Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Part of what's happening around this and other giant IPOs
Speaker 2: that we're expecting this year is investors are trying to
Speaker 2: free up cash and selling other stocks. But Wall Street
Speaker 2: is also digesting the latest inflation print. So we're looking
Speaker 2: at kind of an up and down trade here as
Speaker 2: well as in a situation in Iran that could be good,
Speaker 2: could be bad, or could be just the same as
Speaker 2: it is. Joining us now is Morgan Stanley, Chief US
Speaker 2: Equity Strategists and chief investment Officer.
Speaker 1: Mike Wilson.
Speaker 2: Mike, even if we claw back some of the losses today,
Speaker 2: we're still seeing this rotation. It looks like maybe out
Speaker 2: of tech into something else, or maybe it's investors freeing
Speaker 2: up cash for big IPOs. How do you explain the
Speaker 2: drops that we've seen today, yesterday, and especially on Friday.
Speaker 1: Yeah, I mean I think so.
Speaker 3: First of all, we've had this concentrated market in the
Speaker 3: last month, and it's part of this rotation that's been
Speaker 3: going on all year from one cyclical group to the next,
Speaker 3: and I will I would actually say it's from one
Speaker 3: commodity to the next. Okay, we can go through that
Speaker 3: in a minute. And so now what happened last week,
Speaker 3: and you know we wrote about this this week in
Speaker 3: pretty good detail, is that, you know, the earning revisions
Speaker 3: that we've been probably the most BULLISHU and I think
Speaker 3: than anybody this year, have even exceeded our expectations. And
Speaker 3: they've gotten to a point now where the revision breath,
Speaker 3: the leading indicator, second derivative, is now at a level
Speaker 3: that's unsustainably high. Okay, so I'll give you an example
Speaker 3: semiconductor revision breath and that's a seventy percent. It's only
Speaker 3: happened three or four times in the last twenty five years.
Speaker 3: The S and P five hundred revision breath is close
Speaker 3: to thirty percent, also very very high.
Speaker 1: So it's going to rollover. Now.
Speaker 3: Last week, get a couple of companies report in the
Speaker 3: semiconductor industry. They were fine, but the revision breath started
Speaker 3: to roll over. So it's a second derivative. And then
Speaker 3: there's leverage in the system in that trade, and that's
Speaker 3: sort of starting to unwind a bit. To me, this
Speaker 3: is going to be a transition now to some new leadership.
Speaker 2: All Right, Maybe it's a little too much math for
Speaker 2: my brain. But I was looking at earnings revisions and
Speaker 2: since last time you were on you pointed out they
Speaker 2: were pretty much convex, right, I mean just continued to climb.
Speaker 1: We have a chart of that. We'll probably pull it
Speaker 1: up in a second.
Speaker 2: It looks like we're getting near a plateau at least
Speaker 2: for twenty twenty six earnings revisions, which I guess makes sense.
Speaker 1: What do you make of that?
Speaker 2: You know, how much longer can we continue to head
Speaker 2: upwards with earning earnings revisions? And what do you mean
Speaker 2: by revision's breadth?
Speaker 3: So revision breath is just that the breath of the
Speaker 3: revisions is supposed to the absolute level, and it leads
Speaker 3: to second derivative, the rate of change on the actual growth.
Speaker 1: So I do not expect.
Speaker 3: The first derivative, I either forward earnings growth to come
Speaker 3: down or fall.
Speaker 2: We're showing it here in white twenty twenty six, in
Speaker 2: blue twenty twenty six.
Speaker 3: So that white line is going to continue to go,
Speaker 3: but the revision breath is rolling over so that there's
Speaker 3: a deceleration a second derivative, okay, which is what the
Speaker 3: market's picking up a little bit. That's a correction, that's
Speaker 3: not a change in the trajectory. So as we go
Speaker 3: forward into next year, forward earning is going to contain
Speaker 3: to rise, and that's our call. That's why stocks can
Speaker 3: contain to rise into year end. Multiples don't have to rise.
Speaker 3: It's just a forward you move forward into twenty twenty
Speaker 3: seven as you look forward for twelve months. But the
Speaker 3: rate of change matters in the short term. It matters,
Speaker 3: and that's what's going on right now. That to me
Speaker 3: that that's going to lead to some leadership change, just
Speaker 3: like it did earlier in the year when we went
Speaker 3: from gold and silver stocks to metals, to energy, and
Speaker 3: then we went into d ram and semi conductors.
Speaker 1: By the way, all four of those are commodities.
Speaker 2: I see, yeah, because you said earlier we're going from
Speaker 2: one commodity to the next.
Speaker 1: That's right.
Speaker 2: But semiconductor's DRAM high bandwidth d RAM is the hot
Speaker 2: commodity of the moment, right, Are we going to shift
Speaker 2: out of that into something else?
Speaker 1: Well, it's happening.
Speaker 3: I mean, like I mean, if Friday's sell off is
Speaker 3: a sign that that's exhausted.
Speaker 1: We did a chart this week. It's pretty interesting.
Speaker 3: We looked at silver stocks versus semi conductor stocks, and
Speaker 3: it's like right on top of each other.
Speaker 1: And we made this call at the end of January.
Speaker 3: We said Gold's probably going to go down thirty percent,
Speaker 3: you know, and that would be normal.
Speaker 1: That's what I would like to see, because.
Speaker 3: You can't stay at that page, you know, to your point,
Speaker 3: you can't stay at that rate of change, both on
Speaker 3: price of stocks or the revisions. The key is is
Speaker 3: there a place to rotate too that the market can
Speaker 3: kind of hold in. We think there is, and we've
Speaker 3: highlighted it as consumer some of the other industrial areas
Speaker 3: like transportation stocks and even the regional banks. And by
Speaker 3: the way, all three of those areas were up yesterday
Speaker 3: in the downtape.
Speaker 2: First off, like how much does this really move markets anymore?
Speaker 1: I mean, we're kind of used to no outcome here,
Speaker 1: that's right. We would likened this to the teriffs a
Speaker 1: year ago.
Speaker 3: We were probably the first ones to sort of not
Speaker 3: dismiss what's going on in the Middle East, of course,
Speaker 3: but that the market has moved past the oil spike
Speaker 3: like it did with terror. So if you go back
Speaker 3: a year ago in June, people were still kind of
Speaker 3: hand ringing around the terraces like because we didn't take
Speaker 3: them down, but the market moved past it and it
Speaker 3: started thinking forward, and it started focusing on the earnings revisions,
Speaker 3: which were turning positive.
Speaker 1: At the time.
Speaker 3: And I think it's a very good analogy. Nobody really
Speaker 3: knows how this is going to work out. But what
Speaker 3: I like to say is that the world is a
Speaker 3: lot more resilient than people think around these types of activities.
Speaker 1: And you know, we've had some obviously, some.
Speaker 3: Facilities get destroyed in this, particularly in Katar, and I
Speaker 3: like to remind folks that, you know, when Russia invaded Ukraine,
Speaker 3: we saw the North Stream pipeline get blown up, and
Speaker 3: people are like, oh my god, this is and what
Speaker 3: happened Germany bought, you know, built a bunch of LNG facilities.
Speaker 3: Because the world is resilient, you know, like it won't
Speaker 3: tolerate this. And I also think that ultimately, you know,
Speaker 3: Iran is fighting not just the United States and Israel
Speaker 3: on this, They're now fighting the world, right, so the
Speaker 3: pressure is going to build here and ultimately, like my
Speaker 3: base case is that this will the enough flow is
Speaker 3: getting through now and there will be new flow and
Speaker 3: then there'll be new supply as we were talking offline.
Speaker 3: I think this is going to lead to basically many
Speaker 3: countries basically adopting, you know, kind of going back to
Speaker 3: fossil fuels.
Speaker 1: And new roots as well.
Speaker 2: I mean, it's interesting to me that after you know,
Speaker 2: a US helicopter is shot down you have to assume
Speaker 2: by the Iranians, and then the US launches a counter strike,
Speaker 2: We're still seeing Brent at ninety two dollars a barrel
Speaker 2: in WTI under ninety It's like all the horror stories
Speaker 2: we have about inventories being dry, aren't moving this mark.
Speaker 3: That's right, Well, we're not there yet, right, I mean,
Speaker 3: and markets, you know, they wait until the last minute
Speaker 3: because we don't know the answers.
Speaker 1: It's a binary outcome.
Speaker 3: Now, what would make me bearish is at the kinetic
Speaker 3: war really escalated again, like if we went back to
Speaker 3: where it was in the first couple of days of
Speaker 3: this conflict. That's the situation that I'm not planning on.
Speaker 3: If that would have happened, oil's going to probably spike
Speaker 3: to one fifty pretty quick and we're gonna have a
Speaker 3: real problem. But I mean, that's not my base case.
Speaker 2: Morgan Stanley's Mike Wilson still with us here at the desk,
Speaker 2: and MI like, we haven't talked about these gigantic IPOs.
Speaker 2: What do you make of the I guess animal spirits right,
Speaker 2: or else they wouldn't be here. And the mechanical effects
Speaker 2: on the market. Surely some people are selling winners to
Speaker 2: get into whatever ipo they want.
Speaker 3: Yeah, I mean, look, the market's been very receptive, not
Speaker 3: only to equity offerings, but dead offerings. I mean it's
Speaker 3: been another kind of binanza year. Not as strong as
Speaker 3: as twenty twenty one, but I mean that's a sign
Speaker 3: of a healthy market. Quite frankly, when you're absorbing this
Speaker 3: kind of supply, so it doesn't bother me. I think
Speaker 3: the you know, the collection of stuff, maybe all at once,
Speaker 3: can create some you know, digestion problems, but there's plenty
Speaker 3: of liquidity out there. I mean, I give you one
Speaker 3: statistic which I think will help maybe understand this. You know,
Speaker 3: companies distribute income, whether through buybacks or dividends, and they
Speaker 3: do about one point seven trillion dollars a year. That's
Speaker 3: just you know income back to the showolders. Now, some
Speaker 3: of that's reinvested like dividends, but that's a lot of money. Right,
Speaker 3: and then you have inflows from retail all the time
Speaker 3: and pensioners and asset owners. So there is capital out there,
Speaker 3: and so the fact that the market's absorbing these deals
Speaker 3: doesn't bother me. The collection in one quarter can create
Speaker 3: some you know, disruption, but I think there's there's capital
Speaker 3: to absorb this.
Speaker 2: By the way, that goes to the heart of my
Speaker 2: my main question watching this throughout the last months and years. Right,
Speaker 2: because spreads have been so tight and equity indexes keep
Speaker 2: running up, investors have enough money to pile it into
Speaker 2: gold and things like bitcoin. Where's all this cash coming from.
Speaker 3: Well, don't forget the bond market's been in a bear
Speaker 3: market for four years. Okay, So what we're seeing is
Speaker 3: people are not reinvesting their bond proceeds, right, they mature,
Speaker 3: and they're putting into things that can actually protect them
Speaker 3: against inflation, something we haven't talked about yet. Like, the
Speaker 3: average asset owner is pretty smart. They figured it out that, hey,
Speaker 3: that the biggest risk going forward is inflation, which is
Speaker 3: kind of my thought. Then I want to own assets
Speaker 3: that will protect me against inflation. That's not bonds, okay,
Speaker 3: that's equities, it's gold, it's silver, it's other real assets,
Speaker 3: and that's what they're doing. So there's just a there's
Speaker 3: a tatonic shift, okay, from the sixty forty to something
Speaker 3: that looks more like sixty twenty twenty or even seventy thirty,
Speaker 3: depending on your preference.
Speaker 2: So what is your take on inflation? Do you can
Speaker 2: Are you concerned it can continue to climb from here?
Speaker 2: Because four point two percent is a pretty shocking CPI number.
Speaker 2: If we hadn't all been through the sort of Biden
Speaker 2: inflation era of nine, this would be insane. And then
Speaker 2: the core looks pretty light at zero point two if
Speaker 2: you just month over month.
Speaker 1: Yeah, maybe something perfectly clear.
Speaker 3: I'm a headline guy, okay, I'm not a core guy
Speaker 3: making all these adjustments because I live in the real world,
Speaker 3: and by the way, stocks live in the real world,
Speaker 3: meaning like we don't take out certain things.
Speaker 1: I mean the earning.
Speaker 3: One of the reason why earnings are so good this year,
Speaker 3: which is part of our call, is that nominal GDP
Speaker 3: growth is accelerating, and half of that is inflation. So
Speaker 3: inflation is very, very good for earnings growth, and it's
Speaker 3: very good for stocks so long as the FED isn't pulling.
Speaker 1: Away the punch bowl.
Speaker 3: Okay, so the fact that the Fed is now talking
Speaker 3: about core PCE like they did in twenty twenty one
Speaker 3: and kind of justifying why they're not raising race when
Speaker 3: maybe they should be. We'll see litter this year. Then
Speaker 3: that allows multiples to kind of stay where they are.
Speaker 3: And so there's a lot of similarities to me to
Speaker 3: twenty twenty one. Right we have this incredible earning story
Speaker 3: driven by higher inflation pent up demand, and we're seeing
Speaker 3: inflation kind of breaking above levels that are comfortable. The
Speaker 3: Fed is justifying not raising race because of a core
Speaker 3: PCE and maybe there's some AI productivity boom coming, which
Speaker 3: probably is and Gona they're going to hold firm and
Speaker 3: that's a recipe for higher stock prices. Now, we could
Speaker 3: run into trouble later this year if inflation continues to
Speaker 3: go towards five percent, and then the Fed's going to
Speaker 3: have to do something about it because they got to
Speaker 3: retain their credibilit So it's a very similar set to
Speaker 3: twenty one, which was a very good year for stocks,
Speaker 3: but it rotated around. It's exactly what we're seeing right now,
Speaker 3: and I think it's gonna be more the same.
Speaker 2: But I'm I mean, I imagine your base case is
Speaker 2: that we don't get to five percent or more on CPI,
Speaker 2: that the FED doesn't really do much beyond maybe one hike, right,
Speaker 2: and that we continue to have this nominal GDP growth
Speaker 2: that drives earnings.
Speaker 1: Well, that's our base case exactly. Now.
Speaker 3: I think that sets us up for something maybe a
Speaker 3: little different for next year. We'll have to see, because
Speaker 3: next year we're going to have a real deceleration potentially
Speaker 3: in the growth rate.
Speaker 1: Right.
Speaker 3: But between now and you're in, that growth rate is
Speaker 3: going to stay probably north of twenty percent on a
Speaker 3: forward basis, which is pretty healthy. So I don't anticipate
Speaker 3: a lot of multiple contraction this year, but I think
Speaker 3: that could be an issue for twenty twenty seven.
Speaker 1: Well to wait and.
Speaker 2: Say, but this base case is why you like transportation stocks,
Speaker 2: why you like shippers? I mean today's idiosyncratic I guess
Speaker 2: Amazon story aside. You think that the economy is can
Speaker 2: continue humming along and that these guys are going to
Speaker 2: ship more stuff and have enough power to raise prices.
Speaker 3: Yeah, what's really going on, Matt, is that the economy
Speaker 3: now seeing real velocity and the private economy. Right, We've
Speaker 3: had this thesis for a long time that we're seeing
Speaker 3: a rebalancing from the kind of government driven economy to
Speaker 3: a private driven economy. That's why all the payroll numbers
Speaker 3: now are in the private area and there's real volume
Speaker 3: going through the economy. We got real GDP growth with
Speaker 3: volume for the first time in three or four years,
Speaker 3: which is driving a lot of these sectors that have
Speaker 3: been dormant, like consumer like consumer goods in particularly. We
Speaker 3: think in the second half of this year. They were
Speaker 3: working earlier this year until inflation picked up and you know,
Speaker 3: the war kindomy evolved.
Speaker 1: But we think that comes back.
Speaker 3: Same thing for things like regional banks, transportations in another area,
Speaker 3: and by the way, tech can work in that environment too.
Speaker 3: It's just got a little overcooked here in the short term.
Speaker 1: What do you make of the consumer?
Speaker 2: There's so much talk, probably far too much about the
Speaker 2: K shaped economy, but there are you know, many people
Speaker 2: struggling with higher prices that are having to decide whether
Speaker 2: to buy, you know, cheaper food so they can put
Speaker 2: gas in their car. Does that not hurt the consumer
Speaker 2: stock story?
Speaker 3: It doesn't hurt the consumer stock story because eighty percent
Speaker 3: of the spending is done by the top you know,
Speaker 3: twenty percent or thirty percent of the consumer. So it's
Speaker 3: just a you know, it's it's not good for the
Speaker 3: people at the bottomen of that k. But my job
Speaker 3: as a market strategist is to say, is this going
Speaker 3: to change the earnings profile? And I don't think so.
Speaker 3: In fact, we start this morning some more of these
Speaker 3: you know, retail oriented stocks, you know, consumer consumption stocks
Speaker 3: doing quite well, and we think that's going to continue
Speaker 3: into the second half of the year, particularly if oil
Speaker 3: prices come back down.
Speaker 2: All Right, what a fantastic education. I love when you
Speaker 2: come on the show and we get to spend some
Speaker 2: time with you, because I learned so much. Morgan Stanley,
Speaker 2: Chief US Equity Strategies and Chief Investment Officer, Mike Wilson