Morgan Stanley Chief US Equity Strategist Mike Wilson Talks Fed Rate Cuts

Summary

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Bloomberg Talks Podcast – Episode Summary

Episode Title: Morgan Stanley Chief US Equity Strategist Mike Wilson Talks Fed Rate Cuts
Date: November 3, 2025
Host: Bloomberg (John, Lisa)
Guest: Mike Wilson (Chief US Equity Strategist, Morgan Stanley)

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Episode Overview

This episode features Morgan Stanley’s Chief US Equity Strategist, Mike Wilson, in a conversation with Bloomberg's John and Lisa. The discussion revolves around the aftermath of a rolling recession, the Federal Reserve's approach to interest rates, the evolving US economic and market cycles, and the critical role of capital expenditure—especially in the context of AI, big tech, and broader market recovery in 2025-2026. The episode is rich with insights into the current economic climate, market cycles, the importance of Fed rate cuts, and the changing dynamics of large technology companies.

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Key Discussion Points & Insights

1. The “Rolling Recession” and Recovery

• Summary:
  Mike Wilson posits that the US economy has been experiencing a “rolling recession” over the past three years, with various sectors taking turns in contraction while the government propped up growth. He pinpoints “April capitulation day” as the moment the government’s portion of the economy finally experienced recession-like conditions, marking the end of the rolling downturn.

• Notable Quote:

  “For all the companies that haven't been doing well for the last, I would say, three years, we've been sort of in a recession, I would argue—strong. We've done the work on this… most the private economy kind of suffering, government kind of carrying the water. And then we basically saw all of that come to fruition at the end in April. April capitulation day, as I call it…”
  —Mike Wilson [00:35]

• Current Phase:
  Wilson now sees the economy entering a “rolling recovery,” but emphasizes it's uneven across sectors:

  “It's not like everything flushed at once and everything recovers at once. So it is going to be staged…Semiconductors being an early cycle group. But we're not seeing the other… early cycle groups recover the way they typically do in a new economic cycle.”
  —Mike Wilson [01:50]

2. The Fed’s Interest Rate Policy – “Behind the Curve”

• Fed’s Position:
  Wilson is clear that the Federal Reserve remains “way behind the curve” on interest rates. He argues that rates are still too high to stimulate broad-based private sector growth.

  “The Fed is behind the curve on rates. They need rates much lower if you really want to get the private economy moving.”
  —Mike Wilson [01:50]

• Rate Cut Thresholds:
  He uses the two-year Treasury yield as a barometer:

  “My barometer is always the Fed is behind the curve if the Fed funds is above two-year treasury yields, and in order to stimulate the private economy I would say they need to be well below that. So that's 50 basis points just to get to neutral and maybe another hundred plus to get to something that's more stimulative…”
  —Mike Wilson [02:30]

3. What Triggers Broader Market Recovery?

• AI and Narrow Leadership:
  Wilson notes current market strength is narrow, led by AI and semiconductors. For a much broader rally—including small caps—meaningful Fed rate cuts must occur.

  “In order for that transition to work, the Fed has to cut though. That's what it's contingent on.”
  —Lisa [03:55]
  “If you go back and look at all these different economic cycles, small caps and… lower quality stocks typically don't outperform until the Fed gets below two-year treasury yields.”
  —Mike Wilson [04:00]

• Other Catalysts:
  While capital spending (capex) and deregulation help, the pivot only gets “solidified” by lower rates.

4. Big Tech in a New Investment Cycle

• Shift in Behavior:
  The discussion highlights a shift among major tech firms toward higher capital expenditures funded via increased debt, rather than the classic “asset-light, capital return-heavy” model.

  “We're used to companies that were investing tons. Ultimately they were giving it back to shareholders. Now we've seen… companies… spending tons and then come into the debt market to fund it. That's not what we're used to with these names.”
  —John [05:06]

• Market’s Role:
  Wilson points out that the market acts as a governing factor. Increased capex is being rewarded for now, but if cash flow decelerates, management will quickly respond by adjusting spending.

  “If all of a sudden the market starts to… become a governing factor on those stocks, I can guarantee you that the management teams are going to say, well maybe we aren't going to spend quite as much.”
  —Mike Wilson [05:29]

• The Debt Cycle:

  “In all of these build outs… we got to, we're now into the debt part. Okay, so now they just raised a ton of capital. Well, they're not going to sit, they're going to spend it. So that's another reason to be excited on one hand…”
  —Mike Wilson [06:29]

• Implications for Capital Return:

  “Capex now as a percentage of free cash flow is pretty high for these businesses. But once again, I want to go back. This is… by design, okay. The tax bill is basically incenting these companies to do it now… the administration is… really encouraging businesses of all types to start investing for the first time in 15 years.”
  —Mike Wilson [07:04]

5. Strategic Takeaway – The New Market Cycle and US Equities

• Cyclical Shifts:
  Wilson warns that investors can no longer expect decade-long expansions. Instead, the market is characterized by “hotter but shorter cycles."

  “We're not in these 10 year economic expansions anymore. And so it's two years on, one year off. Two years on, one year off. That's what we've had since COVID right? 2020, 2021 good. 22 bad, 23, 24 good. 24, 25, not so good. Now we're into a new two year cycle.”
  —Mike Wilson [07:53]

• Equities Outlook:

  “I think that the valuation is telling you that the growth is going to be better than we think. My view is that earnings growth [is] to be better next year than people expect. Now on the other side of that, I do think we're in a different environment…”
  —Mike Wilson [07:53]

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Notable Quotes & Timestamps

• On Rolling Recession:

  “April capitulation day, as I call it, was basically the government recession that was the final piece of the rolling recession… The markets figured all this out.”
  —Mike Wilson [00:35]

• On Fed Rate Cuts Required:

  “They need rates much lower if you really want to get the private economy moving.”
  —Mike Wilson [01:50]

• On Current Market Breadth:

  “AI Capex is still… one of early recoveries here, semiconductors being an early cycle group. But we're not seeing the other quote unquote early cycle groups recover the way they typically do in a new economic cycle. Why? Because the Fed is behind the curve.”
  —Mike Wilson [01:50]

• On Small Caps and Fed Policy:

  “Small caps and… lower quality stocks typically don't outperform until the Fed gets below two-year treasury yields.”
  —Mike Wilson [04:00]

• On Big Tech Spending:

  “The asset light story is being called into question. We haven't seen it yet, although last week was the first sign. We saw pretty divergent performance between Some of these. And that's, that's a risk…”
  —Mike Wilson [05:29]

• On Investment Cycles:

  “We're not in these 10 year economic expansions anymore… now you have a higher velocity economy, that means you're going to have to trade it a little bit more. But right now I think it's, you know, we're in pretty good position.”
  —Mike Wilson [07:53]

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Key Segments & Timestamps

• Introduction & Rolling Recession Discussion: [00:22]–[01:50]
• Fed Policy & Rate Cut Requirements: [01:50]–[03:55]
• Broader Market Breadth & Trigger for Small Cap Outperformance: [03:55]–[04:30]
• Outlook on the Fed in 2026: [04:30]–[05:05]
• Big Tech’s Shift in Capex and Capital Structure: [05:05]–[07:41]
• Summary on US Equity Outlook & Market Cycle Dynamics: [07:41]–[08:31]

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Episode Tone

The tone is analytical and pragmatic, with Wilson exuding cautious optimism layered over a clear-eyed awareness of both economic and market risks. He remains confident in Morgan Stanley’s outlook, but stresses the need for investors to adapt to the rapid and irregular cycles of the new era.

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TL;DR

Mike Wilson argues that the US is coming out of a multi-year rolling recession, but that the recovery is uneven and contingent on significant Fed rate cuts. The ongoing investment boom, especially from big tech, is reshaping market dynamics, but creates new risks and uncertainties. Investors should prepare for shorter, hotter market cycles—and watch closely for policy pivots from the Fed as the signal for broader market participation.

Transcript

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[John]

News Mike, Good morning, sir.

[Mike]

Good morning, John.

[John]

I want to pick up on, I think, a core view of yours for 2025. Going into 2026, really recessions behind us. I think that's somewhat unique to you and a team at Morgan Stanley. Just build that out for us.

[Mike]

Yeah, I mean, you know, we try to work six months in the future. I think, you know, a year ago, I think we had this conversation after the election. You were saying, mike, you sound more optimistic and I've heard you in a while. And it was kind of, we were thinking six months in advance. We thought the first half would be tough as they transition from the kind of growth negative policies to these growth positive policies. All this capex you're talking about is right in line with, with the big beautiful bill. I mean, they're trying to basically reduce consumption, increase investment. Okay. It's a totally different economy. And, and what that is, it's a, it's a higher velocity economy. For all the companies that haven't been doing well for the last, I would say, three years, we've been sort of in a recession, I would argue strong. We've done the work on this and you know, we've done the analysis with respect to the rolling recession that has been in place for, I would say three years. Most the private economy kind of suffering, government kind of carrying the water. And then we basically saw all of that come to fruition at the end in April. April capitulation day, as I call it, was basically the government recession that was the final piece of the rolling recession. And if you actually look at the challenger job cuts and you look at the revision data now on the, on the, on the payroll data, it clearly looks to me like a rate of change low in payrolls and a rate of change high in challenger. Job cuts came in April. So the markets figured all this out. That's why revision breadth has gone straight up.

[John]

So rolling recovery, where are we in that stages?

[Mike]

So we deemed it the rolling recovery in April and we're now seeing that like these areas of the market are not everything's going to recover at once because it's an unorthodox stocks recession. It's not like everything flushed at once and everything recovers at once. So it is going to be staged. And we've seen that in the market we're still narrow, quite frankly. AI Capex is still, is kind of one of early recoveries here, semiconductors being an early cycle group. But we're not seeing the other quote unquote early cycle groups recover the way they typically do in a new economic cycle. Why? Because the Fed is behind the curve. The Fed is way behind the curve on rates. They need rates much lower if you really want to get the private economy moving. Rates are too high, much lower.

[Bloomberg Audio Studios Announcer]

How much lower do you think that really is required to get that broadening out?

[Mike]

Well, let's just start with the two year treasury yield. Okay. So my barometer is always the Fed is behind the curve. If the Fed funds is above 2 year treasury yields and in order to stimulate the private economy I would say they need to be well below that. So that's 50 basis points just to get the neutral and maybe another hundred plus to get to something that's more stimulative for the average company and the average consumer.

[Bloomberg Audio Studios Announcer]

Are you right now betting on that broadening out and expecting maybe AI to underperform going forward as they invest more in some of these debt sales and the infrastructure side and the rest of the economy plays catch up?

[Mike]

Absolutely. Think about the trickle down effect of this capital spending. I mean it's not just going to be semiconductor companies. There's, there's a lot of infrastructure, a lot of job creation. There's a lot of velocity in the real economy. And the lending channel starts getting going perhaps for small medium businesses that job creation deregulation is another part of that story. Okay. So absolutely that's what should happen if things play out the way they could. Now there's risk to that. Let's say the Fed continues to say, hey, you know, we still think there's inflation risk. We don't like the inflation rate at 3%. We're not going to raise our, our targets there. And then we just kind of drag their feet. It's going to stay narrow, then it's going to stay up. The quality curve and that's where we are right now, Lisa, is that people basically are trying to choose between those two outcomes. And I would say right now most institutional community is still huddled into the high quality stocks. They haven't really made the transition. Well, we have in some of our guidance. Yeah, absolutely.

[Lisa]

In order for that transition to work, the Fed has to cut though. That's what it's contingent on.

[Mike]

It's one of the main things now. D wrig is a big part of that. Okay. The Capital spending is a part of that. Those can happen without the Fed cutting significantly. But it would really, it would really solidify it for me. And if you go back and look at all these different economic cycles, small caps and you know, lower quality stocks typically don't outperform until the Fed gets below two year treasury yields. We've, we've documented this. So by the way, it doesn't mean these stocks can't work in absolute terms. It just means that relative outperformance you typically get in that early cycle rotation needs Fed funds to be much lower.

[Lisa]

If you look at the Fed next year, are you just expecting a Federal Reserve that's markedly different than it was today, than it is today?

[Mike]

Well, I think they're just, I think they're being patient here. They're doing their job. I'm not one that sit here and criticize the Fed left and right. What I'm, what I see is just a very weird economic cycle. And I think we've kind of, we've solved the puzzle a little bit on this. And that's why I feel fairly confident that our narrative we laid out this year is played out now. I'm getting evidence in the marketplace. I feel more confident in that narrative. And that's sort of the difference. I just think they're not there yet. You know, they're not, they're not where I am in my head. I could be wrong, but I'm pretty confident about that outcome.

[John]

Can we finish on big tech?

[Mike]

Sure.

[John]

These companies are changing. We're used to companies that were investing tons. Ultimately they were giving it back to shareholders. Now we've seen a subtle twist, I think from the likes of say matter who are spending tons and tons and tons and then come into the debt market to fund it. That's not what we're used to with these names. Typically the asset light capital return heavy. Are you noticing the same change and how should we treat those companies differently, if at all, because of that?

[Mike]

So let's talk about the risks for the bull market. We think a bull market started in April. New economic earnings cycle. Okay. There are two risks. One is that the Fed drags their feet. Liquidity, funding market stresses kind of pop up. The second one is what you just talked about is that the market starts to push back on the fact that free cash flow growth is actually decelerating for some of these businesses. And the asset light story is being called into question. We haven't seen it yet, although last week was the first sign. We saw pretty divergent performance between Some of these. And that's, that's a risk because if all of a sudden the market starts to, you know, become a governing factor on those stocks, I can guarantee you that the management teams are going to say, well maybe we aren't going to spend quite as much. Just like we saw in the fall of 2024 as we talked about that deceleration in capex. And also we saw that with, you know, other times when these companies spend much money, the market is a governing factor. The management changed their view. How, how they're guiding on the capex right now. They're getting rewarded for more Capex the market.

[John]

Is it welcome news that they're leaning on the debt market a little bit more just as this equity market starts to push back?

[Mike]

Well, I think that, I mean, I think it's a natural evolution. And just to be clear, in all of these build outs, whether it's railroads, electricity, the Internet itself, okay, we got to, we're now into the debt part. Okay, so now they just raised a ton of capital. Well, they're not going to sit, they're going to spend it. So that's another reason to be excited on one hand because we know that money is going to get spent. It's not going to sit there and collect dust. So, so, you know, typically it could last a year, two or three. I don't know. I mean, but it's hard for me to believe that the spending cycle is over when they just raised gobs and gobs of dollars.

[John]

Do you think it jeopardizes capital return programs as these companies take on more leverage?

[Mike]

Yes, competing for the, for the free cash flow. So whether it's cap and by the way, Capex now as a percentage of free cash flow is, is pretty high for these businesses. But once again, I want to go back. This is, this is by design, okay. The tax bill is basically incenting these companies to do it now. I mean the government, the administration is, is really encouraging businesses of all types to start investing for the first time in 15 years. We've underinvested in so many things, not just, you know, AI, but like infrastructure and factories and you know, automating production and robotics and things like that. I mean this, this bill is designed to get that engine of growth moving and it's happening.

[John]

Just putting all these pieces together, this was a core theme, I think a core pillar for being long US equities for a long, long time. And now it's changed. Is it still good? I think that's what I'm trying to get out here. Is this still an argument to buy U.S. equities?

[Mike]

I think that the valuation is telling you that the growth is going to be better than we think. My view is that earnings growth to be better next year than people expect. Now on the other side of that, I do think we're in a different environment where we have these hotter but shorter cycles. Okay, so we're not in these 10 year economic expansions anymore. And so it's two years on, one year off. Two years on, one year off. That's what we've had since COVID right? 2020, 2021 good. 22 bad, 23, 24 good. 24, 25, not so good. Now we're into a new two year cycle. So you just have to understand that because inflation is right under the surface and now you have a higher velocity economy, that means you're going to have to trade it a little bit more. But right now I think it's, you know, we're in pretty good position.

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