WEBVTT - Morgan Stanley Chief Equity Strategist Mike Wilson Talks Markets 0:00:02.520 --> 0:00:08.480 Bloomberg Audio Studios, podcasts, radio news. The traders await the 0:00:08.560 --> 0:00:12.200 release of key economic data, albeit highly stale. We begin 0:00:12.240 --> 0:00:14.440 this hour with stocks eyeing a rebound as we head 0:00:14.440 --> 0:00:18.360 into that shortened Thanksgiving trading weekend. The team at Morgan 0:00:18.400 --> 0:00:21.720 Stanley releasing their outlook for twenty twenty six, writing, we 0:00:21.840 --> 0:00:24.079 raise our S and P five hundred price target to 0:00:24.160 --> 0:00:27.640 seventy eight hundred, driven by strong earnings growth. We believe 0:00:27.680 --> 0:00:29.479 that we're in the midst of a new bull market 0:00:29.680 --> 0:00:33.360 and earnings cycle, especially for many of the lagging areas. 0:00:33.400 --> 0:00:36.879 Mike Wilson of Morgan Stanley joins. Now, wonderful to see you, Mike. 0:00:37.000 --> 0:00:37.560 Thanks Lisa. 0:00:37.720 --> 0:00:40.440 So let's start on the optimism. We have been optimistic 0:00:40.520 --> 0:00:43.840 for quite a while, talking about the rotation into the adopters, 0:00:44.000 --> 0:00:47.120 not just the AI tech behemoths. Why are you getting 0:00:47.120 --> 0:00:49.280 even more optimistic as the year goes on. 0:00:49.680 --> 0:00:51.599 Well, I would say it's just a change. It's an 0:00:51.600 --> 0:00:55.480 evolving narrative we've had, which is that we think that 0:00:55.520 --> 0:00:58.680 the policy still misunderstood, right, that they essentially came in 0:00:58.720 --> 0:01:01.120 this year to the growth negative stuff first, and now 0:01:01.120 --> 0:01:03.120 we're looking at the growth positive stuff. I'm not worried 0:01:03.120 --> 0:01:05.240 about the economy. What I am a little bit worried 0:01:05.240 --> 0:01:07.800 about is that the FED is kind of dragging its feet. 0:01:07.920 --> 0:01:10.000 So I would agree with Neil's comment, like the FED 0:01:10.080 --> 0:01:12.319 needs to cut, but not to save the economy, but 0:01:12.400 --> 0:01:15.280 to see the full rotation into these lagging parts of 0:01:15.319 --> 0:01:17.399 the market, the interest rates sensitive parts of the market, 0:01:17.400 --> 0:01:19.480 which is really our story for twenty twenty eight or 0:01:19.520 --> 0:01:21.880 twenty twenty six. We think that seventy eight hundred is 0:01:21.920 --> 0:01:23.880 dependent on the earning cycle broadening out. 0:01:24.319 --> 0:01:26.000 So there's a lot to unpack there. I want to 0:01:26.040 --> 0:01:27.920 start with you agreeing with Neil, because Neil had a 0:01:27.920 --> 0:01:31.480 pretty negative assessment of the overall economy, saying he suspects 0:01:31.520 --> 0:01:34.160 the train's already left the station with respect to the 0:01:34.200 --> 0:01:36.200 pain from the FED keeping rates where they are for 0:01:36.200 --> 0:01:38.240 as long as they have, and that we could be 0:01:38.240 --> 0:01:40.920 looking at a recession. You seem to disagree on that. 0:01:41.120 --> 0:01:44.440 So where's the nuance here. What's the difference between preventing 0:01:44.520 --> 0:01:49.720 recession and really allowing the rotation into some of these 0:01:49.760 --> 0:01:50.320 other names. 0:01:50.480 --> 0:01:52.720 Yeah, I mean, I think our view has been differentiated 0:01:52.720 --> 0:01:55.000 that we think we have had a recession. We went 0:01:55.000 --> 0:01:57.840 through a rolling recession in the private economy. So I 0:01:57.840 --> 0:01:59.840 would agree with Neils that the economy is weak, but 0:02:00.840 --> 0:02:03.600 it's rebalancing now towards the private economy. I mean, many 0:02:03.640 --> 0:02:05.880 parts of the economy have been suffering, housing, all the 0:02:05.880 --> 0:02:08.680 interestrates set, durable goods, you know, consumer goods which have 0:02:08.720 --> 0:02:12.880 been under pressure, commodity sectors, transportation, there's been no volume 0:02:13.200 --> 0:02:16.120 going through the economy, no velocity in the real economy, 0:02:16.360 --> 0:02:19.960 and the way that the administration is changing the policy. 0:02:20.160 --> 0:02:22.880 In addition to the FED now cutting, hopefully next year 0:02:23.160 --> 0:02:26.120 you'll see the private economy now doing much better, the 0:02:26.200 --> 0:02:28.440 government no longer crowding out these areas that have been 0:02:28.520 --> 0:02:30.760 under pressure. But we do need to get that trend 0:02:30.760 --> 0:02:32.720 that if the FED needs to do more, the FED 0:02:32.760 --> 0:02:34.840 needs to cut race and they need to probably provide 0:02:34.840 --> 0:02:35.520 some balance sheet. 0:02:35.800 --> 0:02:36.120 I say. 0:02:36.120 --> 0:02:37.760 One of the things that Neil talked about was his 0:02:37.800 --> 0:02:40.360 fear that even if they cut in December, they're not 0:02:40.400 --> 0:02:43.120 going to lay out a path for continuous cuts, and 0:02:43.280 --> 0:02:47.320 FED Governor Waller seemingly enforcing that speaking on Fox moments ago, 0:02:47.400 --> 0:02:49.200 saying you might see more of a meeting by meeting 0:02:49.200 --> 0:02:52.280 approach once you get to January. If you do get 0:02:52.280 --> 0:02:54.920 that posturing from the FED that maybe they cut in December, 0:02:55.600 --> 0:02:58.120 but it's a meeting by meeting approach. They're not necessarily 0:02:58.160 --> 0:03:01.040 going to cut in every single one. Is that enough 0:03:01.080 --> 0:03:02.919 to allow for that rotation or do you need a 0:03:02.960 --> 0:03:04.280 clear pasi of cuts to get it? 0:03:04.400 --> 0:03:05.760 No, we need the ladder, and I think we're going 0:03:05.800 --> 0:03:07.800 to get there one of two ways. Either the data, 0:03:07.919 --> 0:03:10.160 you know, the labor data is going to basically support 0:03:10.240 --> 0:03:12.120 our view or my view that we had a rate 0:03:12.160 --> 0:03:15.160 of change trough and the labor markets in April, okay, 0:03:15.200 --> 0:03:16.840 and so that data then will allow the FED to 0:03:16.840 --> 0:03:19.240 cut more or signal they're going to cut more. The 0:03:19.280 --> 0:03:21.560 second one is that we get more financial stress. 0:03:21.800 --> 0:03:23.920 Okay, that's what's been going on. We think the market. 0:03:24.000 --> 0:03:26.280 We wrote about this back in September early October, we 0:03:26.280 --> 0:03:27.600 thought the market was going to have a ten to 0:03:27.639 --> 0:03:31.400 fifteen percent correction because the liquidity wasn't there, that the 0:03:31.440 --> 0:03:33.760 balance you was tightening, and we think there's evidence that 0:03:33.600 --> 0:03:35.400 that correction is well advanced. 0:03:35.440 --> 0:03:37.200 Okay. All the momentum stocks. 0:03:37.160 --> 0:03:39.240 You know, Crypto obviously is the topic of the date. 0:03:39.280 --> 0:03:41.840 Down thirty percent for bitcoin. I mean, these things are 0:03:41.880 --> 0:03:44.760 telling you that the market is worried about this liquidity. 0:03:44.600 --> 0:03:49.040 So as usual, the markets will dictate the Fed's timing. 0:03:49.080 --> 0:03:51.400 So if the market really wants and look, markets are 0:03:51.440 --> 0:03:54.040 like children, right, they'll have a little temper tantrum and 0:03:53.680 --> 0:03:55.840 then and then the Feder will respond to that. So 0:03:56.000 --> 0:03:58.400 is this like a miny twenty eighteen in that regard, 0:03:58.480 --> 0:03:59.800 right that you kind of go into end of the 0:03:59.880 --> 0:04:02.440 year and then there's stress in some of these financial 0:04:02.480 --> 0:04:04.840 metrics that the FED cares about, and then they provide 0:04:04.920 --> 0:04:07.440 more balance sheet So we think there's sort of this 0:04:07.520 --> 0:04:10.120 tuggle war going back and forth, but ultimately it results 0:04:10.160 --> 0:04:11.480 in a more dubbish policy path. 0:04:11.720 --> 0:04:13.560 On the point of Crypto, a lot was made, I 0:04:13.600 --> 0:04:15.960 mean even from Bill Ackman basically saying things that he 0:04:16.000 --> 0:04:18.279 thought weren't correlated. All of a sudden word that Fanny 0:04:18.320 --> 0:04:20.440 and Freddy were selling off because the people who were 0:04:20.440 --> 0:04:23.400 buying Crypto were the same people in those names did 0:04:23.480 --> 0:04:25.960 last week in the week before's episode. Given how much 0:04:26.000 --> 0:04:29.839 Crypto falls, show some vulnerability within the market structure, within 0:04:29.920 --> 0:04:32.520 who owns these stocks, and how fragile and weak some 0:04:32.560 --> 0:04:33.320 of those hands are. 0:04:33.480 --> 0:04:35.200 I don't think it's showing anything new. I think this 0:04:35.240 --> 0:04:36.640 has been their whole time, right, I mean. 0:04:36.480 --> 0:04:38.320 I don't people waking up to the idea that liquidity 0:04:38.360 --> 0:04:40.479 is important for the market. I mean, obviously I don't 0:04:40.480 --> 0:04:42.320 know what they're doing. I mean that's kind of crazy. 0:04:42.480 --> 0:04:45.560 Of course, liquidity matters. I mean liquidity is, and especially 0:04:45.560 --> 0:04:47.720 the last ten years or so, I think that the 0:04:47.760 --> 0:04:49.720 hard part about liquidity is it's sort of this sort 0:04:49.760 --> 0:04:50.640 of nebulous thing. 0:04:50.960 --> 0:04:51.800 It's hard to measure. 0:04:52.279 --> 0:04:54.120 And I've spent a lot, like the last two or 0:04:54.120 --> 0:04:56.919 three years trying to develop a better skill set around that, 0:04:57.000 --> 0:04:58.840 and I think we've got a better handle, but I 0:04:59.240 --> 0:05:01.600 would I would say still is one of these things 0:05:01.640 --> 0:05:03.800 that's sort of the invisible hand. And so what you 0:05:03.839 --> 0:05:05.040 have to do is you have to look at the 0:05:05.080 --> 0:05:08.039 market to tell you when liquidity is tight or not. 0:05:08.400 --> 0:05:10.840 So you kept mentioning the balance sheet. Are you saying 0:05:10.880 --> 0:05:11.960 que's going to start again. 0:05:12.360 --> 0:05:14.000 Well, they may not call it Q, but yeah, the 0:05:14.000 --> 0:05:17.400 balance sheet needs to expand, not only to support financial markets, 0:05:17.440 --> 0:05:19.280 but to support the better growth. 0:05:19.000 --> 0:05:20.320 That I think is coming next year. 0:05:20.400 --> 0:05:22.440 Right, So if CAPEX really picks up for the first 0:05:22.440 --> 0:05:25.320 time in ten years, OK, let's be honest, we haven't 0:05:25.320 --> 0:05:27.880 seen much capital spending, but the big beautiful bill is 0:05:27.880 --> 0:05:30.920 in scenting that that's a usage of capital that. 0:05:30.960 --> 0:05:32.520 Needs to be supplied by somebody. 0:05:32.560 --> 0:05:34.640 So the balance sheet needs to grow just to help 0:05:35.080 --> 0:05:37.760 the economy and the markets, and so we can call 0:05:37.800 --> 0:05:40.400 it QE, call it not QE, but generally they need 0:05:40.480 --> 0:05:41.120 to expand that. 0:05:41.240 --> 0:05:43.880 How much is a seventy eight hundred target predicated on 0:05:43.920 --> 0:05:46.120 the idea of the FED cutting rates and using its 0:05:46.120 --> 0:05:47.840 balance sheet to help support liquidity. 0:05:47.880 --> 0:05:48.560 It's very important. 0:05:48.640 --> 0:05:50.640 I mean, I would say if we don't get at 0:05:50.720 --> 0:05:53.559 least one of those items surprising the market, it's meaning 0:05:53.800 --> 0:05:56.120 more than three cuts, or we get more balance sheet 0:05:56.120 --> 0:05:58.480 expansion and call a QE, call it something else, okay, yo, 0:05:58.520 --> 0:05:59.920 curve control, whatever you want to call it. 0:06:00.120 --> 0:06:00.280 Okay. 0:06:00.320 --> 0:06:02.560 If we don't get some combination of that, then we're 0:06:02.560 --> 0:06:03.440 not going to reach our target. 0:06:03.520 --> 0:06:05.400 So I'm assuming that we get. 0:06:05.200 --> 0:06:08.560 There either through the labor data or through some financial stress. 0:06:08.680 --> 0:06:10.479 So it has been so far that the AI trade 0:06:10.520 --> 0:06:14.000 has maintained any kind of equity valuation, despite the fact 0:06:14.040 --> 0:06:16.240 that people are getting increasingly worried about an economy that 0:06:16.279 --> 0:06:18.880 you think already has gone through recession. I just wonder 0:06:19.160 --> 0:06:21.120 do you think that ship sailed in terms of AI 0:06:21.240 --> 0:06:23.320 leadership propic things up. Do you think that if we 0:06:23.400 --> 0:06:27.359 don't get the real economy reaccelerating, you cannot get the 0:06:27.440 --> 0:06:30.000 multiples that we currently have been seeing on the big 0:06:30.040 --> 0:06:30.559 tech names. 0:06:30.640 --> 0:06:30.839 Yeah. 0:06:30.839 --> 0:06:32.679 I think it's one of the same. I mean, obviously, 0:06:32.680 --> 0:06:34.960 the investment in AI is on the premise that it 0:06:34.960 --> 0:06:38.080 will lead to higher productivity, adoption and all that works. 0:06:38.120 --> 0:06:40.960 I mean, that's the way technology investment works. So you're 0:06:41.000 --> 0:06:42.080 not going to these stocks. 0:06:41.880 --> 0:06:43.560 Are not going to work. Leaders aren't going to work 0:06:43.640 --> 0:06:43.960 if the. 0:06:43.920 --> 0:06:47.520 Foundation itself isn't being supported by the technology investment. We 0:06:47.560 --> 0:06:49.800 assume that is going to happen in twenty twenty six. 0:06:49.880 --> 0:06:52.240 That is part of our thesis. Okay, but it's not 0:06:52.279 --> 0:06:55.280 without risk. So our job is to lay out our narrative, 0:06:55.320 --> 0:06:57.880 which we have conviction in, but then to highlight these 0:06:57.960 --> 0:06:59.640 risks in the short term or in the medium term. 0:06:59.680 --> 0:07:01.840 That could though that that could throw that narrative off. 0:07:02.320 --> 0:07:02.600 Edi R. 0:07:02.640 --> 0:07:05.000 Denny also joined us earlier, just saying that some of 0:07:05.040 --> 0:07:07.480 the air is being taken out of the AI bubble, 0:07:07.520 --> 0:07:09.800 and to him that meant that the mel tip that 0:07:09.840 --> 0:07:11.720 we've been seeing is going to be harder to come by. 0:07:12.320 --> 0:07:14.960 Has something changed at least with that blind willingness to 0:07:15.000 --> 0:07:18.200 continue to buy AI related stocks regardless of how much 0:07:18.200 --> 0:07:20.200 they're spending and what the return on that spend is. 0:07:20.320 --> 0:07:22.040 Well, I mean, this is a natural evolution of any 0:07:22.040 --> 0:07:24.440 capital spending cycle. There's always going to be a challenge 0:07:24.480 --> 0:07:26.400 on the return you're going to get. And this is 0:07:26.640 --> 0:07:28.480 you know, we've seen this multiple times. We saw it 0:07:28.560 --> 0:07:31.040 a year ago. We've talked about this, you know multiple times. 0:07:31.040 --> 0:07:33.800 In July of twenty twenty four, that was the peak 0:07:34.120 --> 0:07:37.040 and sort that an AI campbacks deceleration. So this is 0:07:37.080 --> 0:07:39.160 an EBB and flow. What I like to look at 0:07:39.280 --> 0:07:42.000 is AI spenders. How are those stocks reacting? Is the 0:07:42.040 --> 0:07:46.440 market enforcing discipline on the AI spenders, which then trickles 0:07:46.480 --> 0:07:48.760 down into the campacks beneficiaries. 0:07:49.080 --> 0:07:50.160 But we think this is going to happen. 0:07:50.280 --> 0:07:52.440 The money's been raised now, so we don't think the 0:07:52.480 --> 0:07:54.960 debt markets are now involved, and so that money is 0:07:55.000 --> 0:07:56.320 not going to sit on these balancees. 0:07:56.360 --> 0:07:57.240 It's going to be spent. 0:07:57.640 --> 0:08:00.560 The question is what's the payoff look like and what's 0:08:00.600 --> 0:08:02.520 the timing of that payoff. We think we'll see some 0:08:02.560 --> 0:08:04.600 of that in twenty twenty six, twenty twenty seven, and 0:08:04.920 --> 0:08:07.280 so now it's just this transition. You're kind of trading 0:08:07.320 --> 0:08:08.640 back and forth. So I want to make it clear 0:08:08.880 --> 0:08:11.280 we think there's a broadening out. That doesn't mean that 0:08:11.360 --> 0:08:14.080 all the AI stuff gets killed and everything else does 0:08:14.120 --> 0:08:16.440 really really well. It can work in harmony. In fact, 0:08:16.480 --> 0:08:18.520 it needs to work in harmony to some degree. 0:08:18.720 --> 0:08:20.840 If you do get a scenario though we're let's say, 0:08:20.920 --> 0:08:23.120 I don't know, meta that seems to be one of 0:08:23.160 --> 0:08:25.720 the post your children for not getting that return doesn't 0:08:25.720 --> 0:08:27.360 get it as much, and they need to pull back 0:08:27.360 --> 0:08:29.560 on their spending, but everybody else is still spending. Do 0:08:29.600 --> 0:08:32.880 you only need one pillar to fall to really hurt 0:08:32.880 --> 0:08:35.600 this trade or can just any sort of spending happening 0:08:35.640 --> 0:08:38.079 within this trade, regardless of who the winner is, continue 0:08:38.120 --> 0:08:39.240 to lift all the boat. 0:08:39.400 --> 0:08:40.880 Well, look, I mean, look what's been going on, right, 0:08:40.880 --> 0:08:44.480 So we've seen a massive bifurcation or dispersion and the 0:08:44.520 --> 0:08:47.160 performance of not only the hyperscalers but names within that. 0:08:47.360 --> 0:08:50.280 To me, that's healthy. That's like not everybody's gonna win, 0:08:51.120 --> 0:08:53.560 Like there's no trophies here. I mean, you have to 0:08:53.600 --> 0:08:55.960 actually win the game. But all of these companies are 0:08:55.960 --> 0:08:59.080 competing for the trophy so in that competition, I think 0:08:59.120 --> 0:09:01.760 we continue to see this velocity of spend and then 0:09:01.760 --> 0:09:03.920 we're going to see the most exciting part about this 0:09:04.040 --> 0:09:07.440 AI spend to me is we don't even know yet. Okay, 0:09:07.440 --> 0:09:09.640 these new businesses that are going to be created, these 0:09:09.679 --> 0:09:11.760 new industries that are going to be created, the efficiencies 0:09:11.800 --> 0:09:14.319 we're going to get in areas like healthcare or education 0:09:14.559 --> 0:09:17.960 or manufacturing, that's on the come. That's really real wealth 0:09:18.000 --> 0:09:19.440 creation is going to be coming from. 0:09:19.520 --> 0:09:21.800 So next year or maybe the end of this year, 0:09:21.800 --> 0:09:23.440 when we find out who the next FED chair is 0:09:23.480 --> 0:09:26.040 going to be, how much will that matter to you 0:09:26.200 --> 0:09:28.720 in terms of whether your goal case will get realized? 0:09:28.720 --> 0:09:31.360 I mean, who will necessarily be good for that and 0:09:31.400 --> 0:09:33.520 who might be a little more problematic for that. 0:09:33.840 --> 0:09:35.839 You're probably not gonna like my answer, but it doesn't 0:09:35.840 --> 0:09:38.400 matter to me because ultimately, the market's going to tell 0:09:38.440 --> 0:09:40.480 the FED what to do. I mean, that's my general 0:09:40.559 --> 0:09:42.640 that's always been my view. People hate it, but like 0:09:42.840 --> 0:09:45.520 I'm a markets person, Okay, the market's dominant. The markets 0:09:45.520 --> 0:09:48.000 tell investors what to do, right, so the markets will 0:09:48.360 --> 0:09:52.040 you kind of force their hand. If the market's believe 0:09:52.040 --> 0:09:53.800 they need more liquidity, they will force the fast hand. 0:09:53.840 --> 0:09:55.760 If the market believes it needs more Ray cuts, it 0:09:55.760 --> 0:09:58.720 will force the hand because we become so financialized at 0:09:58.720 --> 0:10:02.200 this point, right, the FED now is basically obligated to 0:10:02.400 --> 0:10:04.680 make sure that we have financial stability to some degree, 0:10:04.679 --> 0:10:06.959 and they're also they have an obligation to help Treasury 0:10:07.000 --> 0:10:09.920 fund the government. So I don't believe the FED is independent. 0:10:09.960 --> 0:10:12.840 I believe they're trying to work in the best interests 0:10:12.840 --> 0:10:15.520 of Americans. Okay, I'm not saying they're dictated by the 0:10:15.520 --> 0:10:17.680 White House, but they are not independent of the markets. 0:10:17.720 --> 0:10:21.120 They're not independent of the funding requirements of the US government. Okay, 0:10:21.160 --> 0:10:23.560 So the Treasury and the FED will work together to 0:10:23.880 --> 0:10:25.559 do the best they can to solve those issues. 0:10:25.720 --> 0:10:29.320 Michaelson, wonderful to speak with you, Michaelson of Morgan Stanley. 0:10:29.320 --> 0:10:30.320 Have a wonderful Thanksgiving. 0:10:30.440 --> 0:10:31.320 Thank you for being here.