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Bloomberg Audio Studios Podcasts Radio news Part of what's
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Interviewer (Matt)
happening around this and other giant IPOs that we're expecting this year is invest. Investors are trying to free up cash and selling other stocks, but Wall street is also digesting the latest inflation print. So we're looking at kind of an up and down trade here as well as a situation in Iran that could be good, could be bad, or could be just the same as it is. Joining us now is Morgan Stanley Chief US Equity Strategist and Chief Investment Officer Mike Wilson. Mike, even if we claw back some of the losses today, we're still seeing this rotation. Looks like may out of tech into something else. Or maybe it's investors freeing up cash for big IPOs. How do you, how do you explain the drops that we've seen today, yesterday and especially on Friday?
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Mike Wilson
Yeah, I mean, I think so. First of all, we've had this concentrated market in the last month and it's part of this rotation that's been going on all year from one cyclical group to the next. And I would actually say it's from one commodity to the next. Okay, we can go through that in a minute. And so now what happened last week, and you know, we wrote about this this week in pretty good detail, is that, you know, the earnings revisions that we've been prob with the most bullish on I think than anybody this year have even exceeded our expectations. And they've gotten to a point now where the revision breath, the leading indicator second derivative, is now at a level that's unsustainably high. Okay, so I'll give you an example. Semiconductor revision breadth got to 70%. It's only happened three or four times in the last 25 years. The S&P 500 revision breadth is close to 30%, also very, very high. So it's going to roll over. Now last week had a couple of companies report in the semiconductor industry they were fine, but the revision breath started to roll over. So it's a second derivative. And then there's lever system in that trade and that sort of starting to unwind a bit. To me, there's going to be a transition now to some new leadership.
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Interviewer (Matt)
All right, maybe it's a little too much math for my brain, but I was looking at earnings revisions and since last time, you were on. You pointed out they were pretty much convex. Right? I mean just continued to climb. We have a chart of that. We'll probably pull it up in a second. It looks like we're getting near a plateau at least for 2026 earnings revisions, which I guess makes sense. What do you, what do you make of that? You know, how much longer can we continue to head upwards with earnings earnings revisions? And what do you mean by revisions breadth?
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Mike Wilson
Yeah, so revision breadth is just that, the breadth of the revisions as opposed to the absolute level. And it leads the second derivative, the rate of change on the actual growth. So I do not expect the first derivative, I.e. the forward earnings growth to come down or fall.
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Interviewer (Matt)
We're showing it here in white 2026 in, in blue 2026.
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Mike Wilson
That white line is going to continue to go, but the revision breadth is rolling over so that there's a decele derivative which is what the market's picking up a little bit. That's a correction. That's not a change in the trajectory. So as we go forward into next year, that MTM forward earnings is going to continue to rise and that's our call. That's why stocks continue to rise into year end multiples. Don't have to rise. It's just a forward. You move forward into 2027 as you look forward for 12 months. But the rate of change matters in the short term. It matters and that's what's going on right now. That to me, to me that's, that's going to lead to some leadership change just like it did earlier in the year when we went from gold and silver stocks to metals to energy. And then we went into DRAM and semiconductors. By the way, all four of those are commodities.
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Interviewer (Matt)
I see. Yeah. Because you said earlier we're going from one commodity to the next. That's right. But semiconductors, dram, high bandwidth. DRAM is the hot commodity of the moment. Right. Are we going to shift out of that into something else?
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Mike Wilson
Well, it's happening. I mean, I mean Friday's sell off is a sign that that's exhausted. We did a chart this week is pretty interesting. We looked at silver stocks versus semiconductor stock and it's like right on top of each other. And we made this call at the end of January. We said gold's probably going to go down 30%. You know, and that would be normal. That that's what I would like to see. Because you can't stay at that pace. You know, to your point, you can't stay at that Rate of change both on price of stocks or the revisions. The key is, is there a place to rotate to that the market can kind of hold in? We think there is. And we've highlighted as consumer some of the other industrial areas like transportation stocks and even the regional banks. And by the way, all three of those areas were up yesterday in a downtape.
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Interviewer (Matt)
First off, Mike, how much does this really move markets anymore? I mean, we're kind of used to no outcome here.
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Mike Wilson
That's right. We've likened this to the tariffs a year ago. We were probably the first ones to sort of not dismiss what's going on in the Middle east, of course, but that the market has moved past the oil spike like it did with tariffs. So if you go back a year ago in June, people were still kind of hand wringing around the tariffs like because we didn't take them down. But the market moved past it and it started thinking forward and it started focusing on the earnings revisions which were turning positive at the time. And I think it's a, it's a very good analogy. Nobod really knows how this is going to work out. But what I like to say is that the world is a lot more resilient than people think around these types of activities. And you know, we've had some, obviously some facilities get destroyed in this, particularly in Qatar. And I like to remind folks that, you know, when Russia invaded Ukraine, we saw the Nord Stream pipeline get blown up and people are like, oh my God, this is. And what happened, Germany bought, you know, built a bunch of LNG facilities because the world is resilient. You know, it won't tolerate this. And I also think that ultimately, you know, Iran is fighting not just the United States and Israel on this, they're now fighting the world. Right. So the pressure is going to build here. And ultimately, like my base case is that this will enough flow is getting through now and there will be new flow and then there'll be new supply. As we're talking offline, I think this is going to lead to basically many countries basically adopting, you know, kind of going back to fossil fuels and new routes as well.
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Interviewer (Matt)
I mean, it's interesting to me that after, you know, a US helicopter is shot down, you have to assume by the Iranians and then the US launches a counter strike. We're still seeing Brent at $92 a barrel and WTI under 90. It's all the horror stories we have about inventories being dry aren't moving this market.
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Mike Wilson
That's right. Well, we're not there yet. Right. I mean, and markets, you know, they wait until the last minute because we don't know the answers. It's a binary outcome. Now, what would make me bearish is if the. If the kinetic war really escalated again, like if we went back to where it was in the first couple of days of this conflict. That's not. That's a situation that I'm not planning on. If that were to happen, yeah, oil is going to probably spike to 150 pretty quick, and we're going to have a real problem. But, I mean, that's not my base case.
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Interviewer (Matt)
Morgan Stanley's Mike Wilson still with us here at the desk. And Mike, we haven't talked about these gigantic IPOs. What do you make of the. I guess animal spirits. Right. Or else they wouldn't be here. And the mechanical effects on the market? Surely some people are selling winners to get into whatever IPO they want.
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Mike Wilson
Yeah, I mean, look, the market's been very receptive, not only to equity offerings, but debt offerings. I mean, it's been. It's been another kind of bonanza year. Not as strong as 2021, but, I mean, that's a sign of a healthy market, quite frankly, when you're absorbing this kind of supply. So it doesn't bother me. I think the, you know, the collection of Stu stuff maybe all at once can create some digestion problems, but there's plenty of liquidity out there. I mean, I gave you one statistic which I think will help maybe understand this. You know, companies distribute income, whether through buybacks or dividends, and they do about $1.7 trillion a year. That's just, you know, income back to shareholders. Now, some of that's reinvested, like dividends, but that's a lot of money, Right? And then you have inflows from retail all the time and pensioners and asset owners. So there is capital out there. And so the fact that the market's absorbing these deals doesn't bother me. The collection in one quarter can create some, you know, disruption, but I think there's. There's capital to absorb this.
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Interviewer (Matt)
By the way, that goes to the heart of my. My main question, watching this throughout the last months and years, right, because spreads have been so tight and equity indexes keep running up, investors have enough money to pile it into gold and things like Bitcoin. Where is all this cash coming from?
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Mike Wilson
Well, don't forget the bond market's been in a bear market for four years. Okay. So what we're seeing is people are not reinvesting their bond proceeds. Right. They mature and they're putting things that can actually protect them against inflation. Something we haven't talked about yet. Like the, like the average asset owner is pretty smart. They figured out that, hey. That the biggest risk going forward is inflation, which is kind of my thought. Then I want to own assets that will protect me against inflation. That's not bonds, okay? That's equities. It's gold, it's silver. It's other real assets. And that's what they're doing. So there's just a, there's a tectonic shift, okay, from the 6040 to something that looks more like 60, 2020 or even 70, 30, depending on your, you know, your preference.
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Interviewer (Matt)
So, so what is your take on inflation? Do you, are you concerned it can continue to climb from here? Because 4.2% is a pretty shocking CPI number. If we hadn't all been through the sort of Biden inflation era of 9, this would be insane. And then the core looks pretty light at 0.2. If you just month over month.
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Mike Wilson
Yeah, let me just make something perfectly clear. I'm a headline guy, okay. I'm not a core guy making all these adjustments because I live in the real world. And by the way, stocks live in the real world. Meaning, like we don't take out certain things. I mean, the earn it when. The reason why earnings are so good this year, which is part of our call, is that nominal GDP growth is accelerating and half of that is inflation. So inflation is very, very good for earnings growth and it's very good for stocks so long as the Fed isn't pulling away the punchbowl. Okay? So the fact that the Fed is now talking about core PCE like it did in 2021, and kind of justifying why they're not raising rates when maybe they should be, we'll see later this year, then that allows multiples to kind of stay where they are. And so there's a lot of similarities to me to 2021. Right. Incredible earnings story driven by higher inflation, pent up demand, and we're seeing inflation kind of breaking above levels that are comfortable. The Fed is justifying not raising rates because of core PC and maybe there's some AI productivity boom coming, which there probably is, and they're, they're going to, they're going to hold firm, and that's a recipe for higher stock prices. Now, we could run into trouble later this year if inflation continues to go towards 5%. And then the Fed's going to have to do something about it because they got to retain their credibility. So it's a very similar set to 21, which is a very good year for stocks, but it rotated around down. It's exactly what we're seeing right now. And I think it's going to be more of the same.
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Interviewer (Matt)
But I'm, I mean, I imagine your base case is that we don't get to 5% or more on CPI, that the Fed doesn't really do much beyond maybe one hike. Right. And that we continue to have this nominal GDP growth that drives earnings.
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Mike Wilson
Well, that's our base case exactly. Now I think that sets us up for something maybe a little different for next year. We'll have to see because next year we're going have a real deceleration potentially in the growth rate. Right. But between now and year end that, that growth rate is going to stay probably north of 20% on a forward basis, which is pretty healthy. So I don't anticipate a lot of multiple traction this year, but I think that could, could be, could be an issue for 2027. We'll have to wait and see.
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Interviewer (Matt)
But this base case is why you like transportation stocks, why you like shippers. I mean, today's idiosyncratic, I guess, Amazon story aside, you think that the economy is going to continue humming along and that these guys are going to ship more stuff and have enough power to raise prices.
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Mike Wilson
What's really going on, Matt, is that the economy now is seeing real velocity in the private economy. Right. We've had this thesis for a long time that we're seeing a rebalancing from the kind of government driven economy to a private driven economy. That's why all the payroll numbers now are in the private area and there's real volume going through the economy. We got real GDP growth with volume for the first time in three or four years, which is driving a lot of these sectors that have been dormant, like consumer, like consumer goods in particular. We think in the second half of this year. They were working earlier this year until inflation picked up and you know, the war kind of evolved. But we think that comes back. Same thing for things like regional banks, mistakes, transfer, transportation is another area. And by the way, tech can work in that environment too. It just got a little overcooked here. In the short term, what do you
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Interviewer (Matt)
make of the consumer? There's so much talk, probably far too much about the K shaped economy, but there are, you know, many people struggling with higher prices that are having to decide whether to buy, you know, cheaper food so they can put gas in their car. Does that not hurt the consumer stock stock story?
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Mike Wilson
It doesn't hurt the consumer stock story because 80% of the spending is done by the top 20% or 30% of the consumers. So it's just a, you know, it's not good for the people at the bottom end of that. K. But my job as a market strategist is to say, is this going to change the earnings profile? And I don't think so. In fact, we saw it this morning. Some more of these, you know, retail oriented stocks, you know, consumer consumption stocks doing quite well. And we think that's going to continue into the second half of the year, particularly if oil prices come back down.
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Interviewer (Matt)
All right. What a fantastic education. I love when you come on the show and we get to spend some time with you because I learned so much. Morgan Stanley chief US Equity strategist and chief investment officer Mike Wilson.
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