on keeping 189 00:08:18,360 --> 00:08:21,520 Speaker 1: jgbs from blowing out the higher levels. But it appears 190 00:08:21,560 --> 00:08:23,920 Speaker 1: to me as an observer of markets, that you know, 191 00:08:23,960 --> 00:08:26,680 Speaker 1: when the ten year yield or thirty year yeld gets 192 00:08:26,680 --> 00:08:28,520 Speaker 1: to a certain level in Japan, or the end gets 193 00:08:28,560 --> 00:08:31,320 Speaker 1: closer to one forty against a dollar. We also see intervention. 194 00:08:31,760 --> 00:08:34,120 Speaker 1: So these are all related. These are all related. But 195 00:08:34,160 --> 00:08:36,319 Speaker 1: the fact that we were seeing these things get pinned 196 00:08:36,640 --> 00:08:40,000 Speaker 1: around these key levels suggests to me that they're observing 197 00:08:40,080 --> 00:08:42,160 Speaker 1: it and they're they're gonna, you know, they're gonna try 198 00:08:42,200 --> 00:08:44,600 Speaker 1: to control that. All right, keep an eye on Japan. 199 00:08:44,679 --> 00:08:46,840 Speaker 1: We'll be doing that over the weekend. Hope you have 200 00:08:46,920 --> 00:08:47,760 Speaker 1: fun too. 201 00:08:47,920 --> 00:08:49,640 Speaker 2: That is Morgan Stanley's Mike Wilson. 202 00:08:49,679 --> 00:08:50,640 Speaker 1: Great to speak with you.