Mike Wilson: The Fed is NOT Independent, and That's Good for Stocks

Summary

The Master Investor Podcast with Wilfred Frost
Episode: Mike Wilson – The Fed is NOT Independent, and That’s Good for Stocks
Date: November 12, 2025

---

Episode Overview

In this episode, host Wilfred Frost welcomes Mike Wilson, Chief U.S. Equity Strategist, CIO, and Chair of the Investment Committee at Morgan Stanley. Wilson shares candid insights from his decorated career in market strategy, offers in-depth views on the current economic regime, and lays out why he believes the Federal Reserve is not truly independent—and why that may actually benefit U.S. equities. The discussion covers the evolution of Wilson’s investment process, his notable market calls and misses, lessons learned, and a provocative take on inflation, policy, and market structure.

---

Key Discussion Points & Insights

1. Investment Process & Market Indicators

(02:26–06:06, 14:03–16:40)

• Art & Science: Wilson’s approach blends data-driven analysis and intuition.
• Key Metrics: He prioritizes “rate of change” on earnings growth (earnings revision breadth) and policy changes, especially in the last two decades as policy’s market impact has surged.
  • “The main item that I focus on is essentially the rate of change second derivative on growth for either earnings … That’s how stocks trade.” – Mike Wilson (02:44)
• Shift in Market Structure: The marginal price setter is no longer the informed institutional investor but passive flows and retail, making fundamentals less predictive and flows more influential:
  • “The fundamental portion of the price discovery has become less important… something I hate because it’s nothing you can analyze in a proactive way. It’s more reactive.” (05:17)

2. Track Record: Market Calls, Hits, and Misses

(07:02–12:37, 13:36–14:03)

• Pandemic Playbook: Wilson entered 2020 bearish but flipped bullish at the March lows, forecasting the Fed and government response (“helicopter money”) would be highly stimulative and inflationary.
• Late 2021 Bearish Turn: Correctly anticipated the Fed’s pivot to hawkish policy as inflation became concern.
• Misses in ‘23–‘24: Overstayed bearish thesis as he underestimated the liquidity boost from the BTFP, failed to anticipate the magnitude of the AI-driven rally, and recognized too late that the market would be led by a handful of mega-cap stocks.
  • “2023 was not a good year despite the fact that the average stock performed really poorly… Our earnings revision breadth indicator was terrible during 2023, except for those seven stocks.” (11:10)
• Learning & Adapting: Experience shapes process—recent misses improved his understanding of the dynamics between liquidity, policy, and secular themes like AI.

3. Evolving Framework, Key Lessons

(13:36–16:40)

• Adaptability: Markets and indicators evolve—investors must, too. Time horizon is a crucial edge for individuals.
  • “The main advantage you have is time. You don’t have to do anything if you’re willing to … say, I’m just going to wait for the market to come to me.” (15:29)
• Only Warren Buffett Stays Unchanged: Most professionals can’t underperform for years; individuals (with discipline) can.

4. Economic Outlook & The “Rolling” Recession

(17:14–23:12, 23:38–25:45)

• Contrarian View: Believes the U.S. has already experienced a “rolling recession” from 2022–2024, hitting different sectors at different times.
  • “We actually believe we were in a recession in those years for the private economy…” (17:28)
• Current Recovery: The breadth of earnings growth has recently turned sharply positive, supporting a broadening bull market.
  • “The Russell 3000 ... the median stock has been in a very deep long earnings recession … and that just flipped positive in the second quarter.” (23:54)
• AI CapEx & Capital Investment: AI drove a capex boom; now, broader capital spending is being incentivized by tariffs, bill incentives, and policy design.

5. Market Structure & the Path Forward

(25:45–29:00, 29:00–34:53)

• Inflationary Regime: 2020 marked the start of a long inflationary period. High nominal growth needed to manage the U.S. debt load will mean higher baseline inflation—potentially 3–4%.
  • “That was the beginning of a new inflationary regime ... these regimes tend to last 30 to 40 years.” (26:54)
• Stock Implications: High-quality/‘moat’ companies have led the market, but accelerating inflation and a broadening economy will benefit “average” stocks in coming years (especially 2026).
• Passive Flows & Valuation: Pushes back on Howard Marks’ concern about passive flows distorting valuations; believes inflation is the key context.

6. The Fed, Policy, and Market “Independence”

(31:34–34:53; opening/closing)

• Not Truly Independent: The Fed’s paramount responsibility is stabilizing government funding and debt, not just inflation or full employment. He compares the current environment to the 1940s and asserts ongoing coordination with Treasury.
  • “I don’t think the Fed is independent … They have to intervene when the government needs their help. And I think that’s going to continue.” (33:32)
• Policy Response: If yields rise and volatility spikes, the Fed and Treasury will deploy new tools/programs to suppress it.

7. US Equities Outlook

(34:53–36:17)

• Constructive Bull: S&P 500 target at 7,200, expects a broadening rally and positive earnings momentum for the average stock.
• Short-term Caution: Possible year-end liquidity wobble is a buying opportunity as it would push the Fed toward more easing.
  • “There may be a bit of a wobble in the short term and that would be a tremendous opportunity to add risk.” (35:32)

8. Investment Advice

(36:29–38:00)

• For Individuals: The most important thing is disciplined rebalancing—avoid letting portfolios become excessively lopsided.
  • “Rebalancing is the single most important thing that individual investors probably do not do right.” (36:39)
• For Sophisticated Investors: Leverage one’s time horizon advantage—don’t follow fads; be patient and conviction-driven.
• For Institutions: His role is to provoke and broaden client thinking rather than overhaul processes.

---

Notable Quotes & Memorable Moments

• “The main advantage you have is time. You don’t have to do anything if you’re willing to stand there and say, I’m just going to wait for the market to come to me …” – Mike Wilson (15:29)
• “2023 was not a good year … Our earnings revision breadth indicator was terrible ... except for those seven stocks. So we just got it wrong.” (11:10)
• “We actually believe we were in a recession in those years for the private economy … And those higher interest rates have remained too high, in my view, for many parts of the economy that are levered to interest rates.” (17:28)
• “I don’t think the Fed is independent, okay? That doesn’t mean that they’re not trying to do the right thing. The Fed is not independent because they have a overarching responsibility to help the government fund itself.” (33:32)
• “I’m telling the audience right now is that we are now into an inflationary regime. And you have to understand that that means kind of two years on and one year off. And now we’re into a new two year positive cycle where inflation’s accelerating again, the Fed is on hold, and even cutting rates and tolerating the higher inflation. And that’s a very good earnings story.” (29:51)
• “Rebalancing is the single most important thing that individual investors probably do not do right.” (36:39)

---

Timestamps for Key Segments

• Investment Process & Market Metrics: 02:26–06:06
• Recap of Key Calls & Lessons: 07:02–12:37
• Adapting Strategy, Lessons Learned: 13:36–16:40
• Rolling Recession & Recovery Thesis: 17:14–23:12
• AI CapEx and Investment Cycle: 20:43–23:12
• Market Structure, Breadth Broadening: 23:38–25:45
• Inflationary Regime & Stock Market Outlook: 25:45–31:00
• Fed “Independence” & Policy Dynamics: 31:34–34:53
• Year-End S&P 500 Target & Strategy: 34:53–36:17
• Overriding Investment Advice: 36:29–38:00

---

Takeaway for Listeners

Mike Wilson believes markets have entered a multidecade era of higher inflation, necessitating a fresh approach—one that considers the Fed’s true (non-independent) policy imperatives and the ongoing evolution of liquidity, capital investment, and passive flows. He argues the next leg of the bull market will see broader participation beyond the mega-caps, provided investors recognize the realities of policy and inflation. Above all, Wilson’s advice is to stay adaptable, to use time to one’s advantage, and to rebalance, rebalance, rebalance.

---

Transcript

[A]

Howard Marks is a legendary investor in the long term. I'll take his track record anytime, but he's not a trader. Okay? And I am a bit of a trader. And what I'm telling the audience right now is that we are now into an inflationary regime. And you have to understand that that means kind of two years on and one year off. And now we're into a new two year positive cycle where inflation's accelerating again, the Fed is on hold, and even cutting rates and tolerating the higher inflation. And that's a very good earnings story. I don't think the Fed is independent, okay? That doesn't mean that they're not trying to do the right thing. Okay? The Fed is not independent because they have a overarching responsibility to help the government fund itself. I think the treasury and the Fed, just like in the 1940s, by the way, are working very closely together to manage the number one problem that we have, which is funding these incredible deficits. So this is, this is where they're not independent. They have to intervene when, when the government needs their help. And I think that's going to continue.

[B]

Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you our listeners, the edge. My guest today is a master of US equities and has boldly and publicly nailed his colors to the masks repeatedly since he became Morgan Stanley's chief U.S. equity strategist in 2017. More often than not highly accurately. He's also got the title now of Chief Investment Officer and Chair of the Investment Committee. He is, of course, Mike Wilson and joins me now. Mike, welcome to the Master Investor Podcast.

[A]

Thank you, Will. Thanks for having me. Hunt.

[B]

It's a treat to connect with you. Sadly not in person, but maybe next time. There's so much for us to get to, including obviously your current market views, but I wanted to sort of roll the clock back to start and reflect on some of the calls you've made since we've got to know each other. Me in 2016, moving to the US and obviously you became chief Equity strategist around that time. But before even doing that, how do you weigh up whether to be constructive or negative towards a certain sector or the markets as a whole? Is there a sort of set formula, set set of data points, or is there a lot of gut to it as well?

[A]

Well, it's a little bit of an art and science, as you know. I would say there are definitely certain metrics that we lean on more than others. I think the difference between myself and maybe other equity strategists out there is and I started out as a bottoms up person and really kind of did my career backwards. So I spent a lot of time, you know, trading specifically tech stocks, TMT stocks and the, and the late 90s and early 2000s and really began my career following individual security. So I've developed, I think a little bit different approach than others. And I would say the main item that I focus on is essentially the rate of change second derivative on growth for either earnings and earnings revision breadth or just, you know, in terms of expectations. And that's how stocks trade. That's how we've learned over time at the highest, like the highest efficacy metric that we follow is earnings revision breath. It's a coincident indicator, but if you catch the turns correctly, it really is quite valuable. And it works at the index level, works at the stock level, works at the sector level and it works on a relative basis. And I would say that, you know, we've used that probably the most effectively. We also of course follow policy and policy changes, particularly in the last 20 years. In fact, I've been, I've been wrong a lot of times because I've ignored policy or not ignored it, but just haven't put it in the hopper in a big enough weighting. And I think in the last 20 years policy changes and rate of change on the policy has become a much bigger determinant of equity prices in particular risk assets more broadly. So those are the two big ones. And of course interest rates fall into that category, essential monetary policies, fiscal policy. So it's really the rate of change on earnings growth and not so much GDP growth, but earnings growth and also interest rate and policies.

[B]

And Mike has that key factor, the rate of change on growth and policies, you say become less strong of an indicator of change in direction over the time or is it still as strong as ever? Just perhaps you have to look more at the long term and short term disconnects can, can exist for longer.

[A]

Well, what we've discovered in the last 10 years also is that we have this passive strategy flow dynamic. Let me kind of go into that for a minute, which is 25 years ago the marginal price setter of a security was generally a pretty well informed institutional investor, maybe as a long only asset allocator type who's really trading the fundamentals of a company's business. And now in the last 20 years it's become, you know, the marginal price setters. Become either retail passive flows, CTAs and other institutional passive flows that target, you know, Vol, or they target, you know, price momentum, etc. And so the fundamental portion of the price discovery has become less important. And that's an area where, quite frankly, I feel somewhat, we're probably one of the better position people in the world to determine kind of where the flows are. And there's sort of the institutional passive, there's the fundamental institutional, and then of course there's the retail flows. But even with our breadth of, you know, eyes and ears out there as Morgan Stanley, I mean, it's very challenging to kind of predict those flows. But that has become a galvanizing factor, a really an important determinant of prices and quite frankly something I hate because it's nothing you can analyze in a proactive way. It's more reactive.

[B]

Yeah, that's really, really interesting. Those changing shifts of, I guess where the marginal bit of AUM is over the last decade or so, as I mentioned there, we got to know each other. From 2016 onwards. You became chief equity strategist. 2017, you were correctly bullish then for a few years when people were kind of struggling for direction. But the part I want to review initially is a moment when you absolutely nailed it. I remember covering it closely and you really stood out. You were correctly bullish coming out of the pandemic. You called the low in March 2020 and then turned correctly bearish in late 2021. Of course, 2022 was a big negative drawdown year. What did you see in those two moments that led to those calls? And I think it's fair to say really kind of elevated you as know, the top equity market strategist at the time.

[A]

Yeah, I mean, I would say in, in, in the pandemic, you know, we came into 2020 with a bit of a skeptical view that we were setting up for some sort of a, you know, recession, quite frankly, and you never know what the trigger is going to be. But of course, when the pandemic hit and then it was really the lockdowns that, you know, caused the, the economy to freeze up. And when we saw that in the moment and we looked at all of our indicators, particularly the valuation indicators, equity risk premium, we were like, okay, well this is it. This is what we've been kind of waiting for. And so we were able to kind of jump in there on a valuation basis, but also knowing how the policymakers would respond. So it was, it was kind of coming in with a bit of a, you know, Skeptical eye. And then when the event hit, we were in position to flip it. And I think, you know, we've been around the block enough times. I think we kept our head on our shoulders probably more than most in that moment. And then, and then, and then of course, the Fed and the government came in with incredible amounts of stimulus and we identified that correctly at the time as quote, unquote, helicopter money. And we even predicted that there would be inflation ultimately from that, but that in the short term it would be very bullish. So the reason we were able to flip negative then at the end of 21 is we started to see the Federal Reserve, particularly Jay Powell, start to talk more bearishly or hawkishly about policy that he was going to have to deal with inflation. And I think people were still trying to catch up with performance at the time. So we were able to get in front of that. We called it fire and ice at the time. Right. There was the fire of the inflation, which is very bullish for growth, but that leads to ultimately ice because the Federal Reserve has to respond. So we didn't nail that. But of course we've made some bad calls in the, you know, we'll probably get to that in a minute. Not getting everything correct. But that was, I think that was, that was a, that was a result of our experience having the right framework around understanding how policy would respond to the shock of the emergency of the COVID event. And quite frankly, Wilf, I mean, it was also something we were waiting for from a long term perspective. And we were coming off a period of long term secular stagnation, not having enough inflation. And so we needed inflation. And that was very, very bullish for stocks for a period of time. But of course there was a governing factor when inflation gets out of control.

[B]

Obviously then the Fed did hike rates. You're absolutely correct that that led to a down year in 2022. And you did call the October low again, remarkably. But I think it's fair to say, Mike, at that point you kind of called it as a trading low. And then even though you kind of pointed it out at the time, we're a bit ahead of the curve, you didn't drastically change your positioning and remained largely kind of negative to us equities bearish for the, for the following year or so, even when stocks bounce. So did you miss something then into 2023 and early 2024? And was that, was that punishing for you? Was that tough?

[A]

Oh, absolutely. We, I mean, let me just go through it. I mean, we, we basically we got the trading low in 22 for the same reason we kind of got the trading low in 2020. I mean, a lot of our metrics were saying, you know, the same thing. We were very oversold stocks. The average stock was very, very cheap. What we missed was that the liquidity picture was actually changing beneath, you know, beneath the surface. And we, we were, I would say, just didn't have the right tools in place to see that change in liquidity, but that's what happened. And then of course, in the spring of 2023, we got the regional bank crisis. And so we, we saw that and, and didn't predict it, but we saw that, said, okay, well this is going to be now the final low. And so we were basically saying at the time that we were going to make a new low close to 3,000. We got the 3,600 and we just overstayed our welcome, quite frankly. But what we missed again was the fact that the Fed came in and provided an incredible amount of liquidity with the BTFP to help, you know, secure the regional banking system. And then the other thing, of course that came along was, was AI and you know, ChatGPT was, was launched in the fall of 2022. And we just underestimated how voracious the appetite would be for this new theme in addition to the liquidity that was being provided. So as you recall, in 2023, I mean, that was really the, I mean, that talk about narrowness of the market. It was truly seven or ten stocks and we, we just missed, I missed it in terms of the, you know, I just couldn't get ahead and say, oh my God, this is going to be, you know, this is a real theme that people are going to get excited about. So, you know, we. 2023 was not a good year despite the fact that the average stock performed really poorly in 2023. And our earnings revision breadth indicator, by the way, was terrible during 2023, except for those seven stocks. So it was, you know, we just got it wrong. And then of course, 24, we stuck around too bearish as well in the first, first half of 24 on the same idea. And yeah, we learned a lot during that period. Quite frankly, I think it helped us a lot this year, understanding the Dynamics of both AI and the liquidity picture.

[B]

And you flip bullish in June 2024. You've been largely bullish and constructive since then, but also with a trading caution at the start of this year. So the last 12 to 16 months have been, have been right on Again, just quickly, because I want to go into today in more detail in the second half of the conversation, but quickly. What flipped you in the summer of 2024 to be constructive?

[A]

Well, we did start to see revision breath start to pick up for the broader market a bit finally, that the economy was doing a little bit better and stocks were doing a little bit better and price basically the technical picture looked a lot better. That's one thing I did mention at the beginning. I use technicals quite a bit. And so that breath improvement in addition with higher prices was just like, okay, well obviously we're, you know, we got to get more constructive here. And then you're correct. I mean we, we coming into this year, I think our key insight was that Trump 2 would be different than Trump 1, because in Trump 1 we, we identified correctly that, you know, he, he was in a reflationary president, he was going to do all the pro growth stuff first and his grow negative stuff second. And this time around it had to be the opposite because inflation was still right beneath the surface. And so I think sequencing a policy was how, why we came in more negative this year, which allowed us to be very well positioned again to kind of call that low in April.

[B]

Before we get onto the picture today, Mike, I'm interested if maybe it falls into the period we just covered, but obviously you've had a long career before that as well. Is there a moment which led to a significant change in that process that you outlined for us at the top of the interview? Is there a moment you look back on where you thought, you know what, before that. I never used to consider this a factor and now it's a really important factor for me when I, when I weigh up my views.

[A]

No, I think it's, it's just evolved over time. I mean, if you think about what I used to look at 25, 30 years ago, it was very micro and it was very company specific. And it was their traditional metrics of, you know, just looking at kind of, okay, well let's just do a model and try to predict earnings here. What's the valuation look like? And so now there's just, you know, it's become a mosaic of different items. I mean, the biggest one, of course, as I mentioned, was policy. And a lot of that is these unique policies from monetary authorities in particular. We're now in an era of fiscal dominance, something that we were probably early to identify in April of 2020 and some of the dynamics there and of course these passive flows. So it's not one thing in particular, but you always have to adjust your process to the environment. I mean, I don't think markets have ever been static over long periods of time. I think that best investors in the world who I have a privilege of talking to always adjust their process because, and I would say the gout, probably the factor that forces people to do that the most, quite frankly, is price and performance. If you're wrong, by definition, you're losing money or you're not making as much money as you should be, you're not capturing, you have to decide, okay, am I going to stick with this long standing process that has worked for 30 years or, or am I going to try to make money here? I mean, the only person in the world I think who's probably stayed true to their process is Warren Buffett. I mean, he, the guy is one of the greatest investors of all time. And he's also, I think literally probably done the same thing for 60 years, you know, but he has this one major advantage that most people don't, which is time. He doesn't care about underperforming for years if he thinks he has a view on something. And let's be honest, most asset managers can't do that. Okay? Most, even asset allocators can't do that because you get fired or if you underperform for so long. But individual investors do have that luxury. But they probably don't have the skill or the wherewithal to, or even the process in place to stay with it. But, but that is the one advantage that the audience should understand that as an individual investor, as an asset allocator, the main advantage you have is time. You don't have to do anything if you're willing to stand there and say, I'm just going to wait for the market to come to me, give me good value in certain areas, or I'm going to do something that's out of consensus. Because I have a very strong fundamental view about the next five years. And I still do that, quite frankly in my own investing where I have a view on something. Three to five years out I may start to acquire position in something and just say, I'm not, not worried about making money today. This is a view I have and I think a lot of great investors do that.

[B]

I mean, and, and your position as a sell side strategist at, you know, one of the biggest banks, you, you get mark to market, I guess more often than most. So the pressure must be significant. Let's talk about the picture today. And, and clearly, as we've Already outlined, aside from that early part of the year where you, you were cautious, you've been constructive now for, for over a year. I think I'm right in saying you still are on the headline numbers on the economy in the U.S. do you think there'll be a recession in the next 12 to 18 months or not?

[A]

Well, this is probably where we have a very differentiated view. We've been talking about this for quite a while. Part of the reason we stayed bearish too long in 23 and 24 is that we, we actually believe we were in a recession in those years for the private economy, for much of the private economy, not all of it. And let me kind of go through that framework which is, you know, coming out of the pandemic, we had this incredible stimulus, you know, we call it helicopter money. And you know, that, that really affected certain parts of the economy as, you know, technology stocks, you know, to work from home had a boom in spending. We had consumer goods companies, you know, do really well because people are at home buying things for, for their house or for their, you know, whatever they're doing, you know, at home. And, and so that was the worst part of the economy in 22. There was that payback from that boom in 21. And then, since then, literally when the Fed raised rates, I would say 70% of the US economy is going through what I call a rolling recession at different periods of time. And those higher interest rates have remained too high, in my view, for many parts of the economy that are levered to interest rates. Housing, some of the durable goods areas, Autosomal, you know, commodity sectors. Manufacturing has been in the doldrums for three years. So what we think happened earlier this year is we ended up having a recession in the areas of the economy that have been kind of holding things up. Let me go through those. AI, CapEx, government and then consumer services, all three of those sectors had a recession in the first quarter, really started in the fall of 2024 with AI AI, CapEx, started to decelerate in the fall of 24. And that deceleration bottomed in April when we saw a lot of the rate of change again on capex bottom out in that April period. The other thing we had was the government had a recession in the first quarter because of Doge. And there was a massive layoff cycle that actually played through the numbers. And of course consumer good or consumer services rather has seen a major slowing, whether it's travel, restaurants, et cetera. So that completed the recession. And we've laid this out in our research in detail, we think the rate of change once again the rate of change on the jobs market bottomed in April and that coincided with earnings revision breath which is also now seeing a V shaped recovery. So we think it's pretty clear that we had the recession. Everybody missed it, effectively including the Fed because it was a very unusual recession. Typically when you get a recession everything kind of goes down at once. This time around it took two or three years with each sector of the economy kind of going through it at different points in time. And a final kind of crescendo in April which shows very clearly once again the bottoming the rate of change bottom for earnings revision breadth and for labor market indicators that we think are important, for example payroll revisions and challenger job cuts. To be more specific.

[B]

I want to come to what that means for the shape of the economy in just a second but a tangent because you mentioned the rate of change of AI Capex in the fall last year. What is that looking like now the rate of change on it? I mean the announcements are significant. Are they starting to slow the scale of the incremental AI Capex or if that does start to slow, what would that lead you to conclude?

[A]

So the AI I mean first of all the US economy has been very deficient in capital spending. Okay? We've over consumed and we've underinvested now for the better part of 20 years in my opinion and I don't think most people would disagree with that. We pull forward demand post GFC with negative real interest rates and quantitative easing and other programs to stimulate demand. But we've been under investing, which makes sense when you have negative interest rates, you've got companies have a disincentive to invest in real capital projects with real risk. Instead they do financial engineering. But now because of this, you know, with the tariffs, which is essentially a consumption tax and then using those tariffs to incent businesses to do more spending and capital through the big beautiful bill. What I expect now is that not only are we going to see AI CapEx do well, but other forms of capital spending across the US economy. And this is by design. I think the administration is trying to incent businesses to use their balance sheets to invest because that ultimately will lead to higher growth. And this is part of the story that the stock market has figured out that this higher capital spending across the economy will lead to better growth over time, probably inflationary too at some point. And we can get to that in a minute. And it's positive in the short term and probably There'll be a negative impact of that later on. But generally speaking, I've taken this view that the rebalancing of the economy now is happening on three planes. Number one, more exports, less imports via tariffs and weaker currency, more investment, less consumption via the big beautiful bill. And also the tariffs restricting consumption and then rebalancing the economy from what I call the high end to the lower middle class income consumers via immigration restriction, which should help real wage growth at the low end. And of course AI will suppress wage growth at the high end. And it is kind of interesting when you think about it that way. The policies do make a lot of sense. And I think the stock market quite frankly has figured this out. As we like to say, trust your own analysis and your framework, but then verify it through the stock market or asset prices. And I think the asset price movement we've seen this year has verified our analysis. And I think that thesis or that narrative I just laid out is one explanation for why the markets are doing what they're doing.

[B]

So I'm really interested in what that means for the stock market going forward. Because I guess what you're saying is this two speed economy that we've had for a year or longer, AI taking off and housing stocks, for example, you know, the regular economy, stock struggling. Do you expect that to flip over the next couple of years? Both in the economy and perhaps more importantly for our listeners in the stock market?

[A]

We do think it's going to be the story for 2026, meaning we should see a broadening out, which is by the way, what's with the earnings revision? Breath is telling us. Let me give you another statistic. The Russell 3000, which is large caps and small caps, probably the biggest, you know, index that we have, the median stock, okay, that, so it's not the average, but the median stock has been in a very deep long earnings recession for the last three years. Negative earnings growth for three years running. And that just flipped positive in the second quarter. And in fact now in the third quarter so far the median stock is showing 11% earnings growth year over year. That's the fastest earnings growth we've seen since the fourth quarter of 2021. All right, so that is, that is a clear indication that we are seeing the overall economy starting to heal from that rolling recession bottom that I just sort of discussed. Which means that we should see the market start to broaden out at 24. And you know, areas that have really underperformed, areas like transportation stocks, you know, some of the regional banks, perhaps Consumer goods as we see volumes pick up again, commodity related sectors, by the way, it doesn't mean that the winners have to completely roll over. It just means we're going to see more companies do better and so their stocks should do better as well. I mean we do have a K economy in the, in the, in the market as much as we do in say the consumer sectors. Right. I mean, so while the, you know, the high end consumers doing well, low middle class not doing as well, it's the same thing in the corporate world. Right. The top 10% companies are doing really well as they have scale and they can deal with this kind of weird economy. And now we think that's also changing where we could see a broadening out into 2026. The thing that's been holding us back is the Federal Reserve. Because I think the Federal Reserve does not have the narrative I have. And I could be right, I could be wrong, I think I'm right. And the federal ultimately figured this out, that the labor market has been a lot weaker than they thought, which means that interest rates can come down more than what the market is projecting. And once that happens, that broadening out will really happen in earnest.

[B]

I think you said that it would Broaden out in 2024 and I think you meant 2026, the kind of pushback to that Howard Marks offered us a few weeks ago and I refer people back to that episode. But he said he wasn't concerned about the valuation of the Mag 7 because they're uniquely brilliant companies with very strong moats, et cetera, et cetera. But he was concerned about the valuations of the other 493 because as you mentioned earlier, there's a lot of passive investing. So that's lifted all boats, as it were, and not to the extent of 30, 40 times earnings like the MAG 7, but 10 or 20% premiums to perhaps what's warranted. What's your pushback to that? Where is the market Overall for those 493 who maybe are going to have a bit better earnings growth in the next few years than they have the last few years, but they're not, you know, the Microsofts and Nvidia's of this world.

[A]

Yeah, I mean here again I think I have a little bit different view than others because I firmly believe that in 2020 with the pandemic and the response to the pandemic, right, the helicopter money, that that was the beginning of a new inflationary regime. Okay. And these regimes tend to last 30 to 40 years in duration. It's very similar to coming out of World War II, which we like in this period to, and we've written about this extensively, that we are now into a world where the government has to run the economy hot. Which means what? It means better GDP growth. Real. But also higher inflation, which means the Federal Reserve is going to tolerate higher inflation, which I think we've seen evidence that they're willing to do so. So why are they doing that? Well, because we have this incredible debt problem that there's no way we're going to grow out of that unless we run nominal GDP close to 7%, which requires inflation to be well above target. Call it 3, 4%. And that's the reported statistics. We don't get to the non reported statistics on inflation. And then of course going back to my thesis about less consumption, more investment, that gets you better real GDP growth and that creates a higher velocity economy. Okay? So that is a world in which you should be willing to pay a higher multiple for four stocks, particularly relative to bonds. Because if you're now into a 30 year inflationary regime, the only way you're going to protect your wealth or against inflation, that should be your number one concern is with things that can outgrow or outpace inflation. Now, the market has correctly chosen these. It's more than the Mag 7, okay? This is a high quality large cap bull market, really, for the last three or four years globally. Okay? There are plenty of high quality stocks globally that are trading even richer than the Mag 7. There's just not as many of them. Right. Which is why the indices globally haven't done as well. But the individual securities have done even better than some of the Mag 7. Okay? Because they have these high quality moat monopoly type businesses, which is what you should own in a world where base rates 1 1/2% for real, which is pretty good. And then you pay a very low equity risk premium. You're willing to take a 0% equity risk premium to protect your portfolio against that inflation. Now, during periods of where inflation is accelerating, the average stock does better. So go back to 2021, the best year for stocks. One of the reasons we were so bullish in 21 is because of inflation. Inflation is the elixir for earnings growth for these lower quality businesses. Right? It's called pricing power. And that's what we think 2026 is going to be. We think inflation is going to come back next year. People are like, oh my God, Mike, that sounds terrible. Isn't that what killed us? Well, not the Fed's not raising rates. If inflation is accelerating, that's when the average stock does better than these sort of higher quality moat stocks because they now are participating. And I have the evidence in my hand, the third quarter median stock is growing earnings 11% now mainly due to revenue upside. We're seeing pricing power come back into the broader economy. So what you have to do, and you know, I'm probably a, you know, Howard Marks is a legendary investor in the long term. I'll take his track record anytime, but he's not a trader. Okay. And I am a bit of a trader. And what I'm telling the audience right now is that we are now into an inflationary regime. And you have to understand that that means kind of two years on and one year off. And here's the evidence. 20, 20, 20, 21, very good. Inflation accelerating, great for stocks. 22 terrible. Fed had to kill, pull the punch bolt. 23, 24 were good. Inflationary wasn't coming down. But we had this AI, you know, phenomena along with the, the fed doing their thing. 24 and 25, we had a bare market. People, I mean, they Forget that from July 24 to April 25, we were down 35% for the average stock and even 25, 30% for some of these, you know, big moat companies. And now we're into a new two year positive cycle where inflation's accelerating again, the Fed is on hold and even cutting rates and tolerating the higher inflation. And that's a very good earnings story. So that's the framework I'm using now, which, which means Howard can be right and I can be right for different reasons in a shorter term frame and also a longer term frame.

[B]

I love that Mike and I love bringing different perspectives to this podcast. And I guess in those two episodes we've got a great snapshot for our listeners to, to weigh up what they think. I guess one of the big risks to that view would be a Federal Reserve that's more hawkish than you expect. I guess the chance of that is relatively low given the politics right now. I doubt it's going to get more hawkish from here as time passes. What about the long end of the yield curve? Could longer term rates derail that positive thesis? Is that something you worry about?

[A]

Sure. And we've had a couple episodes over in 23 and 24, quite frankly, where the back end sort of got away from the Fed, so to speak. Right. And they came in and had to squash that volatility. And here's where my view is also different. Okay, So I think there's a lot of consternation right now around, oh my God, the White House is going to control the Fed from here. It's this captured entity, the Fed. Independence is being threatened. And what I'm going to say I'm sure a lot of people are going to disagree with, but I have high conviction. If you really think hard about what I'm saying, you'll probably agree, okay, I don't think the Fed is independent, okay? That doesn't mean that they're not trying to do the right thing. Okay? The Fed is not independent because they have a overarching responsibility to help the government fund itself. Okay? It's not they're necessarily their primary function, but this idea that, oh, full employment, you know, price stability and then maybe financial stability is a third mandate. Sort of a man, a sort of a made up mandate. Well, that made a mandate is there for a reason. It's what allows the Fed to do extraordinary things and ignore the other two. For example, when we had the regional banking crisis, why didn't the Fed come in and do that? Why did the Fed come in and pump $500 billion of capital into the system? Because we had a potential banking crisis. Okay? That's their job is to make sure that things don't fall apart. In 23 and 24, all that was happening is that 10 year yields were kind of moving out, saying, hey, I'm worried about inflation. So what do they do? Well, they worked hand in glove with the Treasury Department to make sure that that was squashed. They have so many tools to do this. All right, they had, you know, they can, the treasury can buyback, can do treasury buybacks, okay? The Fed can, they have the srf, right? The stability fund, they have the repo facility and they're doing it now again. Right. So what do they do? Recently they announced that they're ending cut early and they're going to participate in money markets because of financial stability reasons. Well, the reason they're participating in money markets is because that's the way the government is funding itself. They're issuing more bills. So I don't really, I don't. This is not a, you know, made up, it's not a made up story. And it's also not all that complicated. It's very straightforward. I think the treasury and the Fed, just like in the 1940s by the way, are working very closely together to manage the number one problem that we have, which is funding these incredible deficits and the debt that's already on the balance sheet. And that doesn't even include the entitlement programs that are also growing, you know, pretty quickly. So this is where they're not independent. They have to intervene when the government needs their help. And I think that's going to continue. And so in other words, if we see bond volatility pick up in the back end and rates start to move ahead as the Fed starts cutting rates, I can guarantee you they're going to find a new program to reduce that volatility. Now the question is, will they eventually lose control? Is there a big enough problem where it doesn't matter what they do, the bond market is just going to get away from them? I don't think we're anywhere near that stage. But it is a risk in the long term that this problem just becomes too big to control.

[B]

We're nearly out of time. Mike, two final questions. The first is, is just gauge for us how, how constructive therefore you are on US Equities. What's your target for the end of next year?

[A]

So we're in the process right now of doing our year end target, but I'll give you what we've been saying, you kind of extrapolate. So we, we've had a view that may, where we have published targets of 7,200 for the S&P 500, but with a rotational call once again that where we see broader participation and, and, and we'll be publishing our year end outlook here shortly, probably around the time this, this interview comes out. And you know, listeners can, can read that. But, but generally we have a very constructive view for the next 12 months. Now what I will tell you is that on this liquidity front and on this, you know, perhaps the back end getting a little wobbly. That is probably my number one concern in the very short term which is at around year end liquidity constraints and, and the fact that the Fed is moving slower then I think they should be not only rate cuts, but on balance sheet expansion. There may be a bit of a wobble in the short term and that would be a tremendous opportunity to add risk probably going into the first quarter. And that will be the catalyst then to get the Fed to do what I think they should be doing, which is cutting rates and adding more liquidity which will help that broadening out story that I talked about and really essentially pay for these, what I think are positive changes on the policy front to rebalance the economy on those three fronts that we talked about earlier.

[B]

And then Mike, just finally we've asked this question to many of our guests. And it's. What is your overriding piece of investment advice for our listeners?

[A]

Well, I think it depends on who we're talking to, whether we're talking to professional investors or we're talking to individual investors. I think for most individual investors, if you can afford it, if you have enough assets, you should have some sort of advisor who can help you not only manage your own emotion, you know, like rebalancing. I think rebalancing is the single most important thing that individual investors probably do not do. Right. They, they end up their portfolios and getting totally unbalanced. And you know, part of staying in the game is, is not being, putting yourself in a position where you're taking too much risk in, in very certain areas that can then put you in a bind. Okay, so that's number one, I would say if you're an asset allocate or asset owner rather, who's fairly sophisticated, use that time advantage I talked about earlier, you know, to your own advantage. In other words, don't, don't do the flavor of the day just because everybody else is, is doing that. You know, think for yourself. Ask yourself, is this, is this something I really want to do with my own money? And then, you know, for our institutional clients, I mean, it just depends on who I'm talking to. Everybody has their own. I'm not going to change our institutional clients investment process. My job there is to make our smartest clients think about things they're not thinking about. Like I'm, I tend to, I try to be somewhat provocative for, for a reason. Not because I'm trying to get attention, but because I'm trying to make our institutional clients think about things they may be missing and that can help them in their own investment process. I'm not here to change their investment process. I'm here to help them do a better job of what they, they already know how to do really well.

[B]

Well, Mike, you've provoked a lot of thought for me today. I'm sure you will with our, our listeners as they tune in in the next 24 hours. It's been a real pleasure having you on podcast. Thanks so much for joining us.

[A]

Thank you and great to see you again, Will.

[B]

That was Mike Wilson, the chief U.S. equity strategist of Morgan Stanley. Next week on the Master Investor Podcast, we'll be joined by the CEO of Carlisle, Harvey Schwartz. If you've enjoyed the conversation, please do subscribe and leave us a five star review. And remember that nothing you've heard on the Master Investor Podcast should be considered direct financial advice. The Master Investor Podcast is produced by Paradine Productions and Master Investor Podcast Ltd. In association with Birdline Media. If you've enjoyed the podcast, please do subscribe on YouTube or click follow on your podcast platform, and then you'll be automatically notified each time a new episode drops. Once again, our thanks to Mike Wilson. Sam.