Chief U.S. Equity Strategist & Chief Investment Officer, Morgan Stanley
Morgan Stanley's Wilson Says Investors Looking Past War
Investors are already looking beyond the US-Iran war, according to Morgan Stanley Chief Investment Officer Mike Wilson, even with the two sides working on a deal that defers many of the conflict's thorniest issues. He speaks with Lisa Abramowicz and Annmarie Hordern on ``Bloomberg Surveillance.''
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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 (14 segments)
✨ AI-enhanced transcript with speaker attribution
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Host0:00
Mike Wilson of Morgan Stanley writing, if there is a stable resolution in the Middle East, the bond market might walk back the Fed hike it's currently pricing in. Our conviction in the current bull market is intact. Mike joins us now for more. Mike, always great to see you. Thanks for being here. Let's start there. This idea of what a bull market means, does it mean stocks just go up into the right, or does this mean that there is some sort of cyclical undercurrent that shows an economy that truly is strengthening?
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Michael Wilson0:27
Well, let's go back to why we're in a bull market. It's all about the recovery from the rolling recession from a year ago, this operating leverage story. It's an earnings driven bull market. Right? So last year, we got the multiple expansion in advance of predicting that was gonna happen. And as you recall going into this year, there were a lot of boo birds on the economy. People were very nervous about earnings, and we took the opposite view. I mean, nominal GDP is booming. It's seven to 8%, and that's in place. So what's going on now is the multiple's coming down over the last six months, but the earnings have been so good that the market can still go up. So the next phase of the bull market at this stage typically is multiples are flat to down. Earnings come through as expected, but that can drive the stock market higher, and you get rotations to the areas where that earnings growth is underappreciated. And we think that yesterday's action is some evidence that maybe we're gonna have that next rotation. We've already had several rotations this year, and we think that next rotation is in some of the areas you mentioned, like regional banks or consumer goods, which are asymmetrically positively inspired by oil prices coming down.
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Host1:29
This has been the argument that the rally in the equity market is entirely driven by fundamentals, and then SpaceX happened. How much does that kind of torpedo some of this thesis?
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Michael Wilson1:39
Well, look. I mean, markets are driven by fundamentals and animal spirits at the same time. You can't separate the two. They work in harmony. And so yeah, it's a little frothy right now in certain areas. I mean, not necessarily in those areas, there's a lot of leverage in the system in semiconductors as an example, and that's coming out now a little bit. That's something we wrote about two weeks ago. To me, that's a healthy development as long as there's some place to go to. Right? And so if there's no place to go to, then you can have a much more serious downturn that can turn into something that's more severe. I don't think that's happening. We think this is a normal transition. I wanna go back once again to the beginning of the year when people were really kind of pessimistic about growth. All we've seen this year is one rotation to the next from commodities. Okay? What happened this year? The Fed started printing money again. Right? They did the RMP. That went into gold and silver stocks, then it went into metals and rare earths, then it went into energy stocks, ended up in semiconductors. Where do all those have in common? They're all commodities. Okay? So we've had a commodity rally basically bouncing around, and we think now we're gonna get that broadening out story. It was going in January and February, and it was halted by the war in Iran and the oil price spike and the repricing of the Fed. That now is subsiding, and so we can rotate back to some of these areas, procyclical areas where the earnings are quite good, but they're underappreciated by the market.
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Host2:55
What if we get a hawkish Kevin Walsh? Could that hurt the rotation?
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Michael Wilson2:58
We'll define hawkish Kevin Walsh. I mean, there's a couple ways to think about that. I think one is on the rate side, which I think is unlikely. Okay. The other is on the balance sheet, and we don't really know yet how he's gonna wanna position that. What I would say, we've heard about this this past week, is we already know what's happening, okay, which is that Jay Powell left him a nice little package, which is that we're basically already seeing a deceleration in the RMP. Okay? So this is a I've spent the last two years painstakingly trying to follow liquidity because that has been the main driver of the animal spirits. And it was very positive at the beginning of the year when they restarted the RMP or asset purchases, and you had treasury buybacks as well. And the SLR increased some capital from the banks. That now is decelerating. Right? You've moved on from 40 billion a month in RMP to 10 billion a month. So that's a deceleration that's already in place. He's inheriting that. Is he gonna come out and say, hey, we're gonna increase that? Probably not. Is he gonna say we're gonna kill it? Probably not. But that deceleration is still in place. So I think we already know the answer to the test. Okay? We're having a deceleration in liquidity in the moment, and that to me, as we've been talking about, is sort of where you can have this summer chop and summer correction. Like, in this rotation yesterday, you said it already, we're getting a rotation in a down tape. Okay? That's what I expect. We're gonna get a down tape, but we're gonna get a rotation, and that's a signal that we're seeing a leadership change.
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Host4:18
What's the next risk on the horizon? The market was able to get through tariffs. Obviously, they're looking beyond now the conflict in Iran. For the rest of the year, is it just that potentially? I mean, the president says if he sees in Iran, he'll start strikes again. Is that what potentially could be disruptive?
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Michael Wilson4:34
Well, I mean, your viewers probably won't like me saying this, but the markets moved past the war. You know, they moved past tariffs a year ago. I remember this time last year, June 2025, everybody was still harping on tariffs, and we had said a month before, like, we've moved past tariffs. And so it's just I feel it's the same thing. The other thing we learned in this war, which is amazing, okay, and I didn't expect this, is we just learned how much supply is out there. Okay? I mean, like, if you had the situation this is a perfect storm. If you're an energy bull at the beginning of the year, by the way, energy stocks did incredibly well, and then they peaked literally the day of the attacks. So if you think about this event, you can only get to $125 in oil. And if you inflation adjust that, that's so far below where we were in the Russia Ukraine war that began five years ago. So that to me is just a really strong signal that the world is very resilient in terms of finding energy. China is a big part of the excess of all the storage. But to me, that's a very bearish view for oil going forward.
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Host5:33
You're pointing to something that's fascinating. Do you think that the trade in terms of bullish on commodities is ending? The idea that that is going to be the outperforming sector in the rally, which has worked at least year to date.
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Michael Wilson5:46
Well, no. I think what I'm saying is that there are multiple types of commodities. And the reason why commodities have done so well this year at different times is because of the liquidity picture, which was so robust. We've written a lot about this last two weeks, which is we think that between the Fed, the treasury, and then the deregulation, they've added over half a trillion dollars of liquidity to the system. So the whole rates argument is a sideshow to me. It's just a sideshow. I mean, it's been neutral. You know? Yes. To date, has the Fed been less dovish than expected at the beginning of the year, including me? Yes. Have they been way more dovish on balance sheet? Absolutely. And that has trumped the negativity. Now having said all that, multiples have come down this year. Okay? So multiples have come down because we're later in the earning cycle. We're gonna get our peak rate of change in earnings revisions too. So the combination of peak rate of change on earnings revisions, peak rate of change on liquidity tells me that we're in a corrective mode right now.
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Host6:42
Well, I guess another way to ask is do you expect that Fed chair Kevin Walsh to pull back some of this liquidity in the face of these pockets of froth as you called them?
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Michael Wilson6:50
It's already happening. It's already happened. In other words, the path has already been set. We're having a deceleration in the rate of change of liquidity being provided to the market. That's what the market's picking up right now. The question, which you may or may not answer today, is what are you gonna do going forward? Are you going to be active using the balance sheet in helping funding markets stabilize, which is what the last Fed chair did, Jay Powell, which is still there, by the way. So they're probably having a conversation about this. So, you know, I think they will ultimately. In other words, I think the Fed and treasury will provide more liquidity if they need to. But right now, they don't need to because bond volatility is totally under control. Funding markets are totally good. We're seeing issuance of equities and credit being absorbed, so they don't need to do anything right now. Why spend your bullets? And so there's a lesson in that. We kinda need the markets to pressure them to provide more liquidity. And the reason why we need more liquidity is because the economy is booming. Okay? I mean, we're growing seven to 8% nominally. That absorbs a lot of capital. Money supply is only growing six, so that money's gotta come from somewhere.
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Host7:56
Do you think that the market could still hit your 8,000 target for the S&P by the year end if you do see a rotation away from some of the hyperscalers, away from some of the semiconductors, given how much they've rallied, given the proportion of them into the entire rally, and given how small the relative economy has gotten in response?
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Michael Wilson8:14
Yes. Because I don't expect these stocks to correct more than whatever 10%. I mean, they're gonna correct, and then they're gonna come back. I don't anticipate that this is the end of the AI CapEx cycle or the end of these stocks working. I'm just saying the relative outperformance doesn't make sense to me given the relative earnings revisions in these other areas. And by the way, just a reminder, that happens at the beginning of the year. At the beginning of the year, these stocks were all underperforming. So, you know, it's just the hot dot becomes all the attention of the market goes right there. And I like to try and think six months in the future. I try, you know, my job is to tell you what's going to happen, not what is happening. Okay? That's harder. And so people don't like to do that, but I try to do that. And I'm telling you that I think we're gonna get a rotation, but it doesn't kill the bull market.