Speaker 1: Bloomberg Audio Studios, podcasts, radio news. The traders await the
Speaker 1: release of key economic data, albeit highly stale. We begin
Speaker 1: this hour with stocks eyeing a rebound as we head
Speaker 1: into that shortened Thanksgiving trading weekend. The team at Morgan
Speaker 1: Stanley releasing their outlook for twenty twenty six, writing, we
Speaker 1: raise our S and P five hundred price target to
Speaker 1: seventy eight hundred, driven by strong earnings growth. We believe
Speaker 1: that we're in the midst of a new bull market
Speaker 1: and earnings cycle, especially for many of the lagging areas.
Speaker 1: Mike Wilson of Morgan Stanley joins. Now, wonderful to see you, Mike.
Speaker 2: Thanks Lisa.
Speaker 1: So let's start on the optimism. We have been optimistic
Speaker 1: for quite a while, talking about the rotation into the adopters,
Speaker 1: not just the AI tech behemoths. Why are you getting
Speaker 1: even more optimistic as the year goes on.
Speaker 3: Well, I would say it's just a change. It's an
Speaker 3: evolving narrative we've had, which is that we think that
Speaker 3: the policy still misunderstood, right, that they essentially came in
Speaker 3: this year to the growth negative stuff first, and now
Speaker 3: we're looking at the growth positive stuff. I'm not worried
Speaker 3: about the economy. What I am a little bit worried
Speaker 3: about is that the FED is kind of dragging its feet.
Speaker 3: So I would agree with Neil's comment, like the FED
Speaker 3: needs to cut, but not to save the economy, but
Speaker 3: to see the full rotation into these lagging parts of
Speaker 3: the market, the interest rates sensitive parts of the market,
Speaker 3: which is really our story for twenty twenty eight or
Speaker 3: twenty twenty six. We think that seventy eight hundred is
Speaker 3: dependent on the earning cycle broadening out.
Speaker 1: So there's a lot to unpack there. I want to
Speaker 1: start with you agreeing with Neil, because Neil had a
Speaker 1: pretty negative assessment of the overall economy, saying he suspects
Speaker 1: the train's already left the station with respect to the
Speaker 1: pain from the FED keeping rates where they are for
Speaker 1: as long as they have, and that we could be
Speaker 1: looking at a recession. You seem to disagree on that.
Speaker 1: So where's the nuance here. What's the difference between preventing
Speaker 1: recession and really allowing the rotation into some of these
Speaker 1: other names.
Speaker 3: Yeah, I mean, I think our view has been differentiated
Speaker 3: that we think we have had a recession. We went
Speaker 3: through a rolling recession in the private economy. So I
Speaker 3: would agree with Neils that the economy is weak, but
Speaker 3: it's rebalancing now towards the private economy. I mean, many
Speaker 3: parts of the economy have been suffering, housing, all the
Speaker 3: interestrates set, durable goods, you know, consumer goods which have
Speaker 3: been under pressure, commodity sectors, transportation, there's been no volume
Speaker 3: going through the economy, no velocity in the real economy,
Speaker 3: and the way that the administration is changing the policy.
Speaker 3: In addition to the FED now cutting, hopefully next year
Speaker 3: you'll see the private economy now doing much better, the
Speaker 3: government no longer crowding out these areas that have been
Speaker 3: under pressure. But we do need to get that trend
Speaker 3: that if the FED needs to do more, the FED
Speaker 3: needs to cut race and they need to probably provide
Speaker 3: some balance sheet.
Speaker 2: I say.
Speaker 4: One of the things that Neil talked about was his
Speaker 4: fear that even if they cut in December, they're not
Speaker 4: going to lay out a path for continuous cuts, and
Speaker 4: FED Governor Waller seemingly enforcing that speaking on Fox moments ago,
Speaker 4: saying you might see more of a meeting by meeting
Speaker 4: approach once you get to January. If you do get
Speaker 4: that posturing from the FED that maybe they cut in December,
Speaker 4: but it's a meeting by meeting approach. They're not necessarily
Speaker 4: going to cut in every single one. Is that enough
Speaker 4: to allow for that rotation or do you need a
Speaker 4: clear pasi of cuts to get it?
Speaker 3: No, we need the ladder, and I think we're going
Speaker 3: to get there one of two ways. Either the data,
Speaker 3: you know, the labor data is going to basically support
Speaker 3: our view or my view that we had a rate
Speaker 3: of change trough and the labor markets in April, okay,
Speaker 3: and so that data then will allow the FED to
Speaker 3: cut more or signal they're going to cut more. The
Speaker 3: second one is that we get more financial stress.
Speaker 2: Okay, that's what's been going on. We think the market.
Speaker 3: We wrote about this back in September early October, we
Speaker 3: thought the market was going to have a ten to
Speaker 3: fifteen percent correction because the liquidity wasn't there, that the
Speaker 3: balance you was tightening, and we think there's evidence that
Speaker 3: that correction is well advanced.
Speaker 2: Okay. All the momentum stocks.
Speaker 3: You know, Crypto obviously is the topic of the date.
Speaker 3: Down thirty percent for bitcoin. I mean, these things are
Speaker 3: telling you that the market is worried about this liquidity.
Speaker 3: So as usual, the markets will dictate the Fed's timing.
Speaker 3: So if the market really wants and look, markets are
Speaker 3: like children, right, they'll have a little temper tantrum and
Speaker 3: then and then the Feder will respond to that. So
Speaker 3: is this like a miny twenty eighteen in that regard,
Speaker 3: right that you kind of go into end of the
Speaker 3: year and then there's stress in some of these financial
Speaker 3: metrics that the FED cares about, and then they provide
Speaker 3: more balance sheet So we think there's sort of this
Speaker 3: tuggle war going back and forth, but ultimately it results
Speaker 3: in a more dubbish policy path.
Speaker 4: On the point of Crypto, a lot was made, I
Speaker 4: mean even from Bill Ackman basically saying things that he
Speaker 4: thought weren't correlated. All of a sudden word that Fanny
Speaker 4: and Freddy were selling off because the people who were
Speaker 4: buying Crypto were the same people in those names did
Speaker 4: last week in the week before's episode. Given how much
Speaker 4: Crypto falls, show some vulnerability within the market structure, within
Speaker 4: who owns these stocks, and how fragile and weak some
Speaker 4: of those hands are.
Speaker 2: I don't think it's showing anything new. I think this
Speaker 2: has been their whole time, right, I mean.
Speaker 3: I don't people waking up to the idea that liquidity
Speaker 3: is important for the market. I mean, obviously I don't
Speaker 3: know what they're doing. I mean that's kind of crazy.
Speaker 3: Of course, liquidity matters. I mean liquidity is, and especially
Speaker 3: the last ten years or so, I think that the
Speaker 3: hard part about liquidity is it's sort of this sort
Speaker 3: of nebulous thing.
Speaker 2: It's hard to measure.
Speaker 3: And I've spent a lot, like the last two or
Speaker 3: three years trying to develop a better skill set around that,
Speaker 3: and I think we've got a better handle, but I
Speaker 3: would I would say still is one of these things
Speaker 3: that's sort of the invisible hand. And so what you
Speaker 3: have to do is you have to look at the
Speaker 3: market to tell you when liquidity is tight or not.
Speaker 1: So you kept mentioning the balance sheet. Are you saying
Speaker 1: que's going to start again.
Speaker 3: Well, they may not call it Q, but yeah, the
Speaker 3: balance sheet needs to expand, not only to support financial markets,
Speaker 3: but to support the better growth.
Speaker 2: That I think is coming next year.
Speaker 3: Right, So if CAPEX really picks up for the first
Speaker 3: time in ten years, OK, let's be honest, we haven't
Speaker 3: seen much capital spending, but the big beautiful bill is
Speaker 3: in scenting that that's a usage of capital that.
Speaker 2: Needs to be supplied by somebody.
Speaker 3: So the balance sheet needs to grow just to help
Speaker 3: the economy and the markets, and so we can call
Speaker 3: it QE, call it not QE, but generally they need
Speaker 3: to expand that.
Speaker 1: How much is a seventy eight hundred target predicated on
Speaker 1: the idea of the FED cutting rates and using its
Speaker 1: balance sheet to help support liquidity.
Speaker 2: It's very important.
Speaker 3: I mean, I would say if we don't get at
Speaker 3: least one of those items surprising the market, it's meaning
Speaker 3: more than three cuts, or we get more balance sheet
Speaker 3: expansion and call a QE, call it something else, okay, yo,
Speaker 3: curve control, whatever you want to call it.
Speaker 2: Okay.
Speaker 3: If we don't get some combination of that, then we're
Speaker 3: not going to reach our target.
Speaker 2: So I'm assuming that we get.
Speaker 3: There either through the labor data or through some financial stress.
Speaker 1: So it has been so far that the AI trade
Speaker 1: has maintained any kind of equity valuation, despite the fact
Speaker 1: that people are getting increasingly worried about an economy that
Speaker 1: you think already has gone through recession. I just wonder
Speaker 1: do you think that ship sailed in terms of AI
Speaker 1: leadership propic things up. Do you think that if we
Speaker 1: don't get the real economy reaccelerating, you cannot get the
Speaker 1: multiples that we currently have been seeing on the big
Speaker 1: tech names.
Speaker 2: Yeah.
Speaker 3: I think it's one of the same. I mean, obviously,
Speaker 3: the investment in AI is on the premise that it
Speaker 3: will lead to higher productivity, adoption and all that works.
Speaker 3: I mean, that's the way technology investment works. So you're
Speaker 3: not going to these stocks.
Speaker 2: Are not going to work. Leaders aren't going to work
Speaker 2: if the.
Speaker 3: Foundation itself isn't being supported by the technology investment. We
Speaker 3: assume that is going to happen in twenty twenty six.
Speaker 3: That is part of our thesis. Okay, but it's not
Speaker 3: without risk. So our job is to lay out our narrative,
Speaker 3: which we have conviction in, but then to highlight these
Speaker 3: risks in the short term or in the medium term.
Speaker 3: That could though that that could throw that narrative off.
Speaker 2: Edi R.
Speaker 4: Denny also joined us earlier, just saying that some of
Speaker 4: the air is being taken out of the AI bubble,
Speaker 4: and to him that meant that the mel tip that
Speaker 4: we've been seeing is going to be harder to come by.
Speaker 4: Has something changed at least with that blind willingness to
Speaker 4: continue to buy AI related stocks regardless of how much
Speaker 4: they're spending and what the return on that spend is.
Speaker 3: Well, I mean, this is a natural evolution of any
Speaker 3: capital spending cycle. There's always going to be a challenge
Speaker 3: on the return you're going to get. And this is
Speaker 3: you know, we've seen this multiple times. We saw it
Speaker 3: a year ago. We've talked about this, you know multiple times.
Speaker 3: In July of twenty twenty four, that was the peak
Speaker 3: and sort that an AI campbacks deceleration. So this is
Speaker 3: an EBB and flow. What I like to look at
Speaker 3: is AI spenders. How are those stocks reacting? Is the
Speaker 3: market enforcing discipline on the AI spenders, which then trickles
Speaker 3: down into the campacks beneficiaries.
Speaker 2: But we think this is going to happen.
Speaker 3: The money's been raised now, so we don't think the
Speaker 3: debt markets are now involved, and so that money is
Speaker 3: not going to sit on these balancees.
Speaker 2: It's going to be spent.
Speaker 3: The question is what's the payoff look like and what's
Speaker 3: the timing of that payoff. We think we'll see some
Speaker 3: of that in twenty twenty six, twenty twenty seven, and
Speaker 3: so now it's just this transition. You're kind of trading
Speaker 3: back and forth. So I want to make it clear
Speaker 3: we think there's a broadening out. That doesn't mean that
Speaker 3: all the AI stuff gets killed and everything else does
Speaker 3: really really well. It can work in harmony. In fact,
Speaker 3: it needs to work in harmony to some degree.
Speaker 4: If you do get a scenario though we're let's say,
Speaker 4: I don't know, meta that seems to be one of
Speaker 4: the post your children for not getting that return doesn't
Speaker 4: get it as much, and they need to pull back
Speaker 4: on their spending, but everybody else is still spending. Do
Speaker 4: you only need one pillar to fall to really hurt
Speaker 4: this trade or can just any sort of spending happening
Speaker 4: within this trade, regardless of who the winner is, continue
Speaker 4: to lift all the boat.
Speaker 3: Well, look, I mean, look what's been going on, right,
Speaker 3: So we've seen a massive bifurcation or dispersion and the
Speaker 3: performance of not only the hyperscalers but names within that.
Speaker 3: To me, that's healthy. That's like not everybody's gonna win,
Speaker 3: Like there's no trophies here. I mean, you have to
Speaker 3: actually win the game. But all of these companies are
Speaker 3: competing for the trophy so in that competition, I think
Speaker 3: we continue to see this velocity of spend and then
Speaker 3: we're going to see the most exciting part about this
Speaker 3: AI spend to me is we don't even know yet. Okay,
Speaker 3: these new businesses that are going to be created, these
Speaker 3: new industries that are going to be created, the efficiencies
Speaker 3: we're going to get in areas like healthcare or education
Speaker 3: or manufacturing, that's on the come. That's really real wealth
Speaker 3: creation is going to be coming from.
Speaker 1: So next year or maybe the end of this year,
Speaker 1: when we find out who the next FED chair is
Speaker 1: going to be, how much will that matter to you
Speaker 1: in terms of whether your goal case will get realized?
Speaker 1: I mean, who will necessarily be good for that and
Speaker 1: who might be a little more problematic for that.
Speaker 3: You're probably not gonna like my answer, but it doesn't
Speaker 3: matter to me because ultimately, the market's going to tell
Speaker 3: the FED what to do. I mean, that's my general
Speaker 3: that's always been my view. People hate it, but like
Speaker 3: I'm a markets person, Okay, the market's dominant. The markets
Speaker 3: tell investors what to do, right, so the markets will
Speaker 3: you kind of force their hand. If the market's believe
Speaker 3: they need more liquidity, they will force the fast hand.
Speaker 3: If the market believes it needs more Ray cuts, it
Speaker 3: will force the hand because we become so financialized at
Speaker 3: this point, right, the FED now is basically obligated to
Speaker 3: make sure that we have financial stability to some degree,
Speaker 3: and they're also they have an obligation to help Treasury
Speaker 3: fund the government. So I don't believe the FED is independent.
Speaker 3: I believe they're trying to work in the best interests
Speaker 3: of Americans. Okay, I'm not saying they're dictated by the
Speaker 3: White House, but they are not independent of the markets.
Speaker 3: They're not independent of the funding requirements of the US government. Okay,
Speaker 3: So the Treasury and the FED will work together to
Speaker 3: do the best they can to solve those issues.
Speaker 1: Michaelson, wonderful to speak with you, Michaelson of Morgan Stanley.
Speaker 2: Have a wonderful Thanksgiving.
Speaker 1: Thank you for being here.