Chief U.S. Equity Strategist & Chief Investment Officer, Morgan Stanley
Mike Wilson on Fed, Inflation, Artificial Intelligence
Morgan Stanley's Mike Wilson joins "Bloomberg Surveillance" and says the stock market is taking its cues from the bond market. He says the Fed has beat inflation and the AI theme is "overcooked."
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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 (16 segments)
✨ AI-enhanced transcript with speaker attribution
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Interviewer0:00
Traders awaiting CPI at 8:30 Eastern time for clues about how much the Fed will cut rates this time next week. Concerns are lingering over whether the central bank has waited too long. Mike Wilson of Morgan Stanley writing, 'Until the bond market starts to believe the Fed is no longer behind the curve, growth data reverses course and improves materially, or additional policy stimulus is introduced, it will be difficult for equity markets to trade with a more risk-on tone.' Markets with this around a table might commodity asset. Good morning. How are you? I want to pick up on that quote and we're doing great. I want to pick up on a line that you're focused on. The difference between Fed funds and the front end of the yield curve, Fed funds in a two year, and that quote. How important is that?
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Michael Wilson0:38
Well, that's a signal that we're getting from the bond market. The bond market has historically been a pretty good indicator of where the Fed is relative to where they need to be. And we saw this, by the way, in the upside to rates in the 2021 timeframe. The two year got ahead on the upside. So it's the same picture, just on the other side. And people's complaint—they don't complain, they say we look at the stock market and it's behaving fine, but that's not true internally. Once again, defensive stocks are really doing extremely well. So I think the stock market is taking its cues from what the bond market is saying. It's not saying hard landing yet. What it's saying is that growth has continued to disappoint. So since April, and we've been on this program many times since then, I would say that the data has been under distinguished—negative in terms of growth data. Also, the labor data has been much worse. So how has the equity market dealt with that? Well, it's pivoted from what I call quality growth to quality defensives. And we made that pivot in May, and that's classic late cycle behavior. So I think everything kind of sinks. It's just we're waiting for the, you know, can somebody give us the keys to the test, the Cliff notes, whatever it is, and how is this going to end? And we don't know.
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Interviewer1:45
But the markets—you don't get—I'm going to ask it. Basically, you've said we need one or two things. Either the Fed cuts aggressively or the labor market starts to improve and improve quickly.
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Michael Wilson1:55
That's right. For equity markets to perform well.
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Interviewer1:57
So if you've got a base case, is it one of the other two? We get one or the other?
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Michael Wilson1:59
Well, what I would say is that the Fed could get ahead of the curve if they decide. But the problem is, they're constrained. They're constrained by two things, not inflation. By the way, inflation's over as far as I'm concerned. They beat that. What the issue is now is the currency market. If they come in and start cutting aggressively, the yen-dollar relationship is going to create some stress. So they need to be careful with that. The other thing I would throw out there is that we've looked at this: when the Fed starts a cutting cycle with 50 basis points as opposed to 25, the chance of a soft landing goes down materially. And they noticed—they know this data. They don't want to signal that. So they're in a tough spot. The Fed's in a difficult spot. They've done a good job of trying to navigate this challenging environment we've been in for the last several years. But now the markets are pressing them. And so next week, I don't really care what they do next week. What I care about is how the markets react, how the markets behave after they've done what they're going to do. 25 probably. And then what did they say in the press conference? The vibes, whether they actually work for the market or not.
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Interviewer2:57
I'm curious, though, before we go into quality growth and quality defensive and what that actually means, you said something about the currency differential. Are there certain target levels that you see sort of unwinding some of the longs that still remain out there? Do you have a sense of just how disruptive the ongoing long trade for the dollar really will be potentially down the road?
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Michael Wilson3:17
Yeah, I mean, I don't have a specific level, but I do feel like they're trying to defend this low 140s level between each dollar. So call 142. If we start to, you know, 130-ish, 138, 139, I think that could cause some stress in other markets.
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Interviewer3:32
Meanwhile, you talk about shifting from quality growth to quality defensive. I've struggled with these monikers quite a bit simply because what does defensive, what does growth mean? Where does NVIDIA fit into this or does the tech trade go given the fact that people have gotten so inflated in terms of expectations and in timing? What does that mean to you? Quality defensive?
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Michael Wilson3:54
You know, defensives are your classic defensive sectors, whether it's utilities, staples, healthcare, things that are positively correlated to bonds. And they did not trade well, by the way, up until sort of April. It was really the quality growth stocks. Now, the other thing that's happened is the AI theme has taken a little bit—that luster has come off. And I really gauge that by what semiconductors are doing. It's not just really—it's semiconductors writ large. And a lot of those stocks have really come off. And that makes sense to me. We just got overcooked. And the whole AI theme doesn't mean it's over. We've written about this extensively. We're not believers that this is going to change productivity materially in the short term. It's a long term story and everything kind of got beat up on that. So with that theme now gone, the market is looking for a new theme. On the growth side, there isn't one. So when it does, it hunkers down into defensive, high quality assets until we get the next thing. Whether that's a bad outcome or a positive outcome, they're going to hide out in these areas.
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Interviewer4:51
Mike, you say inflation is over. We do have CPI data though today, so I'm curious to know how do you think the market would trade if we get, say, a hotter print? Is it too volatile? Or softer with the markets pricing in 50, or look at a softer print and say, wow, we are cooling down faster than even the Fed was expecting and bad news really is bad news?
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Michael Wilson5:10
Yeah, well, when I said inflation is over, I mean the rate of change on inflation is over and it's kind of over for equity markets and quite frankly, even for the Fed. Where inflation is not over is the price level. The price level is absolutely squeezing the heck out of businesses and consumers. And so it's like a vise. And so I don't think inflation is over in that regard. But what I would say is that a hot number, I think, is probably pretty bad for the stock market today. I'm expecting that. But if we get a hot number today, then all of a sudden the Fed is going to stay behind the curve. They're kind of stuck. If we get a really soft number, then we go back to our old thesis, which is pricing power is gone. So we kind of need to thread the needle here a little bit too. I mean, break-evens are at 2% now. So what are we talking about? We're already at 2%. And it's not like these things stop on a dime. There's a risk that we undershoot on the downside. That's good for bonds and is bad for stocks typically. And by the way, that's how the stock market, that's how the markets are trading. So I think the markets understand all of this. Once again, they're going to do something next week to try and manage the situation, and 25 is what we think. And they'll signal for more 25, not 50. And then what do they do with the balance sheet? I think that's probably the bigger wildcard. Do they talk more aggressively about ending QT quickly? Do they find other provisions to provide liquidity? That's the bull case, in my view. That's where we could be surprised on the upside. Is there more liquidity coming into the system from other sources? And after next week, then everyone's going to really be focused on the US election.
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Interviewer6:35
Goldman Sachs, RBC, they talk about how earnings will be much higher potentially under a Trump administration if he gets his tax cut plan rather than Harris, who's calling for 28%. How do you view next year earnings growth based on these two proposals, assuming that the economy is in a soft landing, that the Fed hasn't overstayed its welcome? And by the way, I think that risk is still on the table. We're in the soft landing camp, but that to me is way more important than the outcome in this election in the next 6 to 12 months.
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Michael Wilson7:06
So let's assume we're in a soft landing. Our views are saying that we think basically Trump is kind of pro-growth, kind of bad for bonds, good for stocks. And that's how we would look at it. And by the way, last night when the debate was going on, the betting markets kind of went in favor of Harris and the stock market futures kind of traded a little bit. But I do think the stock market is pro-Trump. I mean, the stock market has traded better when his odds go up and vice versa. So bonds are good under Harris and stocks are bad under Harris, in theory. I mean, at the margin, I would say that's the setup. And the reason being is really taxes. Taxes is the one thing that requires some congressional support, too. But to me, that's the big issue, not tariffs so much. Both administrations have tariffs and immigration. I think both parties are going to deal with that in some way. So taxes is the issue. Obviously, Trump is talking about cutting. Harris is talking about raising them. That's bad for stocks, good for bonds.
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Interviewer8:03
I wanted to ask you this question. I want to squeeze it in. At the very end, Lisa was knocking on the door. Utilities are actually defensive. They're up like 20% this year and it feels like everyone's getting whatever they want from utilities. It's defensive. It's so attached to what are utilities. So this is a very interesting question.
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Michael Wilson8:19
So, you know, we agree. I mean, we were one of the first ones to talk about utilities as an AI beneficiary back in February, March. I think that's probably getting a little overdone, to be honest. But now utilities are definitely trading with the bond market, so the defensive properties of utilities are, I think, dominating their performance in the near term. Here's the interesting thing about utilities. Their balance sheets are typically not great. So you've got to be really careful with utilities if it's going to be a hard landing. These things are going to start trading really poorly. So I would caution listeners: if utilities start trading really poorly and the stock market is not ripping, that's a bad sign. That would be a sign that we are actually getting closer to potentially hard landing risk. That hasn't happened yet. But if you look at things like low volatility parts of the stock market or defensive, they've gone almost parabolic. And if they start to sell off hard without a stock market rally, then I get concerned about hard landing risk. That's not the case yet.