Morgan Stanley Chief US Equity Strategist Mike Wilson Talks
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Bloomberg Audio Studios. Podcasts. Radio. News. Here's the view on Wall Street at the moment. Mike Wilson of Morgan Stanley taking a very constructive view on things, writing, the rate of change has turned for the better on most fronts. This keeps us positive on U.S. equities on a 12-month basis. We expect pullbacks to be shallow and unsatisfying to those looking for a fatter pitch. Mike joins us now for more. Mike, good morning. Good morning.

Good morning, John. I love the recent note, don't fight it. So let's talk about don't fight what? What elements of the market move shouldn't we fight? Well, it's kind of what we were just talking about. I mean, the headlines remain very noisy and uncertain. And I think, you know, this has been the case for the whole year. Our view, as you know, has been a bit different. We came in thinking the first half would be tougher and the rate of change on a lot of things like earnings revisions and some of the headline would be negative.

And in fact, what we think happens, that all got priced in the week after Liberation Day. It was violent. It was deleveraging. And so now, as we look at the data itself, it's all inflected higher. And so, you know...

don't ignore everything, but ignoring the headlines is probably a good strategy and just focus on the data has turned up for the most part. And I think, you know, I don't know where the trade negotiations are going. Nobody does. But I think it's very unlikely we're going to go back to where we were, you know, a month and a half ago. Like, we bottomed in terms of the pain of that

their initial announcement and how bad those tariffs were. So unless it really re-escalates in a negative fashion, I don't think the trade issue is even going to be enough to kind of take the momentum out of this market right now. You know what the bear view sounds like? They would say that maybe some of the data, some of the earnings we've seen have been flattered by pull forward and we'll get the bill for that later this summer. Do you think we're priced for that kind of slowdown, that weakness we could see in the summer months? That's probably right. And we had that view too. There was a pull forward in Q1. Q1 ended up being better than they feared because, you know,

the numbers came down a bunch. I think the second quarter, though, is expected now to be weaker. So that's going to be the key. I think the biggest risk for the market is going to probably be either rates, as we've talked about in the past, north of 4.5%, or we do go into earnings season, it's not as good as people were hoping for, and we have maybe a 5% to 7% correction. But that's not what people kind of want. People want another 10% to 15% drawdown to get more exposure. And I just don't think you're going to get that.

I mean, I've seen this a million times. You want it, but you're just going to have to have a shorter trigger finger. Well, you had seen retail largely buying the dip. That's who participated when you got those ruptures in April. If we're not going to get dips like that anymore, what is the willingness of institutions to continue to put money to work right now, especially they didn't even buy the past dips we saw?

Yeah, I think institutions have re-risked, but there's still more to go. The one area that I think that you have to watch is the systematic strategies, the CTAs, that price momentum money. We saw almost $500 billion of deleveraging in that period of early March through mid-April, and they've re-risked maybe 30%, 40% of that. So that's another bid that's sort of

It's not fundamentally driven, it's just price momentum. So that's going to be kind of the underlying bit. And then I think most institutions have re-risked, but one thing I haven't talked about yet is people are still making the quality bet. And we agree with that, meaning this isn't the beginning of a new cycle. It's once again an extension of the existing cycle, and the Fed's probably going to be cutting at some point later this year, early next year, and that really behooves the large cap quality equities.

Does it behoove companies specifically who can also wait out some of the tariff uncertainty? Because this had been a big part of the narrative, right? No one's making decisions. CapEx is largely stalled unless you're tech. Is there an element where even though we don't have tariffs resolved, that you get companies who just get on with it and start to put capital to work?

Yeah, they've got to run a business. And that's another reason why large-cap quality businesses can do this. They can mitigate some of these risks, whether it's tariffs, whether it's maybe government cutting back on certain types of spending. And one of the things that is getting through this tax bill that I think is still underappreciated is the tax incentives for CapEx.

and R&D spending. We think that could add 3% to 5% to earnings growth or cash earnings for these large multinationals. That's a big tailwind in addition to the weaker dollar. So there's just a lot of tailwinds I see from an earnings standpoint, and this is almost a perfect environment to climb the wall of

because the economic data, the political, geopolitical data is messy, it's noisy, it's scary sometimes. But as long as the revision factors for earnings are heading north, it's just hard for stocks to go down. When you say CapEx, I just think of a handful of tech companies. Do you think it goes beyond just tech leadership? Oh, absolutely. I think this is about capital goods. I think this is not just about AI CapEx. Also, one thing to just keep in mind, the IT CapEx that's been good the last several years has really been concentrated just in AI companies.

The traditional kind of upgrades you see in the enterprise and in the household have not been happening because there was a giant pull forward, remember, in 2020 and 2021 for work from home. So if you actually look at the IT CapEx cycle from 22 to 24, it was kind of a soft recession. And that's another part of our thesis. We've been going through these rolling recessions. And look, to me, the big catalyst to keep in mind for broadening out is going to be when the Fed starts to signal they're more dovish.

I don't know when that's going to be, but my guess is sometime in the third quarter they're going to start to signal that. And that's when you're going to get a more broadening out to the lower quality parts of the market. Does the why matter? Do we need it because inflation has come again? Or is it going to be because the labor market is cracking? Well, I mean, look, last fall it was both. The labor market was cracking last summer. As soon as they signaled they were ready to step in, the market went up anyway. So that's why, I mean, I actually think a recession, if we finally get the broad recession labor cycle,

I don't think the equity markets are going anywhere near the April lows because the Fed will be able to act quickly. And we're like Pavlovian, right? And if retail is buying when the Fed wasn't even cutting, if they are cutting, there's going to be a big bid there. So, look, there's always risks in the market. There's always something to be worried about. There's always things to be bearish on and there's things to be bullish on. And that's our job. I think this year we've navigated that pretty well, being in the right places. And I think we're going to continue to have to shift what we want to own, not so much how much you want to own.

You've acknowledged the one thing that could be a headwind for equities is interest rates. You wrote about it over the weekend. What is it about 450 that's challenging to this equity market? Because based on the rally we've seen over the past few weeks, we don't see much of a challenge. Well, it's stabilized at 450. So we've identified this level almost two years ago, and it's been like a charm. I mean, as soon as you cross 450 on the upside, the correlation between stocks and rates goes negative.

and vice versa. Now, I do think that we kind of went to 470 in the April period, and then they calmed down again. I think the market is getting comfortable that they have enough tools, because the Treasury Secretary has talked about that, to keep it 450 or below if they need to. And I think we talked about this last time I was here. 475 is like the worst place, because that's where markets get really nervous. 5%

I actually get bullish because then I know that they're going to come in and intervene with their liquidity injections or they're going to use these other tools that the Treasury Secretary has talked about. So we're, you know, we're optimistic that that could be managed.

In other words, that risk could be a risk for 5% or 7%, but ultimately that risk will get managed too. Do you get clients asking you now about the debt auctions, asking the equity strategists about the debt auctions that take place in the week? Well, they don't really ask the equity folks, but people do ask about it for sure. And once again, we have seen many auctions, soft auctions for the last two or three years. We've seen this occur, and then they get control of it again. I don't want to dismiss the risk from the back end of the market. That is still, to me...

The risk. I mean, it's the risk not only for markets, it's the risk for the US. Like, we have too much debt. And this is a focus. And if we don't, I mean, ultimately, if we don't cut the budget over time, like maybe the market is now giving them a lead, like, okay, we'll give you 12 months.

But if we don't get serious about budget reconciliation and actually reducing the size of the budget over time, this is an issue that's going to stay with us. Mike Wilson of Morgan Stanley, three words over the weekend, don't fight it. Don't fight this market. Mike, thank you, sir. I appreciate it.

Let's talk about.

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