WEBVTT - Morgan Stanley CIO Mike Wilson Talks Market, AI Trade 0:00:02.720 --> 0:00:07.240 Bloomberg Audio Studios, podcasts, radio news. 0:00:08.000 --> 0:00:11.400 Let's discuss now with Morgan Stanley, Cheap US equity strategists 0:00:11.400 --> 0:00:14.520 and CIO Mike Wilson. And Mike, it didn't feel like 0:00:14.560 --> 0:00:17.520 things were that fragile in May, a gain of six 0:00:17.560 --> 0:00:19.760 point two percent on the S and P five hundred, 0:00:19.800 --> 0:00:21.800 despite what we were just talking about in the last flock, 0:00:22.079 --> 0:00:25.079 all this uncertainty that's out there, all this caution from 0:00:25.120 --> 0:00:27.760 Corporate America. What do you make of where we stand 0:00:27.840 --> 0:00:28.240 right now? 0:00:28.280 --> 0:00:30.479 Well, I would say the fragility got priced. You know, 0:00:30.520 --> 0:00:32.879 we had a big sell off twenty percent sell off 0:00:32.920 --> 0:00:35.519 plus thirty thirty five percent in most stocks. And I 0:00:35.520 --> 0:00:37.800 think that the fragility now has moved to the bomb market, 0:00:37.880 --> 0:00:39.960 you know, like that's where the main concern is now, 0:00:40.040 --> 0:00:42.320 whether it's the global bomb market with jgb's you know, 0:00:42.560 --> 0:00:44.199 kind of getting out of bounds and of course now 0:00:44.240 --> 0:00:46.640 with you know, term premium in the US treasury market, 0:00:46.800 --> 0:00:49.040 I think that's where the risk is the greatest. The 0:00:49.080 --> 0:00:52.400 growth fears have subsided because look, we did take the 0:00:52.440 --> 0:00:56.120 off ramp on the tariff concerns, and and from my perspective, 0:00:56.160 --> 0:00:59.160 I mean like we were probably weeks away from having 0:00:59.200 --> 0:01:01.800 a recession if those one hundred and forty percent plus 0:01:01.840 --> 0:01:04.160 tariffs has stayed on, I don't think there's any you know, 0:01:04.200 --> 0:01:06.720 it's very little doubt that corporates would have had to 0:01:06.720 --> 0:01:09.920 take action with the labor cycle. But now that it's 0:01:09.920 --> 0:01:12.000 backed off and the stock market's up. You know who 0:01:12.000 --> 0:01:15.400 watches stocks more than me and us? CEOs? Yeah, okay, 0:01:15.560 --> 0:01:19.399 so stock market recovers Loosen's financial conditions. They say, you 0:01:19.400 --> 0:01:22.480 know what, hold off on the layoffs because things may 0:01:22.520 --> 0:01:25.400 be turning around. And I think we bought ourselves quite 0:01:25.440 --> 0:01:27.160 a bit of time, and that's why the markets responded 0:01:27.200 --> 0:01:29.360 to that. I don't think it's unusual. You know, CEOs 0:01:29.440 --> 0:01:31.639 rarely admit that to us. That's why I was laughing. 0:01:31.680 --> 0:01:33.680 And they always say, I don't watch the stock on 0:01:33.720 --> 0:01:35.840 the day to day basis, but of course they do. 0:01:37.800 --> 0:01:40.319 Like you think that the bottom is in and that 0:01:40.360 --> 0:01:41.920 the second half is going to be better, or at 0:01:41.959 --> 0:01:44.120 least you said started the year saying the second half 0:01:44.160 --> 0:01:45.520 is going to be better than the first half. Do you 0:01:45.560 --> 0:01:48.760 still think that. I mean, obviously we came down a lot, 0:01:48.800 --> 0:01:52.120 but we came back a lot, and now we're, you know, 0:01:52.160 --> 0:01:53.400 flirting with six thousand again. 0:01:53.440 --> 0:01:56.600 That's right. Markets and economies are reflexive. Okay, we know that, 0:01:56.720 --> 0:01:58.480 and you know, I think we have a unique view 0:01:58.480 --> 0:02:00.440 coming into this year. Our view is that things already 0:02:00.440 --> 0:02:03.600 slowing dramatically, and particularly on earnings. Arning's revision breath was 0:02:03.680 --> 0:02:06.800 rolling over, the AI story was losing steam, okay, But 0:02:06.880 --> 0:02:09.400 all of those things now have bottomed from a rate 0:02:09.440 --> 0:02:12.000 of change standpoint, and that's what Stock's care about. That 0:02:12.080 --> 0:02:14.200 was the focus of our mid year outlook was that 0:02:14.520 --> 0:02:17.320 the rate of change is now bottomed, bottomed in economic 0:02:17.440 --> 0:02:20.920 terms and in fiscal monetary policy. I think is bottomed 0:02:20.960 --> 0:02:24.000 in terms of the most hackeys we're going to see, 0:02:24.360 --> 0:02:26.560 and that is all going to now lead to a 0:02:26.560 --> 0:02:28.320 better rate of change in the second half, which the 0:02:28.320 --> 0:02:29.679 stock market is already discounting. 0:02:30.280 --> 0:02:33.200 Bank of America says the latest turn by the Trump 0:02:33.200 --> 0:02:37.359 administration to favor tax cuts and lower tariffs could spell 0:02:37.600 --> 0:02:40.760 trouble for markets. The flip and US economic strategy could 0:02:40.760 --> 0:02:44.440 incentivize traders to ditch bonds and pile back into AI 0:02:44.800 --> 0:02:48.800 and crypto trades, which would risk inflating a market bubble. 0:02:49.240 --> 0:02:52.560 According to the team led by Michael Hartnett, are we 0:02:52.680 --> 0:02:56.280 already back to a bubble. We're here with Morgan Stanley's 0:02:56.280 --> 0:03:01.400 Mike Wilson. That seems wow, that's a that's an interesting call. 0:03:01.440 --> 0:03:02.920 That's a way to get noticed on a Friday. 0:03:03.680 --> 0:03:06.560 I mean, bubbles are you know, apparently every year now 0:03:06.600 --> 0:03:09.400 and certain things. I mean, I do agree with Michael 0:03:09.720 --> 0:03:12.320 in the premise. Okay, we've been in an environment for 0:03:12.560 --> 0:03:17.240 I would say, POSTGFC where policy has sort of elicited 0:03:17.639 --> 0:03:21.000 you know, mini bubbles in certain assets. The money moves 0:03:21.040 --> 0:03:23.800 to the hot kind of toy, whatever it might be. 0:03:24.880 --> 0:03:26.760 But it's nothing like the late nineteen nineties. Like I 0:03:26.760 --> 0:03:29.120 don't think what we're seeing in AI anything like the 0:03:29.200 --> 0:03:31.040 late nineteen nineties. It's just not as broad. I mean, 0:03:31.200 --> 0:03:33.720 there are four large companies spending all the money. There 0:03:33.720 --> 0:03:36.200 are maybe eight to ten big beneficiaries of that spending. 0:03:36.520 --> 0:03:39.000 That's it was like a mini bubble. We talked about 0:03:39.000 --> 0:03:40.000 that at the end of last year. One of the 0:03:40.000 --> 0:03:41.880 reasons we were a little bit more negative on some 0:03:41.920 --> 0:03:43.880 of those stocks coming into the year was because there 0:03:43.920 --> 0:03:46.440 was a deceleration and growth. But it's not like in 0:03:46.440 --> 0:03:49.120 the nineteen nineties when you had every enterprise over spending 0:03:49.160 --> 0:03:52.960 on equipment, you had this huge IT spending bubble. So 0:03:53.400 --> 0:03:56.160 I don't agree that we're in a bubble, but I 0:03:56.200 --> 0:03:59.600 do think the policy we've chosen, okay, which is to 0:04:00.240 --> 0:04:02.560 kind of at every sign of trouble come in and 0:04:02.880 --> 0:04:05.640 stop it, it does elicit that type of behavior where 0:04:05.720 --> 0:04:08.400 that's why you get this chasing going on, because you know, 0:04:09.000 --> 0:04:12.000 by the dip is a function of that policy that 0:04:12.040 --> 0:04:13.280 we've been doing for fifteen years. 0:04:13.400 --> 0:04:15.680 Yeah, and I mean largely if you take a look 0:04:15.680 --> 0:04:18.120 over the grand scope of time, by the dip has 0:04:18.160 --> 0:04:19.880 worked because socks go up. 0:04:19.800 --> 0:04:20.679 In the long run. 0:04:20.720 --> 0:04:22.400 But I take your point. It kind of feels like 0:04:22.400 --> 0:04:25.200 bubbles in the eye of the beholder here. But I 0:04:25.560 --> 0:04:29.200 am curious where you think we go from here, especially when. 0:04:29.120 --> 0:04:30.400 It comes to the AI trade. 0:04:30.400 --> 0:04:32.440 That narrative had been out there that you know, it 0:04:32.480 --> 0:04:34.240 was getting kind of tired. There was a lot of 0:04:34.440 --> 0:04:38.719 existential worries over deep seak and cheaper models coming in exactly. 0:04:38.760 --> 0:04:41.279 But it feels like, especially with these in video results 0:04:41.320 --> 0:04:43.600 that were this week, somehow it feels like a long 0:04:43.640 --> 0:04:47.080 time ago, we're still putting our foot on the gas here. 0:04:47.360 --> 0:04:49.240 Well, what I would say is that the AI is 0:04:49.279 --> 0:04:53.480 transitioning from the infrastructure place. Okay, so the investment cycle 0:04:53.760 --> 0:04:56.200 to the adopter phase, and that's what we've been talking 0:04:56.200 --> 0:04:58.200 about for the last six months is now we're now, okay, 0:04:58.200 --> 0:04:59.920 we have the compute power. It's built. There's gonna be 0:04:59.960 --> 0:05:02.560 mo to be built. But that initial surge is kind 0:05:02.560 --> 0:05:04.400 of done, and now it's going to continue but at 0:05:04.400 --> 0:05:07.800 a slower pace. And now the fun part starts. Let's 0:05:07.800 --> 0:05:11.599 build the application layer. Let's build the killer applications that 0:05:11.720 --> 0:05:14.320 then can make you know, we could diffuse the technology 0:05:14.360 --> 0:05:16.960 into the economy. You know, the price is coming down. 0:05:17.400 --> 0:05:20.120 That's when technology takes off. That's the that is the 0:05:20.279 --> 0:05:24.760 essence of More's law and tech diffusion. That's when you 0:05:24.760 --> 0:05:27.239 can actually get the productivity benefits. And so we've always 0:05:27.240 --> 0:05:28.680 had the view that twenty five was going to be 0:05:29.160 --> 0:05:31.280 in terms of the productivity, but twenty six and twenty 0:05:31.320 --> 0:05:33.560 seven is when we think that productivity benefit can start 0:05:33.600 --> 0:05:34.080 to come through. 0:05:34.400 --> 0:05:36.680 Is that what drives us to sixty five hundred. I 0:05:36.720 --> 0:05:40.320 mean that combined with the fact that tariffs turn out 0:05:40.320 --> 0:05:42.880 to be not so bad at least at these levels, 0:05:43.000 --> 0:05:46.440 and no one cares if we blow out the deficit 0:05:46.480 --> 0:05:47.799 another couple trillion dollars. 0:05:47.920 --> 0:05:50.520 Well, it's another part of our rate of change argument, right, 0:05:50.560 --> 0:05:52.920 so that AI now is moving to focus on the 0:05:53.000 --> 0:05:55.320 rate of change. That's the title of your note exactly. 0:05:55.400 --> 0:05:57.839 And so like AI was a negative in terms of 0:05:58.000 --> 0:06:01.400 ROE and return on investment capital, it was a cost. 0:06:01.839 --> 0:06:04.000 And now the rate of change on AI from a 0:06:04.000 --> 0:06:06.960 broader market perspective is turning into a tailwind for margins 0:06:06.960 --> 0:06:10.080 and productivity. And that's what the market is. That's another 0:06:10.240 --> 0:06:13.400 factor in our more positive view over the next twelve months. 0:06:13.640 --> 0:06:15.800 Well, I actually want to go back to the bond market, 0:06:15.839 --> 0:06:18.279 speaking of the deficit. You know, you mentioned before the 0:06:18.320 --> 0:06:21.040 break that things are actually looking a little bit fragile, 0:06:21.200 --> 0:06:23.600 not so much in the equity market, but perhaps the 0:06:23.640 --> 0:06:26.599 bond market. And I'm curious, in your rule as chief 0:06:26.760 --> 0:06:30.400 US equity strategists, how much time are you spending looking 0:06:30.440 --> 0:06:31.359 at the tenure yield? 0:06:31.480 --> 0:06:32.800 Well, I spent a lot of time looking at the 0:06:32.839 --> 0:06:35.120 ten year in any environment, because it is the pricing 0:06:35.160 --> 0:06:38.040 mechanism for all assets. You know, as we've said for 0:06:38.160 --> 0:06:40.560 years now, four to fifty is kind of that crossover point, 0:06:40.600 --> 0:06:42.960 and it still continues to be a crossover point when 0:06:43.000 --> 0:06:44.960 you get north of four fifty and a ten year 0:06:45.320 --> 0:06:48.520 you start to see negative correlation to equity multiples. Okay, 0:06:48.520 --> 0:06:50.839 so we're right around that level. And by the way, 0:06:50.880 --> 0:06:53.760 I'm pretty sure the authorities know that as well, so 0:06:53.920 --> 0:06:55.960 they try to defend those levels. I don't think we're 0:06:56.000 --> 0:06:57.960 going to see a real defense. 0:06:57.680 --> 0:07:00.960 Authorities meeting the FED, you know, all of it, Fed treasurysury, 0:07:01.360 --> 0:07:03.039 not Congress. 0:07:03.080 --> 0:07:05.520 Congress is a different animal, you know, and I've made 0:07:05.560 --> 0:07:08.599 this statement before. It's may controversial. I believe Treasury is 0:07:08.600 --> 0:07:10.840 somewhat captured by Congress or they got to fund it, 0:07:11.000 --> 0:07:12.920 and the FED is somewhat captured by Treasury. They got 0:07:12.960 --> 0:07:15.400 to help out, so they work. You know, it's sort 0:07:15.400 --> 0:07:17.679 of it starts with the spending and then it trickles 0:07:17.720 --> 0:07:19.720 down and so, you know, I don't think we're going 0:07:19.800 --> 0:07:22.240 to see an aggressive action until we get to fire. 0:07:22.280 --> 0:07:24.080 If we get to five percent. We said this last time, 0:07:24.480 --> 0:07:26.320 going to five percent is gonna be bad for stocks 0:07:26.320 --> 0:07:28.800 in the short term. However, if we get to five percent, 0:07:29.360 --> 0:07:32.920 I'm pretty confident they're going to intervene well, and that 0:07:32.960 --> 0:07:34.400 will be positive for better worse. 0:07:34.400 --> 0:07:36.760 It feels like we are just glued to four and 0:07:36.800 --> 0:07:38.960 a half percent we just tog around in a range 0:07:39.000 --> 0:07:41.160 around until we get over it, until we get when 0:07:41.160 --> 0:07:43.400 we watch, but then we go back down and we're 0:07:43.400 --> 0:07:44.920 back at four and a half percent at least. That's 0:07:44.960 --> 0:07:47.160 been the story of the past couple months. So I'm like, 0:07:47.360 --> 0:07:48.320 what do you make of that? 0:07:48.560 --> 0:07:50.560 Well, I would say the other side of that too, 0:07:50.680 --> 0:07:53.040 is like, let's not ignore what's going on in Japan, okay. 0:07:53.200 --> 0:07:55.640 So you know they've been they're way ahead of us 0:07:55.720 --> 0:07:58.240 in terms of using you know, the money printer to 0:07:58.760 --> 0:08:00.880 kind of backstop bomb market doing it for thirty years, 0:08:00.960 --> 0:08:03.320 right and qwe they were the originators of that, and 0:08:03.400 --> 0:08:05.679 we followed suit. And so now the question is, okay, 0:08:05.840 --> 0:08:08.600 now they have inflation, Okay, in the end, by the way, 0:08:09.000 --> 0:08:11.200 is you know a big part of that. So the 0:08:11.280 --> 0:08:13.760 question is can they control the yend's movement. I don't 0:08:13.760 --> 0:08:15.520 know if they're more focused on the end going south 0:08:15.560 --> 0:08:18.280 of one forty okay, or they're more focused on keeping 0:08:18.360 --> 0:08:21.520 jgbs from blowing out the higher levels. But it appears 0:08:21.560 --> 0:08:23.920 to me as an observer of markets, that you know, 0:08:23.960 --> 0:08:26.680 when the ten year yield or thirty year yeld gets 0:08:26.680 --> 0:08:28.520 to a certain level in Japan, or the end gets 0:08:28.560 --> 0:08:31.320 closer to one forty against a dollar. We also see intervention. 0:08:31.760 --> 0:08:34.120 So these are all related. These are all related. But 0:08:34.160 --> 0:08:36.319 the fact that we were seeing these things get pinned 0:08:36.640 --> 0:08:40.000 around these key levels suggests to me that they're observing 0:08:40.080 --> 0:08:42.160 it and they're they're gonna, you know, they're gonna try 0:08:42.200 --> 0:08:44.600 to control that. All right, keep an eye on Japan. 0:08:44.679 --> 0:08:46.840 We'll be doing that over the weekend. Hope you have 0:08:46.920 --> 0:08:47.760 fun too. 0:08:47.920 --> 0:08:49.640 That is Morgan Stanley's Mike Wilson. 0:08:49.679 --> 0:08:50.640 Great to speak with you.