Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Let's discuss now with Morgan Stanley, Cheap US equity strategists
Speaker 2: and CIO Mike Wilson. And Mike, it didn't feel like
Speaker 2: things were that fragile in May, a gain of six
Speaker 2: point two percent on the S and P five hundred,
Speaker 2: despite what we were just talking about in the last flock,
Speaker 2: all this uncertainty that's out there, all this caution from
Speaker 2: Corporate America. What do you make of where we stand
Speaker 2: right now?
Speaker 1: Well, I would say the fragility got priced. You know,
Speaker 1: we had a big sell off twenty percent sell off
Speaker 1: plus thirty thirty five percent in most stocks. And I
Speaker 1: think that the fragility now has moved to the bomb market,
Speaker 1: you know, like that's where the main concern is now,
Speaker 1: whether it's the global bomb market with jgb's you know,
Speaker 1: kind of getting out of bounds and of course now
Speaker 1: with you know, term premium in the US treasury market,
Speaker 1: I think that's where the risk is the greatest. The
Speaker 1: growth fears have subsided because look, we did take the
Speaker 1: off ramp on the tariff concerns, and and from my perspective,
Speaker 1: I mean like we were probably weeks away from having
Speaker 1: a recession if those one hundred and forty percent plus
Speaker 1: tariffs has stayed on, I don't think there's any you know,
Speaker 1: it's very little doubt that corporates would have had to
Speaker 1: take action with the labor cycle. But now that it's
Speaker 1: backed off and the stock market's up. You know who
Speaker 1: watches stocks more than me and us? CEOs? Yeah, okay,
Speaker 1: so stock market recovers Loosen's financial conditions. They say, you
Speaker 1: know what, hold off on the layoffs because things may
Speaker 1: be turning around. And I think we bought ourselves quite
Speaker 1: a bit of time, and that's why the markets responded
Speaker 1: to that. I don't think it's unusual. You know, CEOs
Speaker 1: rarely admit that to us. That's why I was laughing.
Speaker 3: And they always say, I don't watch the stock on
Speaker 3: the day to day basis, but of course they do.
Speaker 3: Like you think that the bottom is in and that
Speaker 3: the second half is going to be better, or at
Speaker 3: least you said started the year saying the second half
Speaker 3: is going to be better than the first half. Do you
Speaker 3: still think that. I mean, obviously we came down a lot,
Speaker 3: but we came back a lot, and now we're, you know,
Speaker 3: flirting with six thousand again.
Speaker 1: That's right. Markets and economies are reflexive. Okay, we know that,
Speaker 1: and you know, I think we have a unique view
Speaker 1: coming into this year. Our view is that things already
Speaker 1: slowing dramatically, and particularly on earnings. Arning's revision breath was
Speaker 1: rolling over, the AI story was losing steam, okay, But
Speaker 1: all of those things now have bottomed from a rate
Speaker 1: of change standpoint, and that's what Stock's care about. That
Speaker 1: was the focus of our mid year outlook was that
Speaker 1: the rate of change is now bottomed, bottomed in economic
Speaker 1: terms and in fiscal monetary policy. I think is bottomed
Speaker 1: in terms of the most hackeys we're going to see,
Speaker 1: and that is all going to now lead to a
Speaker 1: better rate of change in the second half, which the
Speaker 1: stock market is already discounting.
Speaker 3: Bank of America says the latest turn by the Trump
Speaker 3: administration to favor tax cuts and lower tariffs could spell
Speaker 3: trouble for markets. The flip and US economic strategy could
Speaker 3: incentivize traders to ditch bonds and pile back into AI
Speaker 3: and crypto trades, which would risk inflating a market bubble.
Speaker 3: According to the team led by Michael Hartnett, are we
Speaker 3: already back to a bubble. We're here with Morgan Stanley's
Speaker 3: Mike Wilson. That seems wow, that's a that's an interesting call.
Speaker 3: That's a way to get noticed on a Friday.
Speaker 1: I mean, bubbles are you know, apparently every year now
Speaker 1: and certain things. I mean, I do agree with Michael
Speaker 1: in the premise. Okay, we've been in an environment for
Speaker 1: I would say, POSTGFC where policy has sort of elicited
Speaker 1: you know, mini bubbles in certain assets. The money moves
Speaker 1: to the hot kind of toy, whatever it might be.
Speaker 1: But it's nothing like the late nineteen nineties. Like I
Speaker 1: don't think what we're seeing in AI anything like the
Speaker 1: late nineteen nineties. It's just not as broad. I mean,
Speaker 1: there are four large companies spending all the money. There
Speaker 1: are maybe eight to ten big beneficiaries of that spending.
Speaker 1: That's it was like a mini bubble. We talked about
Speaker 1: that at the end of last year. One of the
Speaker 1: reasons we were a little bit more negative on some
Speaker 1: of those stocks coming into the year was because there
Speaker 1: was a deceleration and growth. But it's not like in
Speaker 1: the nineteen nineties when you had every enterprise over spending
Speaker 1: on equipment, you had this huge IT spending bubble. So
Speaker 1: I don't agree that we're in a bubble, but I
Speaker 1: do think the policy we've chosen, okay, which is to
Speaker 1: kind of at every sign of trouble come in and
Speaker 1: stop it, it does elicit that type of behavior where
Speaker 1: that's why you get this chasing going on, because you know,
Speaker 1: by the dip is a function of that policy that
Speaker 1: we've been doing for fifteen years.
Speaker 2: Yeah, and I mean largely if you take a look
Speaker 2: over the grand scope of time, by the dip has
Speaker 2: worked because socks go up.
Speaker 1: In the long run.
Speaker 2: But I take your point. It kind of feels like
Speaker 2: bubbles in the eye of the beholder here. But I
Speaker 2: am curious where you think we go from here, especially when.
Speaker 1: It comes to the AI trade.
Speaker 2: That narrative had been out there that you know, it
Speaker 2: was getting kind of tired. There was a lot of
Speaker 2: existential worries over deep seak and cheaper models coming in exactly.
Speaker 2: But it feels like, especially with these in video results
Speaker 2: that were this week, somehow it feels like a long
Speaker 2: time ago, we're still putting our foot on the gas here.
Speaker 1: Well, what I would say is that the AI is
Speaker 1: transitioning from the infrastructure place. Okay, so the investment cycle
Speaker 1: to the adopter phase, and that's what we've been talking
Speaker 1: about for the last six months is now we're now, okay,
Speaker 1: we have the compute power. It's built. There's gonna be
Speaker 1: mo to be built. But that initial surge is kind
Speaker 1: of done, and now it's going to continue but at
Speaker 1: a slower pace. And now the fun part starts. Let's
Speaker 1: build the application layer. Let's build the killer applications that
Speaker 1: then can make you know, we could diffuse the technology
Speaker 1: into the economy. You know, the price is coming down.
Speaker 1: That's when technology takes off. That's the that is the
Speaker 1: essence of More's law and tech diffusion. That's when you
Speaker 1: can actually get the productivity benefits. And so we've always
Speaker 1: had the view that twenty five was going to be
Speaker 1: in terms of the productivity, but twenty six and twenty
Speaker 1: seven is when we think that productivity benefit can start
Speaker 1: to come through.
Speaker 3: Is that what drives us to sixty five hundred. I
Speaker 3: mean that combined with the fact that tariffs turn out
Speaker 3: to be not so bad at least at these levels,
Speaker 3: and no one cares if we blow out the deficit
Speaker 3: another couple trillion dollars.
Speaker 1: Well, it's another part of our rate of change argument, right,
Speaker 1: so that AI now is moving to focus on the
Speaker 1: rate of change. That's the title of your note exactly.
Speaker 1: And so like AI was a negative in terms of
Speaker 1: ROE and return on investment capital, it was a cost.
Speaker 1: And now the rate of change on AI from a
Speaker 1: broader market perspective is turning into a tailwind for margins
Speaker 1: and productivity. And that's what the market is. That's another
Speaker 1: factor in our more positive view over the next twelve months.
Speaker 2: Well, I actually want to go back to the bond market,
Speaker 2: speaking of the deficit. You know, you mentioned before the
Speaker 2: break that things are actually looking a little bit fragile,
Speaker 2: not so much in the equity market, but perhaps the
Speaker 2: bond market. And I'm curious, in your rule as chief
Speaker 2: US equity strategists, how much time are you spending looking
Speaker 2: at the tenure yield?
Speaker 1: Well, I spent a lot of time looking at the
Speaker 1: ten year in any environment, because it is the pricing
Speaker 1: mechanism for all assets. You know, as we've said for
Speaker 1: years now, four to fifty is kind of that crossover point,
Speaker 1: and it still continues to be a crossover point when
Speaker 1: you get north of four fifty and a ten year
Speaker 1: you start to see negative correlation to equity multiples. Okay,
Speaker 1: so we're right around that level. And by the way,
Speaker 1: I'm pretty sure the authorities know that as well, so
Speaker 1: they try to defend those levels. I don't think we're
Speaker 1: going to see a real defense.
Speaker 3: Authorities meeting the FED, you know, all of it, Fed treasurysury,
Speaker 3: not Congress.
Speaker 1: Congress is a different animal, you know, and I've made
Speaker 1: this statement before. It's may controversial. I believe Treasury is
Speaker 1: somewhat captured by Congress or they got to fund it,
Speaker 1: and the FED is somewhat captured by Treasury. They got
Speaker 1: to help out, so they work. You know, it's sort
Speaker 1: of it starts with the spending and then it trickles
Speaker 1: down and so, you know, I don't think we're going
Speaker 1: to see an aggressive action until we get to fire.
Speaker 1: If we get to five percent. We said this last time,
Speaker 1: going to five percent is gonna be bad for stocks
Speaker 1: in the short term. However, if we get to five percent,
Speaker 1: I'm pretty confident they're going to intervene well, and that
Speaker 1: will be positive for better worse.
Speaker 2: It feels like we are just glued to four and
Speaker 2: a half percent we just tog around in a range
Speaker 2: around until we get over it, until we get when
Speaker 2: we watch, but then we go back down and we're
Speaker 2: back at four and a half percent at least. That's
Speaker 2: been the story of the past couple months. So I'm like,
Speaker 2: what do you make of that?
Speaker 1: Well, I would say the other side of that too,
Speaker 1: is like, let's not ignore what's going on in Japan, okay.
Speaker 1: So you know they've been they're way ahead of us
Speaker 1: in terms of using you know, the money printer to
Speaker 1: kind of backstop bomb market doing it for thirty years,
Speaker 1: right and qwe they were the originators of that, and
Speaker 1: we followed suit. And so now the question is, okay,
Speaker 1: now they have inflation, Okay, in the end, by the way,
Speaker 1: is you know a big part of that. So the
Speaker 1: question is can they control the yend's movement. I don't
Speaker 1: know if they're more focused on the end going south
Speaker 1: of one forty okay, or they're more focused on keeping
Speaker 1: jgbs from blowing out the higher levels. But it appears
Speaker 1: to me as an observer of markets, that you know,
Speaker 1: when the ten year yield or thirty year yeld gets
Speaker 1: to a certain level in Japan, or the end gets
Speaker 1: closer to one forty against a dollar. We also see intervention.
Speaker 1: So these are all related. These are all related. But
Speaker 1: the fact that we were seeing these things get pinned
Speaker 1: around these key levels suggests to me that they're observing
Speaker 1: it and they're they're gonna, you know, they're gonna try
Speaker 1: to control that. All right, keep an eye on Japan.
Speaker 1: We'll be doing that over the weekend. Hope you have
Speaker 1: fun too.
Speaker 2: That is Morgan Stanley's Mike Wilson.
Speaker 1: Great to speak with you.