Special Report: Global Market Selloff Easing with Mike Wilson and Mohamed El-Erian
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Good morning. I'm Nathan Hager. I want to get a fuller view of what's been happening in the market over the last several days. Joining us now live, Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley. Mike, it is great to speak with you on this, what looks to be a turnaround Tuesday. Have we found bottom after the sell-off or is this a dead cat bounce for you? Good morning. Good

Good morning, Nathan. Look, I mean, nobody knows if this is going to be it or not, but I will tell you that, you know, Friday looked like that may have been it because we held the 200-day moving average, you know, into the close and then, you know, kind of gave that back quickly on pretty good volume yesterday. So, you know, look, we've been pretty clear in our guidance this year. We felt like the first half was going to be tougher.

after the strong finish, mainly because we saw mostly growth negative features in the initial moves of the administration. But in addition to that, something that doesn't get talked about much is that earnings revisions have been rolling over for several months.

and led by the big tech growth stocks. So that's a story that gets buried in the fine print for some reason, which is that this AI CapEx story is decelerating.

Obviously, the deep seek story that came out earlier this year and all of that is really what's weighed on the kind of, you know, U.S. indices as much as, say, Doge, the immigration enforcement and tariffs and the like.

So, look, the growth story has been deteriorating. Markets have quickly adjusted. We've been using 5,500 as the low end of our range for the first half. We're almost there. You know, it's hard to predict things to the dollar, obviously. What we're really focused on is the revision factors and when they could next turn up or at least stabilize. And we think there's a chance for that later this month.

because the dollar has been weaker and rates have come down a bunch. And those tend to work with a little bit of a lead. So by the end of this month, we could see perhaps some of those revision factors stabilize. And that's really the positive catalyst that we're looking for to kind of get buyers to come in here. In the meantime, you know, look, I mean, the markets have been very efficient in, you know, focusing on the areas where,

which have had positive earnings revisions and those areas being financial, software, consumer services, and media and entertainment, and likewise punishing those areas with bad revisions like

materials, energy, some of the lower quality small cap areas, consumer goods, etc. Is some of that bounce back that you're calling for in earnings revision is going to be driven by tax cuts? I only ask because we heard from the National Economic Council Director Kevin Hassett saying that the economy is going to take off in the second quarter with tax cuts. Is that what your view is?

No, we're not anticipating tax cuts to impact estimates anytime soon. I mean, maybe later this year once the legislative process continues. But, you know, the way we understand it is that these are not incremental tax cuts. These are an extension of the existing tax cuts. So I don't anticipate revision factors to increase because of that. Now, of course, if the tax cuts don't get extended, that would be a real negative. That's not our expectation at the moment.

The president has talked about this as a period of transition. If that's the case, what are we transitioning to and can it support stocks? Yeah, I mean, that's the that's the kind of the bull case. You know, Secretary Besson talked about this last week and that there's no sort of Trump put, but there may be a Trump call. I mean,

Meaning, you know, the short-term pain of some of the things that need to do to rebalance the economy, which I think is a good idea, could lead to benefits later. And the most simplistic way of kind of explaining that would be that we shrink the size of government

And that sort of liberates the private economy ultimately via deregulation and some of the crowding out that's been going on now for several years. I mean, this is, by the way, that's not a new phenomenon. The government has been growing for the better part of, you know, my adult life.

And so the fact that we're finally talking about maybe shrinking the government, I'm not really sure who's against that because we know that's an inefficient way to allocate capital. And if you can get the private sector doing that job instead, that's the payoff down the road. We'll see how long it takes to get there, but that's, I think, the explanation for what they're talking about.

Speaking with Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley. In your start to the week note, Mike, of course, you talked about putting your bottom for the S&P 500 at 5,500. We're pretty close to there now. What's the risk it could go even lower than that?

Well, the risk is that this turns into a hard landing. That's not our view at the moment. I think we need to see more damage here. But it also becomes somewhat reflexive, meaning the more the stock market goes down, the risk that that turns into consumer spending at the high end coming down as well. So it becomes kind of self-fulfilling.

So we're in we're just in that reflexive period right now. I would say, you know, as I mentioned earlier, there's no quote unquote Trump put. If you want to put it that way, I think there is a Fed put. And I, you know, I think if growth were to deteriorate meaningfully and, you know, Chair Powell talked about this last week. I mean, they have a lot of firepower to respond. So it's going to be, you know, one of these one of these years where you just got to be really paying attention minute to minute, day to day, week to week.

kind of to the changes here at the margin. The good news is that the markets have quickly adjusted to kind of what we've been forecasting, which is that growth is disappointing in the first half. And look, I mean, while the S&P is only down 8%, I mean, a lot of stocks are down 20, 30, 40%. So when these corrections happen, they happen quickly. And my guess is that we're already seeing bargains

in some areas that, you know, probably will end up being good entry points right here, right now. Well, Mike, if you're looking for a Fed put, do you think we could get one this half? Well, like I said, the downside, you know, the risk is that we have a, you know, the growth scare turns into a recession scare. And,

And we're not there yet. Right. And I think, you know, Chair Powell said that he said the economy is fine at the moment. What I'm saying is, is if it deteriorates quickly, I think the Fed will respond quickly. But that's a you know, they'll respond to growth. They probably won't respond to the stock market. So I think there's a there's a put as it relates to the growth risk.

So in our last minute, where are you advising your clients to reposition if you are advising that? Where should people be putting their money to work at this moment? Well, we're pretty comfortable right now. I mean, we have a focus list that's actually up on the year close to 7%.

So, you know, and that's really a large cap quality, somewhat defensive bid to it. You know, and so we feel like we've been positioned for this. And now the question is, when do we pivot to get more aggressive?

and get, you know, kind of go higher beta, maybe even go down the cap curve. We're not there yet, but I mean that, so we're, we think we're set up for it. And, and, and, and our portfolios are performing as a result. The key question is, you know, when is the time to get more aggressive like we did last fall?

kind of going into the election and the Fed cuts that we saw. And, you know, we'll let you know. We'll let you know when we think it's time. We don't think it's time yet. We think it's going to remain choppy here, at least for the next couple of weeks. And as you know, we publish every week. So, you know, stay tuned. Really appreciate you coming on with us to give us your latest view. That's Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley.

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We are very pleased to be joined now by Mohamed Al-Erian, the chief economics advisor at Allianz, president of Queens College Cambridge and columnist for Bloomberg Opinion. Mohamed, thanks so much for joining us this morning on Bloomberg Daybreak, as we do see futures bouncing back just a bit this morning from the broad sell-off that we've seen over the last several days. Do you think this is as far as it's going? Could it go down further? Good morning.

Good morning, Nathan. It's hard to tell. It could go further or it could consolidate. And I don't want to sound wishy-washy, but there are some really complex technicals here and there's a lot of policy uncertainty. So these are one of these is a situation where the most important question as an investor is,

that you need to ask yourself is what mistake can I afford to make? Because when the world is so unpredictable, the probability of a mistake goes up. No one wants to make a mistake, Nathan, but sometimes mistakes are forced on you and people have to make sure that their mistakes are recoverable. Because the good news is with time, most investment mistakes are recoverable.

Are you implying that it was a mistake to expect that we would see broad stimulus right away from President Trump? The market seemed to be pricing in after his election in November. So I think, Nathan, the market understood that there were five policy areas that the president intended to pursue that would impact corporate profitability and financial markets.

and you know them, is trade and tariffs in particular. It's about public sector reform and what Doge is doing. It's about energy. It's about deregulation. And the view was that we will get a big bang, that the president would move on all five simultaneously. And the

markets would benefit from deregulation, they would benefit from lower energy prices, and they would be able to absorb the little disturbances that comes from tariff and doge. As it turns out, we're getting the tariffs and the doge first, and the others will come later, including tax cuts. So the question that the market has to deal with today, Nathan, is can we manage this bumpy journey

to a better destination. And that is what people are trying to figure out. As we try to figure this out, Mohamed, is U.S. exceptionalism, something you've been talking about for quite some time, is that at risk now? I think what's at risk is one of the U.S.'s edges. And it's really important in financial markets and in the global economy to understand what your edge is.

And one of the US edges is predictability and the rule of law. And the more these two things are questioned, the more people are going to start questioning economic exceptionalism. The other elements of economic exceptionalism are still sound. We have an incredibly entrepreneurial economy. We have one of the best private sectors. We are relatively closed, meaning that other countries can't force outcomes on us.

So there's a lot that's still going well for the US economy, but there's a question about this edge of predictability.

transparency, and the rule of law. We're speaking with Mohamed Al-Aryan, columnist for Bloomberg Opinion and president of Queens College, Cambridge. Mohamed, what brings U.S. exceptionalism back more strongly for the market as we continue to watch these policy uncertainties play out for investors? I'll quote a CEO friend of mine who simply said,

I just want to know what operating environment I am in. Are tariffs going to stay? Are they not going to stay? Is there going to be a massive layoff from the federal government or not? Is the federal government going to honor their commitments in terms of contracts or not? Clarity is what people want, Nathan. The US is agile enough to operate in many different environments.

But what business leaders need is clarity. And you're starting to hear this phrase, wait and see, over and over again in corporate calls. Companies are just waiting to see what's happening before they commit to major expenditure. The problem is if they wait and see, and if consumers start feeling income insecure, then we could easily book ourselves or wait ourselves during a recession.

Are investors finding clarity outside the U.S.? Is that something that could cause investors to think about putting more of their money into assets outside the U.S.? That's happening. There's been an enormous upending of all the consensus trades that were in place at the beginning of the year. So in the beginning of the year, consensus was favor U.S. equities over the rest of the world.

It was US yields will go higher while German yields will stay low. It was the dollar was strengthened, especially against the euro, which may reach parity. All those trades have been turned on their head. People are favoring foreign equities relative to the US. They've massively outperformed the US. We've seen a significant compression in the yield differential between the US and Germany.

And the dollar has weakened. It's another 0.5% weaker today. And the euro, which was expected to go to parity, is at 109. So the market has seen a reason to exploit what have been significant valuation differences. Why? Not only because there's a growth scare in the US, but there's the hope for what's called a Sputnik moment in Germany in particular. That Germany will...

Sorry, go ahead. Do you think we could see clarity from the Federal Reserve, or do you think the Fed is going to stay on the sidelines waiting for some of this policy uncertainty to get ironed out from the Trump administration? Chair Powell made it very clear. They do not see a reason to move. They will also be in a wait-and-see attitude. Is that the right move? I mean, what could get the Fed off the sidelines? So, Nathan, you know that for a very long time,

I've complained that the Fed is overly reactive, that by being so reactive, whether it's data dependence with wait and see, it tends to add and accentuate volatility rather than act as an anchor of stability and as a no-stop. But this is the reality of today's Fed. After the big mistake they made in 2021-22 by calling inflation transitory,

that become very reactive. So we should not expect the Fed to take the lead here. - I want to get into your latest column for Bloomberg Opinion, talking about the Fed. You were arguing that the fixation on the 2% inflation target is risky. Talk a little bit more about that view and why you see that risk, what the risk is. - You know, the 2% target is a historic accident.

It was something that the Reserve Bank of New Zealand came up during an inflation targeting exercise. And it stuck because the world entered a massive phase of disinflation. The entry of China into the global economy was a very positive supply shock. The dismantling of the Soviet Union was a very positive supply shock. And we didn't have to worry about inflation. And 2% seemed fine.

Now, we are having not favorable supply shocks, but unfavorable supply shock. The global economy is fragmenting, supply chains are being rewired. We're having tariffs, we're having trade wars, we have a rapidization of investment tools. In a world like this, you have to ask the question, is 2% still the right target? Because if you pursue the wrong target,

then you will sacrifice growth, you will sacrifice employment, and ultimately you will undermine the independence of the Fed. Now, I don't think the Fed will change its inflation target anytime soon, but it certainly needs to be thinking about whether 2% is the right target. Well, what would the market impact be if the Fed did decide to change its 2% inflation target, move things higher? How would the market react to that?

And that's the argument that's being used, that if you change it, then you will destabilize inflation expectations. I think that argument has been taken to an extreme. Most of us who believe that the Fed should think about this

suggesting two things. One, the change wouldn't be massive. It would include going to a band, not a point estimate. And the lower end of that band would be either two and a quarter and two and a half. So call it a two and a half to 3% inflation target. That is not something that will fundamentally destabilize market.

And the second thing that we argue is it can be done in a phased manner that doesn't destabilize markets. I wonder if inflation expectations are starting to get unanchored now when we're seeing a lot of survey data showing 3% inflation expectations in the short to medium term and a lot of worry, as we've been talking about, that tariffs could raise prices longer term.

Yes, and we saw another one at 4.8 two weeks ago. So inflation expectations have moved up as people have realized that we're having all these disruptions. I think people have also realized that if the Fed was truly pursuing a 2% inflation target, we would be speculating in the marketplace not about how many cuts are we going to get this year, but we'd be speculating about when is the first hike.

And we will get the CPI report tomorrow. And my hope is that it's not hot. But there is a sense in the marketplace right now that actually 2% is not the target being pursued, but no one quite knows what is being pursued. And that's the danger that there is right now in this environment.

So with this idea that we could see inflation start to get unanchored, what does that mean for the growth outlook when we're seeing so much concern in the market with this sell-off that we could be heading into, if not a slowdown, a recession? So let's speak numbers, Nathan. The U.S. economy grew by 2.8% last year. Coming into this year, the consensus is

forecast was 2.5. I strongly believe that we're going to have a massive round of revisions to these forecasts and that the consensus forecast will fall from 2.5 to somewhere between 1.5 and 2. It's not recession. In fact, my probability of recession is 25 to 30%. But it is close to this notion of stall speed, which is about 1%. So the US is looking right now

at slower growth, and the US is looking right now at higher inflation than what was expected a few months ago. It's a good old-fashioned stagflation. It's the smell of stagflation, I want to stress. Those of us who lived through stagflation in the 70s and the early 80s think that this is nothing, but it is a whiff of stagflation for an economy that has not had to deal with this.

Really appreciate the extended time this morning, Mohamed. Great to have you with us on Daybreak this morning. That was Mohamed El-Erian with us this morning. He is the chief economics advisor at Allianz, president of Queens College, Cambridge. And of course, he is a columnist for Bloomberg Opinion. You can find his columns, O-P-I-N-Go, on the Bloomberg Terminal.

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