Bloomberg audio Studios podcasts radio news. Good morning, I'm Nathan Hagar. Want to get a fuller view of what's been happening in the market over the last several days. Joining us now live, Mike Wilson, Chief US Equity Strategist at Morgan Stanley. Mike, it is great to speak with you on this what looks to be a turnaround Tuesday. Have we found bottom after the selloff, or is this a dead cat bounce for you?
Good morning, Nathan. Look, I don't... I mean, nobody knows if this is going to be it or not, but I would tell you that Friday looked like that may have been it because we held the 200-day moving average into the close, and then we gave that back quickly on pretty good volume yesterday. So look, we've been pretty clear in our guidance this year. We felt like the first half was going to be tougher after the strong finish, mainly because we saw mostly growth-negative features in the initial moves of the administration. But in addition to that, with something that doesn't get talked about much, is that earnings revisions have been rolling over for several months, led by the big tech growth stocks. So that's a story that gets buried in the fine print for some reason, which is that this AI capex story is decelerating. Obviously the DeepSeek story that came out earlier this year and all that is really what's weighed on the US indices as much as DOGE, immigration enforcement, tariffs, and the like. So look, the growth story has been deteriorating. Markets have quickly adjusted. We've been using 5500 as the low end of our range for the first half. We're almost there. It's hard to predict things to the dollar, obviously. What we're really focused on is the revision factors and when they could next turn up or at least stabilize. We think a chance for that later this month because the dollar has been weaker and rates have come down a bunch, and those tend to work with a little bit of a lead. So by the end of this month, we could see perhaps some of those revision factors stabilize, and that's really the positive catalyst that we're looking for to get buyers to come in here. In the meantime, look, the markets have been very efficient in focusing on the areas which have had positive earnings revisions, those areas being financials, software, consumer services, and media entertainment, and likewise punishing those areas with bad revisions like materials, energy, some of the lower quality small cap areas, consumer goods, etc.
Is some of that bounceback that you're calling for in earnings revisions going to be driven by tax cuts? I only ask because we heard from the National Economic Council Director Kevin Hassett saying that the economy is going to take off in the second quarter with tax cuts. Is that your view?
No, we're not anticipating tax cuts to impact estimates anytime soon. I mean, maybe later this year once the legislative process continues, but the way we understand it is that these are not incremental tax cuts; these are an extension of the existing tax cuts. So I don't anticipate revision factors to increase because of that. Now, of course, if the tax cuts don't get extended, that would be a real negative. That's not our expectation at the moment.
The president has talked about this as a period of transition. If that's the case, what are we transitioning to, and can it support stocks?
Yeah, I mean, that's the bull case. Secretary Bessent talked about this last week, and that there's no sort of Trump put, but there may be a Trump call, meaning the short-term pain of some of the things that need to be done to rebalance the economy, which I think is a good idea, could lead to benefits later. The most simplistic way of explaining that would be that we shrink the size of government, and that liberates the private economy ultimately via deregulation and some of the crowding out that's been going on for several years. This is not a new phenomenon; the government has been growing for the better part of my adult life. So the fact that we're finally talking about maybe shrinking the government, I'm not really sure who's against that, because we know that's an inefficient way to allocate capital. If you can get the private sector doing that job instead, that's the payoff down the road. We'll see how long it takes to get there, but that's the explanation for what they're talking about.
Speaking with Mike Wilson, Chief US Equity Strategist at Morgan Stanley. In your start to the week note, Mike, you talked about putting your bottom for the S&P 500 at 5500. We're pretty close to there now. What's the risk it could go even lower than that?
Well, the risk is that this turns into a hard landing. That's not our view at the moment. I think we need to see more damage here, but it also becomes somewhat reflexive, meaning the more the stock market goes down, the risk that that turns into consumer spending at the high end coming down as well, so it becomes kind of self-fulfilling. So we're in that reflexive period right now. As I mentioned earlier, there's no quote-unquote Trump put. I think there is a Fed put. If growth were to deteriorate meaningfully, Chair Powell talked about this last week, they have a lot of firepower to respond. So it's going to be one of those years where you just got to be really paying attention minute-to-minute, day-to-day, week-to-week to the changes here at the margin. The good news is that the markets have quickly adjusted to what we've been forecasting, which is that growth is disappointing in the first half. While the S&P is only down 8%, a lot of stocks are down 20, 30, 40%. So when these corrections happen, they happen quickly, and my guess is that we're already seeing bargains in some areas that probably will end up being good entry points right now.
Well, Mike, if you're looking for a Fed put, do you think we could get one this half?
Like I said, the downside risk is that the growth scare turns into a recession scare, and we're not there yet. Chair Powell said the economy is fine at the moment. What I'm saying is if it deteriorates quickly, I think the Fed will respond quickly, but they'll respond to growth, not to the stock market. So I think there's a put as it relates to the growth risk.
In our last minute, where are you advising your clients to reposition? If you are advising that, where should people be putting their money to work at this moment?
We're pretty comfortable right now. We have a focus list that's actually up on the year close to 7%. That's really a large cap quality, somewhat defensive bid to it. We feel like we've been positioned for this. Now the question is when do we pivot to get more aggressive, go higher beta, maybe even go down the cap curve. We're not there yet. Our portfolios are performing as a result. The key question is when is it time to get more aggressive, like we did last fall going into the election and the Fed cuts. We'll let you know when we think it's time. We don't think it's time yet. We think it's going to remain choppy here at least for the next couple of weeks. As you know, we publish every week, so stay tuned.
Really appreciate you coming on with us to give us your latest view. That's Mike Wilson, Chief US Equity Strategist at Morgan Stanley. We are very pleased to be joined now by Mohamed El-Erian, the Chief Economics Adviser at Allianz, President of Queens' College Cambridge, and columnist for Bloomberg Opinion. Mohamed, thanks so much for joining us this morning on Bloomberg Daybreak. As we do see futures bouncing back just a bit this morning from the broad selloff that we've seen over the last several days, do you think this is as far as it's going, or could it go down further?
Good morning, Nathan. It's hard to tell. It could go further or it could consolidate. I don't want to sound wishy-washy, but there are some really complex technicals here and a lot of policy uncertainty. So this is a situation where the most important question as an investor that you need to ask yourself is: what mistake can I afford to make? Because when the world is so unpredictable, the probability of a mistake goes up. No one wants to make a mistake, Nathan, but sometimes mistakes are forced on you. People have to make sure that their mistakes are recoverable, because the good news is with time, most investment mistakes are recoverable.
Are you implying that it was a mistake to expect that we would see broad stimulus right away from President Trump, that the markets seem to be pricing in after his election in November?
I think the market understood that there were five policy areas that the president intended to pursue that would impact corporate profitability and financial markets. You know them: trade and tariffs in particular, public sector reform and what DOGE is doing, energy, deregulation. The view was that we will get a big bang, that the president would move on all five simultaneously, and the markets would benefit from deregulation, lower energy prices, and they would be able to absorb the littler disturbances that come from tariffs and DOGE. As it turns out, we're getting the tariffs and the DOGE first, and the others will come later, including tax cuts. So the question that the market has to deal with today, Nathan, is: can we manage this bumpy journey to a better destination? And that is what people are trying to figure out.
