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It, Morgan Stanley, how about Andrew Parker, Michelle, We've heard Dana, Diane Ding, I should say, and my eyes are failing me and Nicholas Lentini. They get to work with Mike Wilson, which is a good and wonderful thing. Michael Wilson, thank you so much for joining this morning. You called a new bullmarket and you say you have a higher conviction into twenty twenty six.
Why, yeah, thanks Tom.
I mean we talked about this in our midyear outlook going back to May, which we felt like the April lows would be a durable low for a lot of different reasons. I'll try to go through them in no specific order, but I mean, you know, we have had the view coming into this year that it was going to be a tough first half because earnings revisions were coming down pretty sharply for a lot of reasons, most
notably the AI capex cycle was the celerating. We still had what I would call a rolling recession in many industries that were struggling, and the revisions were coming down. So what tariffs did was it sort of culminated that decline into April. And as you know, I mean you've been around the block like me, I mean, market's bottom on bad news, okay, And so that I would have likened the Liberation Day announcement to sort of a natural
disaster that basically, you know, capitulated, everybody capitulated. So that revision of revision factors the main driver when we're bullish, we think it's a bull market, is the revision factors for earnings are have shot higher. And you've seen our notes, Okay, So like that's that is doesn't happen every year. That is as extreme as we saw coming out of the COVID lows in March of twenty twenty. Okay, it's as extreme as we saw coming out of nine to eleven.
It looked like a recession, It walks like a recession, It priced like a recession.
So that's it, right, Okay. This is a really critical question, folks.
We all understand the Trump legislation, the Beautiful Bill and all that as some form of stimulus forward at least out one two years, maybe three years.
It Morgan Stanley, Mike Wilson.
The key question is the linkage of potential rate cuts to equity enthusiasm.
I don't have a straight answer on that yet.
Can we link Powell, our future chairman, rate cuts into an equity lift?
Yeah, well, I think, I mean, as usual, the markets get ahead of this, and what the markets are anticipating now, the bond market and the equity markets that the FED will be cutting sometime in the next you know, two to six months. And you know, even our house call, I mean, our house calls for no cuts this year, but then they have seven cuts next year. I mean,
that's like wildly bullish for equities. Okay, so you know it's you almost have the perfect setup, Tom, because what you have now is lagging economic data, which is what the FED uses to make decisions, and you have you already had the equity market in ear any divisions telling you what's going to happen, So you know they're looking backwards.
They're gonna be looking at lagging labor.
Data, you know, and then of course lagging inflation data, which should come down ultimately later this year next year, and they're going to cut into that.
And but the but you.
Know, there's not going to be a knock on negative effect for earning revisions in the way that people kind of assume when you get that sort of decline in labor data. In fact, I would argue, because it's gradual that we're going to see revisions go up, because you know when companies reduce headcount, it actually accrues to margins.
Mike, what are what is screening well for you?
Now?
I'm not sure if it's sectors that you guys screened by or different factors that you screen by. How are you looking at this market and maybe where opportunities might.
Be right, So we do both.
We look at factor revisions, we look at sector industry revisions.
And we look at the stock level too.
It works in all those areas, and so we've been rightly positioned, really since April to be overweight financials industrials. Those are the two favorites, and also software to some degree, and those have been the areas where the revisions have been the longest, and I think that probably could continue.
And so at the end of the day, I do think the biggest.
Opportunity going forward is the areas that have not seen those revisions yet. So let's talk about the industries where we've been sort of in this rolling recession. Housing related Okay, commodity related some of the consumer goods areas which are going to feel the effects of terrors now. So in the very short term, we actually think revision breath could come down a bit as some of these you know, terrorts.
Flow through the cost of good soul. But that's just going to.
Create the next buying opportunity perhaps in these areas that are lagged, even small caps, because they will love the fact that that's cutting rates at some point.
Mike, one of the themes today and really for the last period of time has been concentration risk. In this marketplace, it seems like only a handful of stocks are driving the performance. But I think what we're kind of coming to the conclusion of our least rationalizing is because that's where the earnest growth is, that's where the free cash flow is. How do you think about that issue?
You're exactly right. I mean, the market's not stupid.
I mean, the first of all, what drove the market lower in the first quarter the MAG seven You know why, because the MAG seven orange.
Divisions were terrible. In the first quarter. We had an AI camp bACC acceleration.
We had questions around whether it's going to generate ROI revenue growth kind of decelerated a bit, so you know, it happened for a reason, but has nothing to do with teriffs, Okay.
It has everything to do which is.
The natural evolution of this AI cycle that's going on.
So I think, you know, coming out of the April lows.
The reason why the MAG seven led is well, hey, they're big and liquid, everybody loves them, but also because they were seeing a rate of change bottom in the revision factors.
I'll give you two huge catalysts for that.
The weaker dollar, okay, which accrues to the large multinationals, particularly some of the MAGS seven. And the second one was that we saw that you know, U Nvidia could no longer sell they could sell they could no longer sell chips to China, and they took a big write down on inventory. But now they can sell those chips when the inventory is at zero. So what does that tell you? Gross margins are going to be basically manufactured
for the next year. So there's a lot of reasons, you know, why stocks do what they do, But the main reason we for our whole franchise, as you know, focuses on earnings, not lagging economic Data.
Mike Wilson with us across your commute this morning, across the nation, I should say, on YouTube as well, in the office and of course at home.
YouTube.
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