Morgan Stanley Chief US Equity Strategist Mike Wilson Talks AI Research on Wall Street |...

Yeah, I mean it's more of the same. A little known fact is that I started as the original tech sales desk analyst in the '90s. And so I had a front row seat to the whole

Boom and bust of that.

Whole thing.

Yeah. So all these names and everything else. The point is that this is just another capex cycle. This is the next tech cycle. There are a lot of similarities and a lot of differences. We are in the middle of it right now, and that continues. The reason I feel confident it is not at the end of the road yet is because the capital markets are still funding this and the companies are being rewarded for it. When we look at this carefully, capex to sales ratio is being rewarded in the marketplace. If you are spending more, the stock goes up. Eventually that will become a headwind, and we will figure out when that is. When that starts to happen, you have to worry. The other thing to pay attention to is credit spreads. For some companies, credit spreads have blown out or CDSs have gone up because at the margin, we are seeing some companies not being rewarded for higher capex because they are viewed as losers. But broadly speaking, that is not the case yet. There are early warning signs, canaries in the coal mine. I will say this: there is a 100% chance there will be malinvestment here, just like every major capex. That sounds like a crazy statement, but it is no different from fracking, railroads, or the electricity cycle. We are probably not there yet. The other thing to keep in mind is that the marginal cost of compute, the marginal cost of the product itself, has to go to zero for it to work. It will go to zero. It will be an all-you-can-eat plan. We are in that transition period. I think we are now in the transition from the picks and shovels to the adopters. We are seeing actual adopters of the technology becoming more efficient, driving revenue, not just cutting costs by hiring fewer people. That transition could last several years. And then ultimately, we will have the other side of it.

Yeah, so we are seeing a peak rate of change in the revision breadth in a lot of different areas. One of those is semiconductors, where we haven't seen it roll over, but it is at such a high level it cannot sustain. Since ChatGPT was announced in November of '22, we have had three decent corrections in this bull cycle of capex. At three different times, these stocks have gone down 30 to 50%. So we can have a 30 to 50% drawdown and still have the long cycle intact. That is what I expect to see. I suspect we will see another one of those scares. By the way, in March the memory stocks were down 30 to 40%. Should have bought them. And then they went up five times. I know.

So trying to trade that back and forth is for the pros only. We try to do that a little bit, but for the average person, I don't think it is the end. But to think that you cannot have these big cyclical resets is pretty naive.

Well, the appetite is still there. Like I said earlier, the market is absorbing a lot of paper. And it is not just in equities, it is in credit.

We have seen massive credit offerings, which means the market is funding these expenditures. It is unlikely these companies are going to raise the money and not spend it. That is why everybody is so excited about semiconductors, but to your point, Matt, the market is not dumb. People say, oh, this is what happened in the news today. Do I care if I am an equity guy? Not really, because the market is usually thinking six months in advance. That is why we look at indicators like revision breadth because they are canaries that tell me things are accelerating. One of the reasons we got so bullish last year, we were debating this on your other show, is we saw the revision breadth going and we had a different view, but that was almost cheating. We can see in three months what is going to happen to actual earnings. It is a tell. That is why I am so focused right now that we are at such high levels on rate of change that it has to come off a bit, but I don't think it is the end. It is a reset a little bit on the rate of change.

Are you doing that today or are you?

Radio and TV?

Yeah, once again, that can lead to corrections. We have been very focused in the last two months on liquidity. Earlier this year, people were kind of bearish on the economy and on earnings, and that turned out to be true. But what they should have been focused on was that the Fed was transitioning from being less dovish on rate guidance to more dovish on liquidity, which helped stocks bottom in March. Right now, that liquidity picture is actually somewhat deteriorating. Today's meeting with the new Fed chair is going to be important to see how they will think about the reserve management program or purchases and managing liquidity in the face of liquidity being sucked out of the marketplace. There are three draws on liquidity now. One is all this issuance in both equity and fixed income. The other is the economy itself, which is absorbing capital in a way we haven't seen. The other big change, Matt, from not just net issuance, but net consumption of liquidity in the real economy. We haven't been investing for 20 years. We have been in a world of financial repression. That means a more volatile world, but it also leads to higher nominal GDP growth. That is why I am not worried about earnings growth at all. I am worried about the multiple in these sort of drawdowns due to volatility and liquidity and the peak rate of change on revisions.