Chief U.S. Equity Strategist & Chief Investment Officer, Morgan Stanley
Morgan Stanley's Mike Wilson Talks Forward Earnings, Market Swings | Bloomberg Talks
Morgan Stanley Chief US Equity Strategist Mike Wilson sees stocks continuing to rise until the end of the year despite the recent tech selloff. Speaking to Matt Miller on Bloomberg Open Interest, Wilson also sees forward earnings growth estimates for 2027 rebounding as projections for this year continue to climb.
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About Michael Wilson
Mike Wilson, Morgan Stanley's chief U.S. equity strategist and chief investment officer, has maintained a bullish outlook on the stock market through mid-2026, describing the current period as an earnings-driven bull market. He stated that the market has "moved past" the U.S.-Iran war, comparing it to how investors previously moved past tariffs, and argued that a stable resolution in the Middle East could lead the bond market to walk back priced-in Federal Reserve rate hikes. Wilson characterized recent market volatility as a "summer chop" and a rotation, not the end of the bull market, and said he expects stocks to rise into year-end. He noted that the next phase of the bull market typically involves flat-to-down multiples with earnings driving gains, and that a rotation into areas such as consumer, transportation, and regional bank stocks is underway. Wilson also addressed risks to the market, including the transition at the Federal Reserve. He said that new Fed chair Kevin Warsh has described himself as a "balance sheet hawk," and that if he follows through on reducing the balance sheet, that could pose a "bigger risk" for markets. Wilson added that the liquidity picture is "deteriorating" and that the Fed's meeting would be important for managing liquidity. On oil prices, he stated that $126 per barrel is "not manageable" and that if prices stay at that level for three to four months, it would likely cause a 10% hit to U.S. earnings growth and push the stock market lower. Regarding artificial intelligence, Wilson described it as a capex cycle and predicted a 30 to 50% drawdown in related stocks at some point, though he said the long-term cycle remains intact.
Transcript (26 segments)
✨ AI-enhanced transcript with speaker attribution
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Narrator0:02
Bloomberg Audio Studios, podcasts, radio, news.
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Host0:08
Part of what's happening around this and other giant IPOs that we're expecting this year is 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 an up and down trade, as well as a situation in Iran that could be good, bad, or 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, and it looks like maybe out of tech into something else, or maybe it's investors freeing up cash for big IPOs. How do you explain the drops that we've seen today, yesterday, and especially on Friday?
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Michael Wilson0:57
Yeah, 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. So what happened last week, and we wrote about this this week in pretty good detail, is that the earnings revisions that we've been probably 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 breadth, 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 hit 70%. That's only happened three or four times in the last 25 years. The S&P 500 revision breadth is close to 30%, also very high. So it's going to roll over. Now last week we had a couple companies report in the semiconductor industry. They were fine, but the revision breadth started to roll over. So it's a second derivative, and then there's leverage in the system in that trade, and that's 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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Host1:57
All right, maybe 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? 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 make of that? How much longer can we continue to head upwards with earnings revisions? And what do you mean by revision breadth?
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Michael Wilson2:29
Yes, so revision breadth is just 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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Host2:42
We're showing it here in white, 2026 in blue.
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Michael Wilson2:46
So that white line is going to continue to go, but the revision breadth is rolling over. So there's a deceleration, a second derivative. That's what the market's picking up a little bit. That's a correction, not a change in the trajectory. So as we go forward into next year, that NTM 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 is 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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Host3:27
I see. Because you said earlier we're going from one commodity to the next. 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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Michael Wilson3:40
Well, it's happening. Friday's selloff is a sign that that's exhausted. And we did a chart this week. It was pretty interesting. We looked at silver stocks versus semiconductor stocks, 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%. That would be normal. That's what I would like to see because you can't stay at that pace. 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 that 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 downtake.
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Host4:18
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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Michael Wilson4:26
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 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 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 very good analogy. Nobody 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 we've had some facilities get destroyed in this, particularly in Qar. I like to remind folks that when Russia invaded Ukraine, we saw the Nordstream pipeline get blown up, and people were like, 'Oh my god,' and what happened? Germany built a bunch of LNG facilities because the world is resilient. It won't tolerate this. I also think that ultimately Iran is fighting not just the United States and Israel on this, they're now fighting the world. So the pressure is going to build here, and my base case is that enough flow is getting through now and there will be new flow, and then there'll be new supply. As we were talking offline, I think this is going to lead to many countries basically adopting going back to fossil fuels.
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Host5:38
And new routes as well. It's interesting to me that after 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 like all the horror stories we have about inventories being dry aren't moving this market.
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Michael Wilson6:00
That's right. Well, we're not there yet, right? Markets 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 kinetic war really escalated again, like if we went back to where it was in the first couple days of this conflict. That's a situation that I'm not planning on. If that were to happen, oil's going to spike to $150 pretty quick and we're going to have a real problem. But that's not my base case.
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Host6:23
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 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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Michael Wilson6:43
Yeah, look, the market's been very receptive, not only to equity offerings, but debt offerings. It's been another kind of bonanza year. Not as strong yet as 2021, but that's a sign of a healthy market, quite frankly, when you're absorbing this kind of supply. So it doesn't bother me. The collection of stuff maybe all at once can create some digestion problems, but there's plenty of liquidity out there. I gave you one statistic which I think will help maybe understand this. Companies distribute income through buybacks or dividends, and they do about $1.7 trillion a year. That's income back to shareholders. Some of that's reinvested like dividends, but that's a lot of money. And then you have inflows from retail all the time, and pensioners and asset owners. So there is capital out there. The fact that the market's absorbing these deals doesn't bother me. The collection in one quarter can create some disruption, but I think there's capital to absorb this.
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Host7:35
By the way, that goes to the heart of 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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Michael Wilson7:53
Well, don't forget the bond market's been in a bear market for four years. So what we're seeing is people are not reinvesting their bond proceeds. They mature and they're putting into things that can actually protect them against inflation. And something we haven't talked about yet: the average asset owner is pretty smart. They figured out that the biggest risk going forward is inflation. That's kind of my thought. They want to own assets that will protect them against inflation. That's not bonds. That's equities, it's gold, it's silver, it's other real assets, and that's what they're doing. So there's a tectonic shift from the 60/40 to something that looks more like 60/20/20 or even 70/30, depending on your preference.
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Host8:30
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 nine, this would be insane. And then the core looks pretty light at 0.2, if you just month over month here.
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Michael Wilson8:49
Yeah, let me make something perfectly clear. I'm a headline guy. 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. We don't take out certain things. One of the reasons 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 good for earnings growth and it's very good for stocks, so long as the Fed isn't pulling away the punch bowl. The fact that the Fed is now talking about core PCE like they did in 2021 and justifying why they're not raising rates when maybe they should be, we'll see later this year, that allows multiples to stay where they are. So there are a lot of similarities to me to 2021. We have this incredible earnings story driven by higher inflation, pent-up demand, and we're seeing inflation breaking above levels that are comfortable. The Fed is justifying not raising rates because of core PCE, and maybe there's some AI productivity boom coming, which there probably is, and they're going to hold firm. 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've got to retain their credibility. So it's a very similar set to 21, which was a very good year for stocks, but it rotated around. 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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Host10:08
But 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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Michael Wilson10:20
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 to have a real deceleration potentially in the growth rate. But between now and year end, 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 contraction this year, but I think that could be an issue for 2027. We'll have to wait and see.
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Host10:41
But this base case is why you like transportation stocks, why you like shippers. I mean, today's idiosyncratic Amazon story aside, you think the economy will continue humming along and that these guys are going to ship more stuff and have enough power to raise prices.
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Michael Wilson10:58
Yes, what's really going on, Matt, is that the economy now is seeing real velocity in the private economy. 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 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 goods in particular, we think in the second half of this year. They were working earlier this year until inflation picked up and the war kind of evolved, but we think that comes back. Same thing for regional banks, 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.
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Host11:38
What do you make of the consumer? There's so much talk, probably far too much about the K-shaped economy, but there are many people struggling with higher prices who have to decide whether to buy cheaper food so they can put gas in their car. Does that not hurt the consumer stock story?
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Michael Wilson11:58
It doesn't hurt the consumer stock story because 80% of the spending is done by the top 20% or 30% of consumers. So 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 retail-oriented 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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Host12:25
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 learn so much. Morgan Stanley chief US equity strategist and chief investment officer, Mike Wilson.