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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?
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.
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?
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.
We're showing it here in white, 2026 in blue.
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.
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?
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.
First off Mike, how much does this really move markets anymore? I mean, we're kind of used to no outcome here.
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.
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.
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.
