Morgan Stanley's Mike Wilson writes in this the data tell us growth and inflation are slowing directionally, and the FED will be easing this year as a result. Under such conditions, quality growth outperforms when in doubt, it pays to go with the highest probability winner. In this case, it's high quality growth. Mike com police to say, joins us. Now for more. Mike, it's going to see you.
Yeah, great to see you guys.
Good morning, fantastic. Have you with us around the table. We'll get to stocks in a second. I want to talk about the outlook. A convictionless outlook was a theme in a recent note of yours. How convictionless are things right now?
Well, look, we just we spend time with clients all the time, that's what we do for a living.
And I would just say that, you know, we had this.
Big rally after you know, the pivot, and I would say it started with the Treasury squeeze when they said they're an issue less coupon. So it was really a duration rally that then fed into a stock rally. And so now evaluations are stressed again and people are looking around going Okay, what's next what's the next catalyst. I think there's going to be a couple of things that will determine the direction. Number one, what is the how much deceleration do we get?
Okay?
What is the come back to this banking question? I think that's like to me, that issue is not a systemic issue.
What it is is.
A weight on growth and credit growth, Okay, Like the regional banking system is just not lending at the same rate that they were because they're constrained.
And that's been our.
View all along, which means quality stocks will continue to do better.
Right.
The companies that are relying on that kind of funding are going to continue to see that's a paperweight for them. And I think that's the main takeaway from the banking situation. And then, of course new themes will evolve. Last year was about two main themes, right, it was about GLPS and AI. So can those two themes continue to drive
you know, the stock market? Yeah, to some degree, but it's probably going to morph a bit and then there'll be new themes, and I think that's what that's what investors are looking for now, looking for new themes to kind of latch onto in a world that's going to remain macro uncertain, is why.
I always saying, can you identify any themes run now?
Well, I mean I think the AI theme is the one. Instead of enablers, we're going to adopters, right, So that's that's probably the biggest thing we have as a firm. The GOLP one is sort of positive and negative as we've seen, and that's so that's a great thing for long short investors.
And then I'm wondering if we're going to get some.
Growth out of the international markets finally, you know international you know, economies have not really recovered from the pandemic yet for the most part, and I think that's a wildcard.
So if that were to happen, that could.
Be a great thing for em It could be a theme for things that are levered more to global growth as opposed to just the US, which has really been the only engine of growth.
Since you say that you fly around and you talk with clients, I was just noticing some of your recent travels. You're recently in Miami. I'm at you getting a lot of points by the way. You talked about the AI stock, saying I think it's the magnificent four now and it's related to earnings.
Who are the magnificent four? Who gets dropped?
Yeah?
Well, I mean I think it's where I talking about specific names, but I think it's obvious people have been talking about this too. I'm not the only one, right, we're seeing you you can identify which stocks have fallen off. But when we look at his earnings, okay, and I would say, there's a magneficent one quite frankly that.
Has real top line acceleration growth. Everybody knows what it is, and then the other ones are been more cost cutting stories, right Nvidia.
Yeah, And my sense is, my sense is that what we're going to say here is a broadening out in quality growth. In other words, and we do our screens on quality growth, only twenty seven percent of that basket is in it. Another ten or twelve percent is in comm services. So there's another sixty to seventy percent of the S and P five hundred that kind of qualify for that high quality growth bucket. And that's what should happen. We should broaden out if we have a soft landing
that doesn't have other issues. And that's that's the other thing that we've been really trying to help clients with is give them a framework on the macro.
That's what we do. And so here's the Here are the three buckets.
Okay, soft landing, we're decelerating growth and decelerating inflation.
That's kind of what we had last year.
It's high quality growth, a soft landing with accelerating growth and maybe stickier inflation. And that's the environment where you can see a broadening out perhaps the lower quality areas.
And then the third scenario is still hard landing.
I mean, we can't eliminate that, and I think that's that's going to be how you know, that's going to determine how you position your portfolio from from a stock.
Standpoint, how do you hedge if you are cautious and there is this uncertainty? Is it energy stocks, is it more duration sensitive stocks? How do you even understand what it means to hedge when you have such bipolar types of outcomes.
Diversification, You've got to be diversified, now, you know. One of things we talked about this conference.
As well, which didn't make the headlines, is this idea that we finally have very attractive real rates and anominal rates to some degree. So from a portfolio construction standpoint. Okay, this is the first time in fifteen years where you can actually bonds actually provide their diversification benefit. And we saw that yesterday right bonds rallied stocks were down, So
you know that's we're very bullish. We've been bullish on duration since four ninety on a ten year I mean, so here we are whatever, it's probably not as good a value, but in the event that this something systemic does happen, there's another shock to the economy that bond portfolio now is that the yields are high enough where they can actually provide some diversification to your equity risk, which means you can take equity risk still.
Up the quality curve.
Okay, so it's a diversification between stocks and bonds, and then understanding what within the equity market you feel more comfortable with.
If look, if things.
Get better on the economic front and we see better growth, then we can go out the risk curve inequities. We can take more equity risk as long as we have that duration benefit.
On the bond side, you mentioned that changing theme from AI enable us to adopt us. What should I be looking for adopters? What does that mean, what does that look.
Like, Well, looks more non tech, right, So who are going to be the early adopters within you know, the adoption of tech AI as a cost benefit as well as driving new growth.
Now, I know we've written about this already. We think it's more of a twenty.
Five story, Okay, like the productivity story is really twenty five. So we're not that bullish on earnings this year. Relatives of the streets streets at like two forty four. Bottoms up, we're two thirty. That's the typical parent. That will probably come down to our two thirty. But then for next year we have two sixty six, a sixteen percent growth, and a lot of that's going to be driven by
productivity improvements as this is adopted. I don't think this is a second court you know, first, second, third quarter, even fourth quarter. It's going to take a little bit of time. But our analysts we've were to report recently bottoms up report identifying potential winners in that and the market will probably start to sniff that out sometime during the year. They're not going to wait all the way until twenty twenty five. But that's that runs the gamut of industries away from tech.
Are they labor intensive industries?
It can be.
It can be a labor intensive but it can also be growth drivers. I mean, like if you use AI to you know, as an effective way of marketing, like as a cheaper way of marketing to get new customers. I mean, we don't know yet. This is this is what's exciting about it. It's also uncertain. There's also gonna be a lot of losers.
Okay.
Now, one of the things that worries me a little bit about AI in the short term, We've seen a lot of layoffs recently within the tech sector. So you know, maybe they're maybe these guys are already seeing the benefits and they're able to remove headcounts.
So, you know, the labor.
Market, I think there's various views in the labor market. I mean, you know, our view is slowing, it's weakening, a lot of government jobs, a lot of healthcare social worker type jobs which are somewhat government related. And if companies get a fish, this could be an interesting catalyst actually for more layoffs potentially.
So it's it's going to be uncertain, right, Okay.
I just have to ask this because I get messages all the time, you're such a downer. Why are you so pessimistic when you go around and you're talking to different clients, how much pushback do you get to just sort of a more realistic view of the potential risks given that only the rosiest seem to have come to pass.
Well, Look, I mean our clients are active managers, right, so they're not worried about the S and P.
Five hundred. They're trying to find what works.
I mean, you know for all of the headlines we get around the S and P. Five hundred, mean what we usually talk to clients about our individual sectors.
And stocks and like what's going to work?
And so like last year we get a you know, an F on SMP, but we get probably an AARB on being in the right places in the market.
And you know, that's our job.
And then that's and that's what active managers are trying to do.
So you know, you don't have to be super bear super. It's not about being bullish or bearish.
It's about being bullish in certain parts of the market and opportunity and being cautious or concerned about others. And and look, last year was a was a really great stock picking market that most stocks. You know, up until October twenty seventh, we're had a tough time and then we had this little rally at end of the year. And we've been very consistent about this over the last twelve
to eighteen months. As you guys know, I mean, we don't think the trade is to then you go to the lower quality bucket, okay, to go for the low quality cyclicals, and like that's a recession trade. We're not in a recession. You know, you need a clearing event. That was our call in twenty twenty. Then that worked really really well. Don't overthink it, right, you need to buy the high quality growth stocks.
And it's not all mag seven all right.
There are other there are other businesses that have those characteristics who are maybe not as appreciated.
It's the mac ful, It's the mac won Lasa making friends. I love how you did that well. And if you get the feedback that I get, people hate and Anya for being clue me. Oh yeah, yeah all the time. It's okay.
I mean, honestly, I actually don't think I'm all that clueing.
But sometimes no, it's so Brami none, it's so that brand is so unfit. I'm greact my wolfs, and you're gonna stick with us. From Moke, standing from place to say