Chief Economic Advisor, Allianz
Special Report: Global Market Selloff Easing with Mike Wilson and Mohamed El-Erian | Bloomberg...
Bloomberg's Nathan Hager breaks down the recent market volatility with Morgan Stanley's Mike Wilson and Bloomberg Opinion contributor Mohamed El-Erian.
Global stocks steadied from a selloff and US stock futures signaled a Wall Street bounce, as Bloomberg News reported President Donald Trump will meet with top business executives later in the day. Contracts for the Nasdaq 100 rose 0.5% after the index’s deepest slump since 2022, while those on the S&P 500 climbed 0.4%. Tesla Inc. shares rose in premarket trading after Monday’s 15% slide while other tech names including Nvidia Corp. also edged...
About Mohammed El-erian
Mohamed El-Erian, chief economic advisor at Allianz and a professor at the Wharton School, has appeared on CNBC multiple times in recent months to discuss the economic impact of geopolitical conflicts, inflation, and Federal Reserve policy. He stated that the U.S. economy has so far avoided "demand destruction" from the Middle East war, but warned that the next phase of the shock would involve affordability issues severe enough to reduce consumer spending. He described the current economic environment as having four phases: higher energy prices, broader inflation, demand destruction, and potential financial instability. El-Erian said he is "really worried" about the UK, noting that the 10-year yield above 5% is "crippling for mortgages and for businesses" and makes government debt more explosive. Regarding the Federal Reserve, El-Erian said he expects the Fed to "sit on their hands" and not cut rates for most of the year, and that a rate hike is more likely than a cut. He suggested the Fed is tolerating a 3% inflation target rather than 2%, as long as inflation expectations remain stable. On Fed Chair nominee Kevin Warsh, El-Erian said he believes Warsh will "err on the side of lowering rates earlier" than the current Fed would, citing Warsh's belief in the productivity enhancement of AI. El-Erian also expressed concern about the volume of funding needed from capital markets, citing large IPOs, government deficits, and corporate borrowing for AI investment, and said he cannot identify where all the money will come from, predicting it will push borrowing costs higher.
Transcript (33 segments)
✨ AI-enhanced transcript with speaker attribution
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Nathan Hagar0:02
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?
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Mike Wilson0:31
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.
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Nathan Hagar2:41
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?
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Mike Wilson2:58
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.
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Nathan Hagar3:27
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?
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Mike Wilson3:37
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.
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Nathan Hagar4:43
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?
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Mike Wilson5:00
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.
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Nathan Hagar6:20
Well, Mike, if you're looking for a Fed put, do you think we could get one this half?
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Mike Wilson6:26
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.
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Nathan Hagar6:55
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?
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Mike Wilson7:06
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.
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Nathan Hagar8:00
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?
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Mohamed El-Erian8:34
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.
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Nathan Hagar9:17
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?
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Mohamed El-Erian9:30
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.
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Nathan Hagar10:42
As we try to figure this out, Mohamed, is US exceptionalism, something you've been talking about for quite some time, at risk now?
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Mohamed El-Erian10:49
I think what's at risk is one of the US's edges, and it's really important in financial markets and in the global economy to understand what your edge is. One of the US edges is predictability and the rule of law. The more these two things are questioned, the more people are going to start questioning economic exceptionalism. The other elements of economic exceptionalism are still sound. We have an incredibly entrepreneurial economy, we have one of the best private sectors, we are relatively closed, meaning that other countries can't force outcomes on us. So there's a lot that's still going well for the US economy, but there's a question about this edge of predictability, transparency, and the rule of law.
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Nathan Hagar11:42
We're speaking with Mohamed El-Erian, columnist for Bloomberg Opinion and President of Queens' College Cambridge. Mohamed, what brings US exceptionalism back more strongly for the market as we continue to watch these policy uncertainties play out for investors?
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Mohamed El-Erian12:05
I'll quote a CEO friend of mine who simply said: 'I just want to know what operating environment I am in. Are tariffs going to stay or not? Is there going to be a massive layoff from the federal government or not? Is the federal government going to honor their commitments in terms of contracts or not?' Clarity is what people want, Nathan. The US is agile enough to operate in many different environments, but what business leaders need is clarity. You're starting to hear this phrase 'wait and see' over and over again in corporate calls. Companies are just waiting to see what's happening before they commit to major expenditure. The problem is if they wait and see, and if consumers start feeling income insecure, then we could easily talk ourselves or wait ourselves into a recession.
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Nathan Hagar13:05
Are investors finding clarity outside the US? Is that something that could cause investors to think about putting more of their money into assets outside the US?
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Mohamed El-Erian13:18
That's happening. There's been an enormous upending of all the consensus trades that were in place at the beginning of the year. At the beginning of the year, consensus was US equities over the rest of the world, US yields will go higher while German yields will stay low, the dollar was strengthened especially against the euro which may reach parity. All those trades have been turned on their head. People are favoring foreign equities relative to the US. They've massively outperformed the US. We've seen a significant compression in the yield differential between the US and Germany, and the dollar has weakened. It's another half a percent weaker today, and the euro, which was expected to go to parity, is at 1.09. So the market has seen a reason to exploit what have been significant valuation differences, not only because there's a growth scare in the US, but there's the hope for what's called a Sputnik moment in Germany in particular.
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Nathan Hagar14:26
Do you think we could see clarity from the Federal Reserve, or do you think the Fed is going to stay on the sidelines waiting for some of this policy uncertainty to get ironed out from the Trump administration? Powell made it very clear they do not see a reason to move. They will also be in a wait-and-see attitude. Is that the right move? What could get the Fed off the sidelines?
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Mohamed El-Erian14:56
Nathan, you know that for a very long time I've complained that the Fed is overly reactive. By being so reactive, whether it's data dependence with a vengeance, it tends to add and accentuate volatility rather than act as an anchor of stability. But this is the reality of today's Fed. After the big mistake they made in 2022 by calling inflation transitory, they became very reactive. So we should not expect the Fed to take the lead here.
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Nathan Hagar15:35
We get into your latest column for Bloomberg Opinion talking about the Fed. You were arguing that the fixation on the 2% inflation target is risky. Talk a little bit more about that view and why you see that risk.
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Mohamed El-Erian15:48
The 2% target is a historic accident. It was something that the Bank of New Zealand, the Reserve Bank of New Zealand, came up with during an inflation targeting exercise, and it stuck because the world entered a massive phase of disinflation. The entry of China into the global economy was a very positive supply shock, the dismantling of the Soviet Union was a very positive supply shock, and we didn't have to worry about inflation. 2% seemed fine. Now we are having not favorable supply shocks but unfavorable supply shocks. The global economy is fragmenting, supply chains are being rewired, we're having tariffs, trade walls, rapid digitization of investment tools. In a world like this, you have to ask the question: is 2% still the right target? Because if you pursue the wrong target, then you will sacrifice growth, you will sacrifice employment, and ultimately you will undermine the independence of the Fed. Now, I don't think the Fed will change its inflation target anytime soon, but it certainly needs to be thinking about whether 2% is the right target.
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Nathan Hagar17:06
What would the market impact be if the Fed did decide to change its 2% inflation target, move things higher? How would the market react to that?
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Mohamed El-Erian17:16
That's the argument that's being used: if you change it, then you will destabilize inflation expectations. I think that argument has been taken to an extreme. Most of us who believe that the Fed should think about this are suggesting two things. One, the change wouldn't be massive. It would include going to a band, not a point estimate, and the lower end of that band would be either two and a quarter or two and a half, so call it a 2.5 to 3% inflation target. That is not something that will fundamentally destabilize markets. And the second thing we argue is that it can be done in a phased manner that doesn't destabilize markets.
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Nathan Hagar18:04
I wonder if inflation expectations are starting to get unanchored now when we're seeing a lot of survey data showing 3% inflation expectations in the short to medium term, and a lot of worry, as we've been talking about, that tariffs could raise prices longer term.
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Mohamed El-Erian18:23
Yes, and we saw another one at 4.8% two weeks ago. So inflation expectations have moved up as people have realized that we're having all these disruptions. I think people have also realized that if the Fed was truly pursuing a 2% inflation target, we would be speculating in the marketplace not about how many cuts we're going to get next this year, but we'd be speculating about when is the first hike. We will get the CPI report tomorrow, and my hope is that it's not hot. But there is a sense in the marketplace right now that actually 2% is not the target being pursued, but no one quite knows what is being pursued, and that's the danger in this environment.
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Nathan Hagar19:11
With this idea that we could see inflation start to get unanchored, what does that mean for the growth outlook when we're seeing so much concern in the market with this selloff that we could be heading into, if not a slowdown, a recession?
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Mohamed El-Erian19:29
Let's speak numbers, Nathan. The US economy grew by 2.8% last year. Coming into this year, the consensus forecast was 2.5%. I strongly believe that we're going to have a massive round of revisions to these forecasts, and that the consensus forecast will fall from 2.5% to somewhere between 1.5% and 2%. It's not recession. In fact, my probability of recession is 25 to 30%. But it is close to this notion of stall speed, which is about 1%. So the US is looking right now at slower growth and higher inflation than what was expected a few months ago. It's the good old-fashioned stagflation. It's the smell of stagflation. I want to stress, those of us who lived through stagflation in the 70s and early 80s think that this is nothing, but it is a whiff of stagflation for an economy that has not had to deal with this.
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Nathan Hagar20:38
Really appreciate the extended time this morning, Mohamed. Great to have you with us on Daybreak this morning. That was Mohamed El-Erian with us this morning. He is the Chief Economics Adviser at Allianz, President of Queens' College Cambridge, and of course he is a columnist for Bloomberg Opinion. You can find his columns at OPINION on the Bloomberg terminal.