WEBVTT - Morgan Stanley's Mike Wilson Talks Forward Earnings, Market Swings

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<v Speaker 1>Bloomberg Audio Studios, podcasts, radio news.

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<v Speaker 2>Part of what's happening around this and other giant IPOs

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<v Speaker 2>that we're expecting this year is investors are trying to

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<v Speaker 2>free up cash and selling other stocks. But Wall Street

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<v Speaker 2>is also digesting the latest inflation print. So we're looking

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<v Speaker 2>at kind of an up and down trade here as

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<v Speaker 2>well as in a situation in Iran that could be good,

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<v Speaker 2>could be bad, or could be just the same as

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<v Speaker 2>it is. Joining us now is Morgan Stanley, Chief US

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<v Speaker 2>Equity Strategists and chief investment Officer.

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<v Speaker 1>Mike Wilson.

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<v Speaker 2>Mike, even if we claw back some of the losses today,

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<v Speaker 2>we're still seeing this rotation. It looks like maybe out

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<v Speaker 2>of tech into something else, or maybe it's investors freeing

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<v Speaker 2>up cash for big IPOs. How do you explain the

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<v Speaker 2>drops that we've seen today, yesterday, and especially on Friday.

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<v Speaker 1>Yeah, I mean I think so.

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<v Speaker 3>First of all, we've had this concentrated market in the

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<v Speaker 3>last month, and it's part of this rotation that's been

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<v Speaker 3>going on all year from one cyclical group to the next,

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<v Speaker 3>and I will I would actually say it's from one

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<v Speaker 3>commodity to the next. Okay, we can go through that

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<v Speaker 3>in a minute. And so now what happened last week,

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<v Speaker 3>and you know we wrote about this this week in

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<v Speaker 3>pretty good detail, is that, you know, the earning revisions

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<v Speaker 3>that we've been probably the most BULLISHU and I think

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<v Speaker 3>than anybody this year, have even exceeded our expectations. And

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<v Speaker 3>they've gotten to a point now where the revision breath,

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<v Speaker 3>the leading indicator, second derivative, is now at a level

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<v Speaker 3>that's unsustainably high. Okay, so I'll give you an example

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<v Speaker 3>semiconductor revision breath and that's a seventy percent. It's only

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<v Speaker 3>happened three or four times in the last twenty five years.

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<v Speaker 3>The S and P five hundred revision breath is close

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<v Speaker 3>to thirty percent, also very very high.

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<v Speaker 1>So it's going to rollover. Now.

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<v Speaker 3>Last week, get a couple of companies report in the

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<v Speaker 3>semiconductor industry. They were fine, but the revision breath started

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<v Speaker 3>to roll over. So it's a second derivative. And then

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<v Speaker 3>there's leverage in the system in that trade, and that's

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<v Speaker 3>sort of starting to unwind a bit. To me, this

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<v Speaker 3>is going to be a transition now to some new leadership.

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<v Speaker 2>All Right, Maybe it's a little too much math for

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<v Speaker 2>my brain. But I was looking at earnings revisions and

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<v Speaker 2>since last time you were on you pointed out they

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<v Speaker 2>were pretty much convex, right, I mean just continued to climb.

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<v Speaker 1>We have a chart of that. We'll probably pull it

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<v Speaker 1>up in a second.

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<v Speaker 2>It looks like we're getting near a plateau at least

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<v Speaker 2>for twenty twenty six earnings revisions, which I guess makes sense.

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<v Speaker 1>What do you make of that?

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<v Speaker 2>You know, how much longer can we continue to head

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<v Speaker 2>upwards with earning earnings revisions? And what do you mean

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<v Speaker 2>by revision's breadth?

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<v Speaker 3>So revision breath is just that the breath of the

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<v Speaker 3>revisions is supposed to the absolute level, and it leads

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<v Speaker 3>to second derivative, the rate of change on the actual growth.

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<v Speaker 1>So I do not expect.

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<v Speaker 3>The first derivative, I either forward earnings growth to come

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<v Speaker 3>down or fall.

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<v Speaker 2>We're showing it here in white twenty twenty six, in

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<v Speaker 2>blue twenty twenty six.

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<v Speaker 3>So that white line is going to continue to go,

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<v Speaker 3>but the revision breath is rolling over so that there's

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<v Speaker 3>a deceleration a second derivative, okay, which is what the

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<v Speaker 3>market's picking up a little bit. That's a correction, that's

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<v Speaker 3>not a change in the trajectory. So as we go

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<v Speaker 3>forward into next year, forward earning is going to contain

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<v Speaker 3>to rise, and that's our call. That's why stocks can

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<v Speaker 3>contain to rise into year end. Multiples don't have to rise.

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<v Speaker 3>It's just a forward you move forward into twenty twenty

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<v Speaker 3>seven as you look forward for twelve months. But the

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<v Speaker 3>rate of change matters in the short term. It matters,

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<v Speaker 3>and that's what's going on right now. That to me

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<v Speaker 3>that that's going to lead to some leadership change, just

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<v Speaker 3>like it did earlier in the year when we went

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<v Speaker 3>from gold and silver stocks to metals, to energy, and

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<v Speaker 3>then we went into d ram and semi conductors.

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<v Speaker 1>By the way, all four of those are commodities.

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<v Speaker 2>I see, yeah, because you said earlier we're going from

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<v Speaker 2>one commodity to the next.

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<v Speaker 1>That's right.

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<v Speaker 2>But semiconductor's DRAM high bandwidth d RAM is the hot

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<v Speaker 2>commodity of the moment, right, Are we going to shift

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<v Speaker 2>out of that into something else?

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<v Speaker 1>Well, it's happening.

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<v Speaker 3>I mean, like I mean, if Friday's sell off is

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<v Speaker 3>a sign that that's exhausted.

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<v Speaker 1>We did a chart this week. It's pretty interesting.

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<v Speaker 3>We looked at silver stocks versus semi conductor stocks, and

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<v Speaker 3>it's like right on top of each other.

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<v Speaker 1>And we made this call at the end of January.

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<v Speaker 3>We said Gold's probably going to go down thirty percent,

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<v Speaker 3>you know, and that would be normal.

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<v Speaker 1>That's what I would like to see, because.

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<v Speaker 3>You can't stay at that page, you know, to your point,

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<v Speaker 3>you can't stay at that rate of change, both on

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<v Speaker 3>price of stocks or the revisions. The key is is

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<v Speaker 3>there a place to rotate too that the market can

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<v Speaker 3>kind of hold in. We think there is, and we've

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<v Speaker 3>highlighted it as consumer some of the other industrial areas

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<v Speaker 3>like transportation stocks and even the regional banks. And by

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<v Speaker 3>the way, all three of those areas were up yesterday

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<v Speaker 3>in the downtape.

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<v Speaker 2>First off, like how much does this really move markets anymore?

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<v Speaker 1>I mean, we're kind of used to no outcome here,

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<v Speaker 1>that's right. We would likened this to the teriffs a

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<v Speaker 1>year ago.

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<v Speaker 3>We were probably the first ones to sort of not

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<v Speaker 3>dismiss what's going on in the Middle East, of course,

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<v Speaker 3>but that the market has moved past the oil spike

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<v Speaker 3>like it did with terror. So if you go back

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<v Speaker 3>a year ago in June, people were still kind of

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<v Speaker 3>hand ringing around the terraces like because we didn't take

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<v Speaker 3>them down, but the market moved past it and it

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<v Speaker 3>started thinking forward, and it started focusing on the earnings revisions,

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<v Speaker 3>which were turning positive.

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<v Speaker 1>At the time.

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<v Speaker 3>And I think it's a very good analogy. Nobody really

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<v Speaker 3>knows how this is going to work out. But what

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<v Speaker 3>I like to say is that the world is a

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<v Speaker 3>lot more resilient than people think around these types of activities.

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<v Speaker 1>And you know, we've had some obviously, some.

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<v Speaker 3>Facilities get destroyed in this, particularly in Katar, and I

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<v Speaker 3>like to remind folks that, you know, when Russia invaded Ukraine,

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<v Speaker 3>we saw the North Stream pipeline get blown up, and

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<v Speaker 3>people are like, oh my god, this is and what

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<v Speaker 3>happened Germany bought, you know, built a bunch of LNG facilities.

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<v Speaker 3>Because the world is resilient, you know, like it won't

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<v Speaker 3>tolerate this. And I also think that ultimately, you know,

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<v Speaker 3>Iran is fighting not just the United States and Israel

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<v Speaker 3>on this, They're now fighting the world, right, so the

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<v Speaker 3>pressure is going to build here and ultimately, like my

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<v Speaker 3>base case is that this will the enough flow is

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<v Speaker 3>getting through now and there will be new flow and

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<v Speaker 3>then there'll be new supply as we were talking offline.

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<v Speaker 3>I think this is going to lead to basically many

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<v Speaker 3>countries basically adopting, you know, kind of going back to

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<v Speaker 3>fossil fuels.

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<v Speaker 1>And new roots as well.

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<v Speaker 2>I mean, it's interesting to me that after you know,

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<v Speaker 2>a US helicopter is shot down you have to assume

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<v Speaker 2>by the Iranians, and then the US launches a counter strike,

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<v Speaker 2>We're still seeing Brent at ninety two dollars a barrel

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<v Speaker 2>in WTI under ninety It's like all the horror stories

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<v Speaker 2>we have about inventories being dry, aren't moving this mark.

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<v Speaker 3>That's right, Well, we're not there yet, right, I mean,

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<v Speaker 3>and markets, you know, they wait until the last minute

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<v Speaker 3>because we don't know the answers.

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<v Speaker 1>It's a binary outcome.

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<v Speaker 3>Now, what would make me bearish is at the kinetic

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<v Speaker 3>war really escalated again, like if we went back to

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<v Speaker 3>where it was in the first couple of days of

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<v Speaker 3>this conflict. That's the situation that I'm not planning on.

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<v Speaker 3>If that would have happened, oil's going to probably spike

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<v Speaker 3>to one fifty pretty quick and we're gonna have a

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<v Speaker 3>real problem. But I mean, that's not my base case.

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<v Speaker 2>Morgan Stanley's Mike Wilson still with us here at the desk,

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<v Speaker 2>and MI like, we haven't talked about these gigantic IPOs.

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<v Speaker 2>What do you make of the I guess animal spirits right,

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<v Speaker 2>or else they wouldn't be here. And the mechanical effects

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<v Speaker 2>on the market. Surely some people are selling winners to

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<v Speaker 2>get into whatever ipo they want.

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<v Speaker 3>Yeah, I mean, look, the market's been very receptive, not

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<v Speaker 3>only to equity offerings, but dead offerings. I mean it's

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<v Speaker 3>been another kind of binanza year. Not as strong as

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<v Speaker 3>as twenty twenty one, but I mean that's a sign

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<v Speaker 3>of a healthy market. Quite frankly, when you're absorbing this

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<v Speaker 3>kind of supply, so it doesn't bother me. I think

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<v Speaker 3>the you know, the collection of stuff, maybe all at once,

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<v Speaker 3>can create some you know, digestion problems, but there's plenty

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<v Speaker 3>of liquidity out there. I mean, I give you one

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<v Speaker 3>statistic which I think will help maybe understand this. You know,

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<v Speaker 3>companies distribute income, whether through buybacks or dividends, and they

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<v Speaker 3>do about one point seven trillion dollars a year. That's

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<v Speaker 3>just you know income back to the showolders. Now, some

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<v Speaker 3>of that's reinvested like dividends, but that's a lot of money. Right,

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<v Speaker 3>and then you have inflows from retail all the time

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<v Speaker 3>and pensioners and asset owners. So there is capital out there,

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<v Speaker 3>and so the fact that the market's absorbing these deals

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<v Speaker 3>doesn't bother me. The collection in one quarter can create

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<v Speaker 3>some you know, disruption, but I think there's there's capital

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<v Speaker 3>to absorb this.

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<v Speaker 2>By the way, that goes to the heart of my

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<v Speaker 2>my main question watching this throughout the last months and years. Right,

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<v Speaker 2>because spreads have been so tight and equity indexes keep

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<v Speaker 2>running up, investors have enough money to pile it into

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<v Speaker 2>gold and things like bitcoin. Where's all this cash coming from.

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<v Speaker 3>Well, don't forget the bond market's been in a bear

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<v Speaker 3>market for four years. Okay, So what we're seeing is

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<v Speaker 3>people are not reinvesting their bond proceeds, right, they mature,

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<v Speaker 3>and they're putting into things that can actually protect them

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<v Speaker 3>against inflation, something we haven't talked about yet. Like, the

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<v Speaker 3>average asset owner is pretty smart. They figured it out that, hey,

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<v Speaker 3>that the biggest risk going forward is inflation, which is

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<v Speaker 3>kind of my thought. Then I want to own assets

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<v Speaker 3>that will protect me against inflation. That's not bonds, okay,

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<v Speaker 3>that's equities, it's gold, it's silver, it's other real assets,

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<v Speaker 3>and that's what they're doing. So there's just a there's

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<v Speaker 3>a tatonic shift, okay, from the sixty forty to something

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<v Speaker 3>that looks more like sixty twenty twenty or even seventy thirty,

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<v Speaker 3>depending on your preference.

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<v Speaker 2>So what is your take on inflation? Do you can

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<v Speaker 2>Are you concerned it can continue to climb from here?

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<v Speaker 2>Because four point two percent is a pretty shocking CPI number.

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<v Speaker 2>If we hadn't all been through the sort of Biden

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<v Speaker 2>inflation era of nine, this would be insane. And then

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<v Speaker 2>the core looks pretty light at zero point two if

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<v Speaker 2>you just month over month.

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<v Speaker 1>Yeah, maybe something perfectly clear.

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<v Speaker 3>I'm a headline guy, okay, I'm not a core guy

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<v Speaker 3>making all these adjustments because I live in the real world,

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<v Speaker 3>and by the way, stocks live in the real world,

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<v Speaker 3>meaning like we don't take out certain things.

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<v Speaker 1>I mean the earning.

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<v Speaker 3>One of the reason why earnings are so good this year,

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<v Speaker 3>which is part of our call, is that nominal GDP

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<v Speaker 3>growth is accelerating, and half of that is inflation. So

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<v Speaker 3>inflation is very, very good for earnings growth, and it's

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<v Speaker 3>very good for stocks so long as the FED isn't pulling.

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<v Speaker 1>Away the punch bowl.

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<v Speaker 3>Okay, so the fact that the Fed is now talking

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<v Speaker 3>about core PCE like they did in twenty twenty one

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<v Speaker 3>and kind of justifying why they're not raising race when

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<v Speaker 3>maybe they should be. We'll see litter this year. Then

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<v Speaker 3>that allows multiples to kind of stay where they are.

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<v Speaker 3>And so there's a lot of similarities to me to

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<v Speaker 3>twenty twenty one. Right we have this incredible earning story

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<v Speaker 3>driven by higher inflation pent up demand, and we're seeing

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<v Speaker 3>inflation kind of breaking above levels that are comfortable. The

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<v Speaker 3>Fed is justifying not raising race because of a core

0:09:44.080 --> 0:09:47.120
<v Speaker 3>PCE and maybe there's some AI productivity boom coming, which

0:09:47.280 --> 0:09:49.680
<v Speaker 3>probably is and Gona they're going to hold firm and

0:09:49.720 --> 0:09:52.920
<v Speaker 3>that's a recipe for higher stock prices. Now, we could

0:09:53.000 --> 0:09:55.680
<v Speaker 3>run into trouble later this year if inflation continues to

0:09:55.679 --> 0:09:57.800
<v Speaker 3>go towards five percent, and then the Fed's going to

0:09:57.840 --> 0:09:59.240
<v Speaker 3>have to do something about it because they got to

0:09:59.240 --> 0:10:01.600
<v Speaker 3>retain their credibilit So it's a very similar set to

0:10:01.640 --> 0:10:03.920
<v Speaker 3>twenty one, which was a very good year for stocks,

0:10:03.960 --> 0:10:06.720
<v Speaker 3>but it rotated around. It's exactly what we're seeing right now,

0:10:06.800 --> 0:10:08.080
<v Speaker 3>and I think it's gonna be more the same.

0:10:08.120 --> 0:10:10.440
<v Speaker 2>But I'm I mean, I imagine your base case is

0:10:10.440 --> 0:10:13.040
<v Speaker 2>that we don't get to five percent or more on CPI,

0:10:13.160 --> 0:10:16.560
<v Speaker 2>that the FED doesn't really do much beyond maybe one hike, right,

0:10:16.600 --> 0:10:19.640
<v Speaker 2>and that we continue to have this nominal GDP growth

0:10:19.679 --> 0:10:20.520
<v Speaker 2>that drives earnings.

0:10:20.520 --> 0:10:22.160
<v Speaker 1>Well, that's our base case exactly. Now.

0:10:22.400 --> 0:10:23.920
<v Speaker 3>I think that sets us up for something maybe a

0:10:23.960 --> 0:10:25.680
<v Speaker 3>little different for next year. We'll have to see, because

0:10:25.679 --> 0:10:27.800
<v Speaker 3>next year we're going to have a real deceleration potentially

0:10:27.800 --> 0:10:28.600
<v Speaker 3>in the growth rate.

0:10:28.960 --> 0:10:29.120
<v Speaker 1>Right.

0:10:29.160 --> 0:10:31.280
<v Speaker 3>But between now and you're in, that growth rate is

0:10:31.280 --> 0:10:33.200
<v Speaker 3>going to stay probably north of twenty percent on a

0:10:33.200 --> 0:10:36.200
<v Speaker 3>forward basis, which is pretty healthy. So I don't anticipate

0:10:36.200 --> 0:10:38.559
<v Speaker 3>a lot of multiple contraction this year, but I think

0:10:38.559 --> 0:10:40.920
<v Speaker 3>that could be an issue for twenty twenty seven.

0:10:40.960 --> 0:10:41.440
<v Speaker 1>Well to wait and.

0:10:41.440 --> 0:10:46.040
<v Speaker 2>Say, but this base case is why you like transportation stocks,

0:10:46.080 --> 0:10:50.160
<v Speaker 2>why you like shippers? I mean today's idiosyncratic I guess

0:10:50.200 --> 0:10:53.400
<v Speaker 2>Amazon story aside. You think that the economy is can

0:10:53.720 --> 0:10:56.160
<v Speaker 2>continue humming along and that these guys are going to

0:10:56.200 --> 0:10:58.720
<v Speaker 2>ship more stuff and have enough power to raise prices.

0:10:58.800 --> 0:11:00.720
<v Speaker 3>Yeah, what's really going on, Matt, is that the economy

0:11:00.720 --> 0:11:03.679
<v Speaker 3>now seeing real velocity and the private economy. Right, We've

0:11:03.679 --> 0:11:05.840
<v Speaker 3>had this thesis for a long time that we're seeing

0:11:05.880 --> 0:11:08.600
<v Speaker 3>a rebalancing from the kind of government driven economy to

0:11:08.640 --> 0:11:10.679
<v Speaker 3>a private driven economy. That's why all the payroll numbers

0:11:10.720 --> 0:11:13.720
<v Speaker 3>now are in the private area and there's real volume

0:11:14.000 --> 0:11:16.880
<v Speaker 3>going through the economy. We got real GDP growth with

0:11:16.960 --> 0:11:18.840
<v Speaker 3>volume for the first time in three or four years,

0:11:19.040 --> 0:11:20.680
<v Speaker 3>which is driving a lot of these sectors that have

0:11:20.679 --> 0:11:23.720
<v Speaker 3>been dormant, like consumer like consumer goods in particularly. We

0:11:23.720 --> 0:11:25.000
<v Speaker 3>think in the second half of this year. They were

0:11:25.000 --> 0:11:27.400
<v Speaker 3>working earlier this year until inflation picked up and you know,

0:11:27.400 --> 0:11:28.920
<v Speaker 3>the war kindomy evolved.

0:11:28.920 --> 0:11:29.920
<v Speaker 1>But we think that comes back.

0:11:30.280 --> 0:11:34.000
<v Speaker 3>Same thing for things like regional banks, transportations in another area,

0:11:34.000 --> 0:11:35.800
<v Speaker 3>and by the way, tech can work in that environment too.

0:11:36.040 --> 0:11:38.079
<v Speaker 3>It's just got a little overcooked here in the short term.

0:11:38.120 --> 0:11:39.360
<v Speaker 1>What do you make of the consumer?

0:11:39.520 --> 0:11:42.880
<v Speaker 2>There's so much talk, probably far too much about the

0:11:42.920 --> 0:11:48.000
<v Speaker 2>K shaped economy, but there are you know, many people

0:11:48.120 --> 0:11:51.720
<v Speaker 2>struggling with higher prices that are having to decide whether

0:11:51.760 --> 0:11:53.600
<v Speaker 2>to buy, you know, cheaper food so they can put

0:11:53.600 --> 0:11:57.320
<v Speaker 2>gas in their car. Does that not hurt the consumer

0:11:57.400 --> 0:11:58.480
<v Speaker 2>stock story?

0:11:58.600 --> 0:12:00.959
<v Speaker 3>It doesn't hurt the consumer stock story because eighty percent

0:12:00.960 --> 0:12:02.560
<v Speaker 3>of the spending is done by the top you know,

0:12:02.600 --> 0:12:05.000
<v Speaker 3>twenty percent or thirty percent of the consumer. So it's

0:12:05.040 --> 0:12:07.280
<v Speaker 3>just a you know, it's it's not good for the

0:12:07.360 --> 0:12:09.560
<v Speaker 3>people at the bottomen of that k. But my job

0:12:09.600 --> 0:12:11.320
<v Speaker 3>as a market strategist is to say, is this going

0:12:11.360 --> 0:12:13.240
<v Speaker 3>to change the earnings profile? And I don't think so.

0:12:13.360 --> 0:12:15.400
<v Speaker 3>In fact, we start this morning some more of these

0:12:15.480 --> 0:12:19.400
<v Speaker 3>you know, retail oriented stocks, you know, consumer consumption stocks

0:12:19.440 --> 0:12:21.720
<v Speaker 3>doing quite well, and we think that's going to continue

0:12:21.720 --> 0:12:23.400
<v Speaker 3>into the second half of the year, particularly if oil

0:12:23.400 --> 0:12:24.320
<v Speaker 3>prices come back down.

0:12:25.280 --> 0:12:28.720
<v Speaker 2>All Right, what a fantastic education. I love when you

0:12:28.720 --> 0:12:30.240
<v Speaker 2>come on the show and we get to spend some

0:12:30.280 --> 0:12:32.760
<v Speaker 2>time with you, because I learned so much. Morgan Stanley,

0:12:32.840 --> 0:12:36.319
<v Speaker 2>Chief US Equity Strategies and Chief Investment Officer, Mike Wilson