Morgan Stanley's Mike Wilson on Tariffs and Earnings
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Oregon Stanley strategist Mike Wilson cutting his 2025 earnings per share forecast for the S&P 500 firms to $257 from 271 because of the tariff uncertainty. And I'm happy to say Mike Wilson joining Bloomberg Daybreak right now to discuss. Mike, let me first of all, good morning. Thanks for being here. Let's start with the earnings season.

I've got to wonder if we're going to learn more from the numbers or from the commentary and the forecasts or lack of forecasts.

Well, good morning. Yeah, we'll learn something. I think what we're going to learn is that there's still a lot of uncertainty. And I want to back up a second. You know, we did cut our numbers, but it wasn't just because of tariffs. I mean, and this is a theme or, you know, a thesis we've had for a while. You know, we think there's a lot more going on than just tariffs that have been weighing on, you know, growth outlooks. And this, you know, correction that we've been involved in is very well advanced. I would say one of the biggest...

headwinds that doesn't get a lot of airtime is the fact that AI CapEx is under pressure. And this idea that the return on AI is just not there. And that's been a huge driver of growth. The other things that are going on, of course, is that fiscal spending is under pressure. And then just the stock market itself, when it's correcting here, is putting pressure on asset prices and that wealth effect that's

That's been a huge tailwind for the last several years. So, you know, the overall economy itself has not been that healthy in the United States for quite a while. And the earnings picture has not really supported the asset price inflation that we've been seeing. And, of course, the Fed not cutting rates anymore. So there's a lot going on besides just tariffs. To me, tariffs are almost the last piece.

of the earnings, and that's why we decided to do it now, is like that's the cherry on top almost to this slowdown that's going on. And the question is, does that tip us over into a recession? Right? So does the 257 look something worse? And that's what we're trying to figure out during earnings season.

Is our company now going to take action, meaning, you know, layoff employees and and we have a labor cycle finally? And I don't know if we're going to get clarity on that, but that's what I want to be looking for. And also on the policy front tax cuts, because it sounds like in Washington, as these negotiations take place, looking for pay for us. I'm not so sure this is a certainty that we're going to see corporate tax cuts.

Well, that's right. I mean, I think what they're trying to negotiate with Congress now is really just an extension of the tax cuts that were put in place, you know, I guess seven years ago now. So I'm not anticipating additional tax cuts. But boy, if we don't get an extension on those tax cuts, that's, you know, that's going to really hammer earnings for next year in 2026. We heard the news this morning, China ordering its airlines not to take any further deliveries online.

Boeing, I got to wonder what goes through your mind as you see this across the tape and the daily flow of evolving trade policy. Does it provide any clarity or does it add to the swirl of uncertainty? It all seems very ad hoc.

Well, that's right. I mean, this is going to be messy. I mean, China clearly is not bowing down in terms of agreeing to everything that the United States wants. And that was always going to be the case. I think the tariffs on China, those never came off, even during the Biden administration. So that's just the one that's going to be the most

contentious, for sure. I mean, we're going to have negotiations with various countries over the next 90 days. And I don't think anybody expects China to come running to the table to negotiate. I mean, that was always going to be the most contentious one. And this is just more evidence of that. What's the message from foreign exchange in the bond market? Can we infer anything with respect to foreign capital inflows into the U.S.?

Well, number one, I think it confirms what we knew at the end of last year, which is that foreigners probably have way too many assets in the United States to begin with. You know, I think we're not the only ones talking about this, but, you know, when you look at the S&P 500 making up 70% of the MSCI global, you know, people talking about U.S. exceptionalism as if it was, you know, preordained, you know, I mean, that was going to happen inevitably. And I think this...

development is only accelerating that. Our work and, you know, talking to dealers and everything else, you know, suggests that we're not seeing outright selling of treasuries from foreign governments. But let's be clear, foreign governments have not been net buyers of treasuries for quite a long time. I think the movement in currencies is probably more a function of stocks.

than it is treasuries. We have seen flows move from the United States to these other regions, particularly Europe, and back to China to some degree. Those have been the two biggest beneficiary of maybe U.S. asset prices coming down and this idea of too much capital concentration in the United States. The question now is, have we adjusted enough?

you know, has that happened? Have we seen that? And I would just point out again that this process started really three, four, five months ago. And, you know, we're probably a good way down that road. We are still somewhat bearish on the U.S. dollar because the U.S. dollar is overvalued. And it's not just a function of flows, but that will accelerate the adjustment process. What's the signal for equities for bottom? Well, for

Well, for us, and we spent a lot of time on this, like I said, we think this correction is well advanced in terms of time and price. And so what we're looking for is a retest probably of those lows we saw last week. That doesn't mean you have to go all the way back down there. But Monday, to me, was a classic capitulation day. We see it in all the data, massive volume. It was almost a panic situation.

And that means that's probably going to be the momentum low for this correction, which is now officially sort of a bear market. Anyway, slice it. And so usually when you have a bear market, you know, capitulation like that, it takes time to heal. And so what we're looking for is sort of a backing and filling, you know, choppy market for the next month or two at least. Maybe it goes further than that. And then on a retest, we want to see lower momentum.

and we want to see certain things start to outperform at the bottom. And we're just not there yet. So we're prepared for another 30, 60 days minimum of high volatility and a lot of price movement. But I'm not in a camp that we still can't see something positive

by the end of the year where we've had all the growth negative impacts now and then the growth positive things that they're going to be doing start to show up at the end of the year and the markets will figure that out, right? Is this a negotiation or the new rules of the game? It could be either. It is up to the president how he wants to negotiate. A deal is going to be made with China. Nothing's over yet. There's been a lot of confusion up to now. A 90-day pause.

This year's bear case very quickly becoming the base case.