Next Leg of the Bull Market?

Summary

Thoughts on the Market – "Next Leg of the Bull Market?"

Host: Mike Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist
Date: July 6, 2026
Theme: Examining the momentum behind the current equity market’s broadening trend, recent sector rotations, and what investors should consider for the next phase of the bull market.

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Overview

In this episode, Mike Wilson discusses the recent broadening of the equity market rally beyond the previously dominant semiconductor and AI sectors. He analyzes the underlying drivers, the implications of shifting sector leadership, and actionable takeaways for investors. Wilson argues that, despite recent market volatility, economic fundamentals support further broadening, and that investors should look beyond the obvious winners of the previous cycle.

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Key Discussion Points & Insights

1. The Broadening Market Rally

• Market Trend Shift: Wilson notes that the equity market is again broadening out, moving away from a heavy concentration in semiconductor and AI stocks.

  • "The broadening trade is back, and it's gaining momentum partly because one of the most crowded areas of the market, the semiconductors, is finally starting to lose some of its own." (00:17)

• No End to AI Cycle But Evolving Leadership:

  • While the AI trend continues, leadership is rotating, which is common when positioning and expectations reach extreme levels.
  • "This doesn't mean the AI cycle is over. However, trends don't move in straight lines and leadership can ebb and flow..." (00:27)

2. Background: Early Cycle Expansion

• Post-Rolling Recession View: Since April 2025, the U.S. economy rebounded from a "rolling recession" into a new expansion phase.

  • "Our broadening call goes back to last November. Back then, we argued the economy had entered a new expansion after the rolling recession ended in April of 2025." (00:54)

• Operating Leverage: Cost-cutting coupled with returning revenue growth is driving strong earnings—a typical "early cycle" characteristic.

  • "That's the definition of operating leverage... and that always leads to better than expected earnings growth." (01:09)

3. Rotation Driven by Macro Events

• Past Year’s Disruptions: The Iran war, oil price spikes, and surprise Fed rate expectations recently refocused investor attention back to AI and semis, creating crowded positioning.

  • "The Iran war interrupted it, oil prices surged and the bond market went from pricing Fed cuts to pricing hikes, and investors crowded back into the obvious AI CapEx winners, especially semiconductors." (01:27)

• Rate-of-Change Question: At extremes, the concern shifts from whether the growth story is compelling to whether such rapid acceleration is sustainable.

  • "The question becomes less about whether the story is good and more about whether the rate of change can keep improving. That's a much higher bar..." (02:04)

4. Sector Leadership Diverging

• Semis & Hyperscalers: Semiconductor underperformance following hyperscaler weakness signals the start of leadership change within tech.

  • "With semiconductor stocks fading, the underperformance in the hyperscalers was probably the first signal. Semis depend on hyperscaler capex, so when the spenders start to lag the beneficiaries, that divergence can't last forever." (02:21)

• Important Development: Companies like Meta selling excess capacity suggests AI buildouts will be less linear than the market had anticipated.

  • "Meta's announcement last week that it would begin selling excess capacity to outside customers fits right into that discussion. It doesn't kill the AI buildout, but it does change the market's perception about how linear that build out will be." (02:36)

5. Where to Rotate Now?

• Favored Sectors:
  • Consumer Discretionary Goods:
    • Most attractive given a shift in consumer spending from services back to goods, improved pricing trends, and stronger earnings revisions.
    • "Discretionary goods remains the cleanest expression in my view, because a wallet share shift from services back to goods is underway." (03:00)
  • Transports:
    • Benefit from improving earnings revisions and broader economic recovery.
    • "Transports are also showing better revisions..." (03:14)
  • Regional Banks:
    • Favored by better loan growth, a steeper yield curve, and overall recovery cues.
    • "Regional banks still benefit from the broader recovery, improving loan growth dynamics and our call for a re-steepening of the yield curve." (03:17)
  • Biotech:
    • Most rate-sensitive; set for gains in a falling rate regime and attractive M&A cycle.
    • "Biotech deserves more attention here too. It's also one of the most rate sensitive areas of the market, and our work shows it has historically done very well in falling rate regimes." (03:27)

6. The Role of Fed & Policy Expectations

• Fed’s Influence:

  • Fed Chair Warsh’s comments about moderating inflation risk and recent weak labor data suggest rate hikes may be less likely, benefitting risk assets.
  • "Chair Warsh's comments last week that inflation risks have come down should matter, especially after the weaker labor data that came out on Thursday." (03:47)

• Market May Be Too Hawkish:

  • If energy prices keep dropping and core inflation is contained, the Fed may stay on hold, boosting conditions for broad market leadership.
  • "If falling energy prices and contained core inflation allow the Fed to stay on hold rather than hike, that should help lower rate expectations and further support broad leadership in equity markets." (04:06)

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Notable Quotes & Memorable Moments

• "The question becomes less about whether the story is good and more about whether the rate of change can keep improving. That's a much higher bar..." — Mike Wilson (02:04)
• "Discretionary goods remains the cleanest expression in my view, because a wallet share shift from services back to goods is underway." — Mike Wilson (03:00)
• "Biotech offers an attractive risk reward setup, particularly with an M and a cycle that continues to build." — Mike Wilson (03:35)
• "Bottom line: the major averages may stay choppy because semis are a large part of the index and crowded, but the message is improving. Beneath the surface, the broader market performance indicates a broader economic and earnings recovery may just be beginning." — Mike Wilson (04:20)
• "The best news is that this view is still out of consensus, which means the opportunity for investors remains significant." — Mike Wilson (04:34)

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Timestamps for Important Segments

• 00:17 – Emerging broadening in market leadership, with semiconductors topping out
• 01:09 – Early cycle setup: earnings leverage from cost efficiency
• 01:27 – Macro disruptions: Iran war, oil, Fed shifts, crowding in AI/semis
• 02:04 – Sustainability of rate-of-change in earnings
• 02:36 – Meta's capacity sale and implications for AI buildout narrative
• 03:00 – Sector rotation recommendations: consumer goods, transports, banks, biotech
• 03:47 – Fed’s role, change in inflation data, policy outlook
• 04:20 – Summary: market surface choppiness, improving breadth, out-of-consensus opportunity

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Conclusion

Mike Wilson presents a compelling case for continued broadening of the U.S. equity market. He encourages investors to look past crowded trades in AI and semiconductors and focus on emerging leadership in consumer discretionary, transport, regional banks, and biotech—areas set to benefit from both cyclical recovery and shifting policy expectations. Despite headline volatility, Wilson argues the fundamentals are improving, with significant opportunity remaining given the out-of-consensus nature of his view.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and chief U.S. equity strategist. Today on the podcast, I'll discuss why I think the broadening out in equity markets can Continue. It's Monday, July 6th at 11:30am in New York, so let's get after it. Let's talk about a market dynamic that's becoming harder to ignore. The broadening trade is back, and it's gaining momentum partly because one of the most crowded areas of the market, the semiconductors, is finally starting to lose some of its own. To be clear, this doesn't mean the AI cycle is over. However, trends don't move in straight lines and leadership can ebb and flow, especially if there are fundamental reasons supporting it. In fact, we've seen this happen several times already over the past couple of years, with the hyperscalers and semiconductors ebbing and flowing. This is based on positioning the rate of change on expectations for CapEx and the returns on that CapEx. Meanwhile, our broadening call goes back to last November. Back then, we argued the economy had entered a new expansion after the rolling recession ended in April of 2025. That view is based on a classic early cycle setup where revenue growth returns to companies that have become cost efficient. That's the definition of operating leverage, and that always leads to better than expected earnings growth, the core differentiation to our original outlook this year. The market started to discount that broadening late last year and into early this year. Then the Iran war interrupted it, oil prices surged and the bond market went from pricing Fed cuts to pricing hikes, and investors crowded back into the obvious AI capex winners, especially semiconductors. That made sense for a while. The revisions in semis were spectacular. But when earnings revisions, breadth gets pressed against historical extremes. The question becomes less about whether the story is good and more about whether the rate of change can keep improving. That's a much higher bar, and over the past few weeks, the market seems to be asking that question. With semiconductor stocks fading, the underperformance in the hyperscalers was probably the first signal. Semis depend on hyperscaler capex, so when the spenders start to lag the beneficiaries, that divergence can't last forever. It usually ends up reconciling with the hyperscalers, tempering capex guidance, or indicating that they're more focused on getting a return on that investment. Meta's announcement last week that it would begin selling excess capacity to outside customers fits right into that discussion. It doesn't kill the AI buildout, but it does change the market's perception about how linear that build out will be. What matters for investors is how they should trade it. First, the market should continue to broaden out. Second, we continue to favor consumer discretionary goods, transports, regional banks, and now biotech as part of that rotation. Discretionary goods remains the cleanest expression in my view, because a wallet share shift from services back to goods is underway. Goods pricing is improving, oil prices have fallen and earnings revisions are strengthening. Transports are also showing better revisions and regional banks still benefit from the broader recovery, improving loan growth dynamics and our call for a re steepening of the yield curve. Biotech deserves more attention here too. It's also one of the most rate sensitive areas of the market, and our work shows it has historically done very well in falling rate regimes. If the market's policy expectations are too hawkish, and I think they are, then biotech offers an attractive risk reward setup, particularly with an M and a cycle that continues to build. The Fed is part of this story as well. Chair Warsh's comments last week that inflation risks have come down should matter, especially after the weaker labor data that came out on Thursday. The market had become too hawkish on policy. If falling energy prices and contained core inflation allow the Fed to stay on hold rather than hike, that should help lower rate expectations and further support broad leadership in equity markets. Bottom line the major averages may stay choppy because semis are a large part of the index and crowded, but the message is improving. Beneath the surface, the broader market performance indicates a broader economic and earnings recovery may just be beginning. The best news is that this view is still out of consensus, which means the opportunity for investors remains significant. Thanks for tuning in. I hope you found it informative and useful. Let us know what you think by leaving us a review and if you find thoughts on a market worthwhile, tell a friend or colleague to try it out.

[B]

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