Morgan Stanley CIO Mike Wilson Talks Market, AI Trade
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Let's discuss now with Morgan Stanley, Chief U.S. Equity Strategist and CIO, Mike Wilson. And Mike, it didn't feel like things were that fragile in May, a gain of 6.2% on the S&P 500, despite what we were just talking about in the last block. All this uncertainty that's out there, all this caution from corporate America, what do you make of where we stand right now? Well, I would say the fragility got priced. We had a big sell-off, 20% sell-off plus, 30%, 35% in most stocks.

And I think the fragility now has moved to the bond market. That's where the main concern is now, whether it's the global bond market with JGBs kind of getting out of bounds, and of course now with term premium in the U.S. Treasury market. I think that's where the risk is the greatest. The growth fears have subsided.

Because, look, we did take the off ramp on the tariff concerns. And from my perspective, I mean, we were probably weeks away from having a recession. If those 140 percent plus tariffs had stayed on, I don't think there's any, you know, it's very little doubt that corporates would have had to take action with the labor cycle.

And but now that it's backed off and the stock market's up, you know who watches stocks more than me and us? CEOs. Yeah. So stock market recovers, loosens financial conditions. They say, you know what? Hold off on the layoffs because things may be turning around. And I think we bought ourselves quite a bit of time. And that's why the markets responded to that. I don't think it's unusual. You know, CEOs rarely admit that to us. That's why I was laughing. They always say, I don't watch the stock on the day-to-day basis. But of course they do.

Mike, you think that the bottom is in and that the second half is going to be better, or at least you started the year saying the second half is going to be better than the first half. Do you still think that? I mean...

Obviously, we came down a lot, but we came back a lot. And now we're flirting with 6,000 again. That's right. Markets and economies are reflexive. We know that. And I think we have a unique view coming into this year. Our view is that things were already slowing dramatically, and particularly on earnings. Earnings revision breath was rolling over. The AI story was losing steam. But all of those things now have bottomed.

from a rate of change standpoint. And that's what stocks care about. That was the focus of our mid-year outlook, was that the rate of change is now bottomed. It bottomed in economic terms and fiscal monetary policy, I think, is bottomed in terms of the most hawkish we're going to see. And that is all going to now lead to a better rate of change in the second half, which the stock market is already discounting.

Are we already back to a bubble?

We're here with Morgan Stanley's Mike Wilson. That seems, wow, that's an interesting call. That's a way to get noticed on a Friday. I mean, bubbles are, you know, apparently every year now in certain things. I mean, I do agree with Michael in the premise, okay? We've been in an environment for, I would say, post-GFC, where policy has sort of elicited, you know, mini-bubbles in certain assets. The money moves to the hot areas.

kind of toy, whatever it might be. But it's nothing like the late 1990s. I don't think what we're seeing in AI, anything like the late 1990s, it's just not as broad. There are four large companies spending all the money. There are maybe eight to 10 big beneficiaries of that spending. That was like a mini bubble. We talked about that at the end of last year. One of the reasons we were a little bit more negative

and some of the stocks coming into the year was because there was a deceleration in growth but it's not like in the nineteen nineties when you get every enterprise overspending on equipment you had is huge IT spending bubble so I don't agree that we're in a bubble but I do think the policy we've chosen okay which is to at every sign of trouble come in and stop it it does elicit that type of behavior where that's why you get this chasing going on because

you know the by the dip is a function of that policy that we've been doing for 15 years yeah I mean largely if you take a look over the grand scope of time by the dip his work because stocks go up in the long run but I take your point it kinda feels like bubbles in the eye of the beholder here but I am curious where

you think we go from here, especially when it comes to the AI trade. That narrative had been out there that, you know, it was getting kind of tired. There was a lot of existential worries over deep seek and cheaper models coming through. Canceling leases. Exactly. But it feels like, especially with these NVIDIA results that were this week somehow, it feels like a long time ago, uh,

We're still putting our foot on the gas here. Well, what I would say is that the AI is transitioning from the infrastructure place, so the investment cycle, to the adopter phase. And that's what we've been talking about for the last six months. Now, we have the compute power. It's built. There's going to be more to be built. But that initial surge is kind of done, and now it's going to continue, but at a slower pace. And now the fun part starts. Let's build the application layer.

let's build that the killer applications that then can make you we can diffuse the technology into the economy you know the price is coming down that's when technology takes off that's the that is the essence of Moore's Law and tech diffusion that's when you can actually get the productivity benefits and so we've we've always had a view that 25 was going to be an "eh" in terms of productivity but 26 and 27 is when we think that productivity benefit can start to come through is that what drives us to 6500 I mean

That combined with the fact that tariffs turn out to be not so bad, at least at these levels, and no one cares if we blow out the deficit another couple trillion dollars. Well, it's another part of our rate of change argument, right? So that AI now is moving to— Focus on the rate of change. Exactly. That was the title of your note. Exactly. And so AI was a negative in terms of ROE and return on invested capital. It was a cost.

And now the rate of change on AI from a broader market perspective is turning into a tailwind for margins and productivity. And that's what the market is. That's another factor in our more positive view over the next 12 months. Well, I actually want to go back to the bond market. Speaking of the deficit, you mentioned before the break that things are actually looking a little bit fragile, not so much in the equity market, but perhaps the bond market. And I'm curious, in your role as...

as Chief US Equity Strategist, how much time are you spending looking at the 10-year yield? Well, I spend a lot of time looking at the 10-year in any environment because it is the pricing mechanism for all assets. You know, as we've said for years now, 450 is kind of that crossover point and it still continues to be a crossover point. When you get north of 450 on a 10-year, you start to see negative correlation to equity multiples. Okay, so we're right around that level.

And by the way, I'm pretty sure the authorities know that as well. So they try to defend those levels. I don't think we're going to see a real defense. Authorities meaning the Fed? Yeah, all of them. Fed, Treasury. Treasury. But not Congress. Well, Congress is a different animal. And I've made this statement before. It's very controversial. I believe Treasury is somewhat captured by Congress. They've got to fund it. And the Fed is somewhat captured by Treasury. They've got to help out. So they work, you know, it sort of starts with the spending.

and then it trickles down. And so, you know, I don't think we're going to see an aggressive action until we get to 5%. If we get to 5%, we said this last time, going to 5% is going to be bad for stocks in the short term. However, if we get to 5%,

I'm pretty confident they're going to intervene. And that will be positive. For better or worse, it feels like we are just glued to 4.5%. We just toggle around in a range around that number. Until we get over it. Until we get over it. And then we watch for five. But then we go back down and we're back at 4.5%. At least that's been the story of the past couple months. So Mike, what do you think?

make of that? Well, I would say the other side of that, too, is let's not ignore what's going on in Japan. They're way ahead of us in terms of using the money printer to kind of backstop bond markets. They've been doing it for 30 years. And QE, they were the originators of that. And we followed suit. And so now the question is, okay, now they have inflation.

And the yen, by the way, is a big part of that. So the question is, can they control the yen's movement? I don't know if they're more focused on the yen going south of 140 or they're more focused on keeping JGBs from blowing out to higher levels. But it appears to me, as an observer of markets, that when the 10-year yield or 30-year yield gets to a certain level in Japan or the yen gets closer to 140 against the dollar, we also see intervention. Right.

So these are all related. These are all related. But the fact that we're seeing these things get pinned around these key levels suggests to me that they're observing it and they're going to try to control that. All right. Keep an eye on Japan. We'll be doing that over the weekend. Hope you have fun, too. That is Morgan Stanley's Mike Wilson. Great to speak with you. How can you grow your business from idea to industry leader? Bring your vision to life with smart business buying tools and technology from Amazon Business. From

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