Welcome to the Risk Reversal Podcast. I am Dan Nathan. That is Guy Adami.
You're still Guy Adami. We have for the 13th time Mike Wilson of Morgan Stanley. He is the chief US equity strategist and CIO. Michael, welcome back to the podcast.
Always good to see you guys.
Now, how loved are you at Morgan Stanley? Why are we going right? Because think about it. You in many ways are the face of the firm. Now you're not going to admit to that, I know. But when they see you, they immediately say Morgan Stanley. They associate that. How does that make you feel when you've become synonymous with arguably one of the best investment banks in the world?
Yeah. I mean it's a privilege. It's great. Thanks for saying that. I mean it's a firm. There's so many great leaders in the firm and I'm one of many and I feel privileged to be a voice that people listen to.
They do, and you've been there throughout so many cycles. You and I met in the late 90s and one of the things I find fascinating about Wall Street, there's so many shortcuts that a lot of folks try to take, right? And the business has changed, every cycle changes a lot and gets smaller and smaller even with all the consolidation that we've seen over the last 30 years. When I met you, you were a research salesperson. Is that fair? And then you pivoted during the dot-com run-up to a tech salesman. And you were very good at it and you were covering all the major hedge fund accounts and some big mutual fund accounts. And it's interesting because I don't think you've worked anywhere else in your career. Have you?
No, I've had like seven or eight totally different jobs. For me, there's no way I would be at the same firm doing the same thing. It's just I get bored or frustrated. And the best part about Morgan Stanley is that they allowed me to do that. They created this...
Well, they recognize a value. I mean like for instance a lot of folks who kind of outlive their usefulness in a certain job. And one of the things that's really interesting when you talk about one of the best investment banks in the world, the CEO, a guy named Ted Pick, has been there for how many years?
But it's also fascinating because when I first heard his name, when I was just a little chamole on the buy side, he was doing IPO allocations, right? He worked in equity capital markets. And I do think that's really interesting about their culture, Guy. And it's interesting that you started there. I'm fascinated by it because in a world where there are a lot of hired guns, a lot of mercenaries out there, you've been at this shop for quite a long time, and I mean that sincerely. When you think of Morgan Stanley, one of the first names you think of is Mike Wilson. And that's a tribute to you because you know how our world works. It is still one of the few meritocracies that are out there. Regardless of whether or not you're going to respond to that, I happen to be true.
Yeah. Look, like I said, it's been a privilege. Ted's a good friend of mine as well as an incredible CEO. He was born for that job. He bleeds the place. And we're lucky to have him. And the one thing I would just say is that there are a lot of 20 to 25 year vets. It is unusual that way I think more than other shops. And it's not as if Morgan Stanley has had this smooth path. No, it is not. It's been a rocky road for all these firms, but it's hung together. And it's great to see. The brand is phenomenal. I think clients, we're very client friendly. And Ted and the whole team has done a great job of building the franchise.
All right, let's talk about the market. The market waits for no one. That was your latest note, April 13th. And I understand exactly what you're saying. You're saying the markets have already priced in a lot of the bad news. Without question, a lot of bad news is out there. The lows in for the year now. I know it's difficult to say now here in April, but I think you have a pretty strong view that what we saw a couple weeks ago might have been it.
Yeah. No, I think we targeted the 6,300-6,500 range. We got right to the low end of that range. It held and to be honest, the reaction, and I'm a technician like a lot of people who do this job, the reaction since then has been very powerful. And so I don't think it's very unlikely that we're going to revisit the lows. We could retrace some of that. There'll be some bumps along the way and obviously the war in Iran is far from resolved and there's still a lot of other things going on but markets have a way of pricing it and moving forward.
You know, a few weeks ago, prior to the move lower, I saw you on Squawk Box with Joe. I think Becky was there that day, and you were talking about the damage being done in different sectors, but the S&P 500 was hanging in there. And what you thought would happen was at some point the S&P was going to acquiesce, and you were quick to say, I'm not calling for a bear market, but you saw that move coming. Was it the churn that sort of gave you the clarity to say, 'Okay, the S&P is going to be next. We're going to flush this thing out. We're going to get to that level.' Like what was the tell?
Just a historical pattern of these corrections that they always end with the highest quality index getting clipped at the very end. And there's some event or shock that creates the signals that we look for to say it's time to step in, which is we measure it with positioning, with all of the data we have internally. We look at sentiment indicators. We have a capitulation index that we've actually created. We checked the box on all those things and it typically is the highest quality index that gets hit at the end so it just wasn't complete at the time.
That was by the way for you folks we're not going to cut that out that was Dan...
Did I just call you on my...
That was Dan using his watch to call me so that was kind of funny. Star Treky man.
Yeah it was pretty Star Treky. All right. So, we have a good friend. His name is John Butters. He is the senior earnings analyst at FactSet and they're great partners of ours. And we were looking at his earnings insight blog. And I just want to get your take on this. Guy and I were talking about it earlier today with our very good friend Liz Thomas of SoFi. For calendar year 26, the earnings growth rate for the MAG 7 is 24.8% while the earnings growth rate for the other 493 is 15.4%. That is estimated obviously. Excluding Nvidia, the calendar 26 earnings growth rate for the MAG 7 falls to 13.2%. So when you see data like that and you've been in markets like this and you're going to come back and you're going to say, I have a history of this and we've always seen this sort of crowding out to some degree, but what does it mean when this is very different than the late '90s because we just didn't have this powerful earnings and that sort of thing. What does it mean to you when you see that sort of concentration in one name as it relates to the earnings contribution of an index of 500?
Yeah, I mean it really was down to sort of one stock as you point out with Nvidia. Look, what I would recognize from that statistic you gave me is that the 493 is doing a lot better. And that's been our call since November really is that this broadening out of the earning story is the more important observation now. And that's where the fat pitch was quite frankly, fall of last year. And those parts of the market were really outperforming up until the war broke out, meaning small caps, consumer discretionary, goods, financials, industrials. And that's because that earning story was getting better away from the MAG 7. That to me is the real story of 2026. It got interrupted, there's this interlude with obviously the war and oil price spike and now the market has moved past that and that's why I think it's really interesting to see this. This is our call. Two weeks ago we said when the market bottoms you want to go back to what was working pre-Iran, and that would be those areas I just mentioned. And that's what's leading us back. Now the MAG 7 is doing quite well too. That was also something we observed which is that the hyperscalers in particular got very, very cheap. Nvidia got very, very cheap. So they can work too. In other words, it's not going to be just seven names anymore.
And that's the point you've made a couple times over the last month, month and a half. The valuations in names that were difficult to make a case for on a valuation basis actually got pretty interesting on a valuation basis. And you made that point. So what's amazing is understanding that valuation is never a timing tool. But things got to levels that made sense. The counter side of that is today we're doing this on a Thursday. A lot of people putting out that Buffett indicator which by the way if you've tried to trade on the back of it you've gotten smoked, but it's at all-time high now. They have $385 billion on their balance sheet. He has obviously stepped down but the rules still apply. So you have the one side of the equation where things look really interesting and then the flip side of the coin, greatest investor of all time, one of the things that he looks at is screaming stop and I don't know how to reconcile that. I don't know. I'll say this, maybe that indicator does not hold as much water as it has historically for maybe reasons that I don't understand.
Well, you also got to remember that Warren Buffett's time horizon is longer than anybody. I mean, longer than even pension funds. He very rarely sells stocks. So, he's looking for like really good entry points. And on that score, I would say there aren't a lot of these crazy pitches where something is wildly out of favor. And that's a function of just people looking for the value. The markets, I think, have become very efficient. We don't see these things completely fall out of bed outside of maybe energy over the last couple years, which is one thing he was buying, right? So I think the fat pitch for these like crazy cheap things trading below replacement cost or below book value kind of stuff that Warren Buffett looks for over time, those are not going to get there. The market's not going to allow that to happen.
That's right. I mean that's one potential answer. There's probably other reasons and other things that are going on, but I think that is something I've observed that there isn't these sort of true value areas unless they're totally challenged by some threat, some growth scare or some permanent structural threat in terms of the individual names, but in terms of the broader market, what is the existential risk? Growth scare blah blah blah. Is it some credit? What are the things that you say, okay, if I start to see glimpses of this, we're going to change course.
Yeah, I think the still the biggest risk is bond and basically the Fed and Treasury losing control of the back end. Because growth is accelerating again. It's booming right now. Capex is booming and so the real economy is sucking down liquidity in a way that it hasn't for the last 10 or 15 years. That's a real change and that can lead to perhaps fewer buyers of bonds which causes bond volatility to spike. Now, as you know, the Fed has been very quick to act whenever bond volatility picks up. They just did it again at the end of March when Jay Powell kind of backed away a little bit from being hawkish. Bond volatility quickly came in. So, the existential risk is that they somehow aren't able to manage that bond volatility or rates go through 450 and don't stop. They keep going through 5%. That will be a problem for equities.
What is the likelihood again I know it's very hard I get it but what is the likelihood of that happening and is it a global thing and then US rates just get dragged up or is it finally a debt problem where the market starts calling on our bond auctions because last couple auctions have been some tepid bond auctions over the last couple weeks.
Yeah. Well I mean they've been tepid for two or three years. Which by the way the Fed has stepped in on multiple occasions. The Treasury has also decided to issue fewer long duration bonds and issue more bills. So, they have these tricks that they can do and ways to finance the debt so that the bond market holds together. And I think they've done a good job both the prior administration and the current administration. So, that will continue. I don't think we're at risk of that happening this year, but that ultimately if we don't find a way to grow out of the debt problem, then eventually the bond market will revolt. That is the existential threat. I think it's a tail risk at the moment. It's not top of my list. Now, there are people out there who I respect who've been talking about this liquidity shortage. And that's why the Fed, by the way, addressed it in the fall by ending QT early and then doing asset purchases again. So, they're aware of it. But there's a school of thought that because of the maturity wall that's coming due, not just for Treasury debt, but also for corporate debt over the next two years, that there's just not enough liquidity in the system. Which means what? Which means they're going to have to print a lot more than what people are anticipating. And there comes a point if they start printing wildly where maybe markets decide that that's not a good outcome. But I just don't see that right now. I think we went through that. That was the reason why stocks started to correct in the fall. They're aware of it. I think it's under control at the moment. We're going through a Fed transition at the moment. I think that's still a little bit of an overhang, but as we go through the rest of this year into the midterms, I think they'll be able to manage it.
All right, let's talk about that capex because you're suggesting that a big part of expected growth and earnings growth comes from there. We already gave the Nvidia example and you could look at the MAG 7 which Butters gave us that data. Prior to the war, we had an S&P that was trading at 7,000 and it started selling off. There was a whole host of reasons why investors had excuses to hit the sell button. Let's be clear. But prior to that, we had seen the hyperscalers starting to roll, right? And Microsoft was exhibit A. Nvidia's inability to kind of get going and it was quick to kind of roll over, that sort of thing, too. When you think about expectations of like $800 billion in capex this year, right? And we're really starting to get model after model after model, but we're starting to also see what looks to be a two-horse race. And it's going to be Anthropic and Google. It seems like OpenAI is almost falling out of the lead in a way. And so I guess if in 2026 we see some sort of lack of differentiation let's say in these top few frontier labs and then we see the moats maybe not as deep as some would think, you have some sort of commoditization of the models. Does that call into question really all that capex to some degree and might you see the way that this is what a lot of investors thought with Microsoft right? They thought there was like a really poor allocation of resources and they stopped spending at certain times they couldn't fulfill certain obligations that sort of thing. It feels like that will come at some point. Investors were trying to discount that a little bit over the last six months but when you see these stocks rage back does that give you more or less confidence that there is a headwind that a lot of folks are not pricing about? And I know that was a long-winded way of saying the markets were worried about that 3 to 6 months ago, and they don't seem to be worried about it now.
Well, I think they discounted it appropriately. Some of these stocks got to 17, 18 times earnings and they have very profitable core businesses. I think the major issue for the hyperscalers is the cash flow. The cash flow destruction, free cash flow because they're spending all this money and the question is, are they going to get a return on capital ultimately on this money they're spending? And it's a big arms race that they all have to participate in. The best news I can tell you on that I think that has put a floor in on these stocks is that the revenues now that these LLMs are generating is actually insane. So not profits yet necessarily. We don't know, those companies aren't public but the revenue is coming in like more than I think I thought or...
Yeah. But OpenAI is losing like $2 billion a month. You know what I mean? And they actually don't have an enterprise strategy right now.
Not profitable. That's what I'm saying. That's going to be the question. I think the bigger question is so we know that these businesses are going to generate a lot of revenue and ultimately a lot of profits. The question is can they all participate, right? So there is going to be a shakeout of the four or five or six that are in the game for the most part and I don't think we know the answer yet because a year ago Anthropic was left for dead right and now it's like all of a sudden the king. So these things are going to ebb and flow back and forth and so in that environment people put chips, it's sort of like playing roulette, you put chips on different or on craps you put chips on a bunch of different bets.
Yeah. So, what does it mean for the S&P 500 though? Like, let's just say those companies and some of them want to go public this year, right? Our good friend Jeff Richards of Notable Capital, he had a great stat I think on the podcast here last week. He was talking about the IGV and the incremental revenue that the entire ETF, the components of it was like $60 billion that it gained last year, right? And then you look at these companies, Anthropic, OpenAI, and a couple others, and they have basically gained $60 billion in revenue. Now, the point is that's unprofitable revenue if those companies find their way into the indices. You know what I mean? Like you're starting to see the SpaceX numbers, right? And SpaceX loses a lot of money, right? Starlink, I think is 61% of the revenues and it's got really good EBITDA margins, you know? And so if a company like that comes public at a half trillion dollar market cap, what happens to the construction of these indices. Now, SpaceX needs to get in the index because who is the incremental buyer other than retail? You know what I mean? I know you guys are going to be all over that thing and I know you don't have to talk specifically about it, but do big trillion dollar market cap companies who are very unprofitable and let's say they get some sort of inclusion into the index, does that change things to some degree?
Yeah, I mean the composition of the index will have an impact on the earnings, but end of the day, I don't know what percentage these companies are going to be the whole thing. We're talking about less than 10% impact probably on earnings and the presumption will be that now the index is a faster grower potentially or maybe there's I think it all comes down to is the market in the mood to pay for revenue and earning streams further in the future. The one thing about AI as you know is starting to cap some of these terminal values in certain areas like software in particular and maybe IT services and some of these areas that are most vulnerable and that is something that can sneak up on you. So I think that's just something we're going to have to deal with as investors until we actually know what this new technology is going to do to the composition of the economy. It's a lot going on. I mean everybody's worried about I give you a good example. So everybody's worried about job destruction. It makes sense to me, but did you know that the new business formation now is at like an all-time high and if you talk to entrepreneurs and let's say you're a white collar worker who is most vulnerable and you're somewhat fluent with technology or whatever and you're laid off and you've been there 10 years like you know what I'm not going to do this again. I can go start a company and all my back office stuff I can do with AI applications whether it's HR or accounting or tax or what all that stuff then and you can be an entrepreneur and be the creative one. I think we may be surprised at how many jobs are created now those businesses may fail ultimately but there's going to be this tug and push and tug between the job destruction and then the job creation that's going on. So I'm not as fatalistic in the near term about what this is going to do either to the composition of the indices on the earning side or what it's going to do to the real economy.
Is there structural damage in the energy market that regardless of outcome is going to be sticking around for a while?
Well, I mean I don't know because we don't really know what the damage is. Nobody really knows what's happened in the Middle East in terms of facilities and what the extent of that damage is. My general view on commodities is that the cure for high commodity prices is high prices. And so I do think the world's pretty resilient and we're seeing that already. There's either storage that's been in place or they find new avenues to get the oil to where it needs to be. There's a substitution effect for natural gas where we have an excess supply. We sell more out of the US whatever and new production becomes profitable at these prices. So from what I see I think oil prices will be lower coming out of this crisis because there's all this hoarding and stuff that's going on now and then I think intermediate term prices are probably higher.
All right. So, what about the AI component of that? When you think about demand for energy, we heard Satya Nadella and there's other folks saying that they're really not capacity constrained anymore. They're like energy constrained, that sort of thing. How do you think that kind of fits into this whole dynamic because getting this energy online for these data centers and there's a huge NIMBY thing as you know, right? And so people they don't want them for a whole host of reasons in their local but one of the most important ones is like pushing up energy costs. So is that going to become a really important component the way you think of as it relates to the economy but like you have the consumer situation and then you also have these companies and these data centers they're just scrambling. They just need to get energy online no matter what it costs. And even the lead times though we're just not going to be there.
Yeah. I mean, there's constraints across the board on data centers. Ironically, it's not even about compute anymore. It's about energy. It's about labor to build these facilities. Getting electricians to do the wiring in these things. So there and I do think that's already become a political issue. Because how do you tell your constituents, yeah, you have a brown out because XYZ hyperscaler has to run their data center in your backyard. So, I 100% agree with that. A couple things I feel confident about is fossil fuels are making a big comeback globally for a lot of reasons. One is because people realize they want to have redundancy given what's going on in the Strait of Hormuz and not to mention what's still going on in Russia, Ukraine. So there's going to be more natural gas fired plants built everywhere. Like people are just throwing the green thing out the door.
Well, you know who's not though? China's not.
