Bloomberg Audio Studios, Podcasts, radio news. Good morning, I'm Nathan Hager. I 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 sell off or is this a dead cat bounce for you?
Good morning, Good morning, Nathan. Look, I don't I mean, nobody knows if this is going to be it or not, but I will tell you that, you know, Friday look like that may have been it because we held the diner day moving average, you know, into the clothes, and then you know, kind of gave that back quickly on pretty good volume yesterday. So you know, look, we've been
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, something that doesn't get talked about much is that earnings revisions have been you know, rolling over for several months and led by the you know,
big tech gross stocks. So you know, that's the that's a story that gets buried in the you know, in the in the fine print for some reason, which is that you know, this AI capex story is decelerating. Obviously, the deep seek story that came out earlier this year and and all of that is really what's what's weighed on the kind of you know, US indices as much
as say doze the immigration enforcement in terraces and the like. So, look, the growth story has been deteriorating, markets have quickly adjusted. We've been using fifty five hundred as a low end of our range for the first half. We're almost there. You know, it's hard to predict things to the dollar obviously, are what we're really focused on is the revision factors and when they could next turn up or at least stabilize.
And we think there's 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 stabilized and that's really the positive canalysts that we're looking for to kind of get buyers to come
in here in the meantime. You know, look, I mean the markets have been very efficient in you know, focusing on the areas which have had positive earning revisions, and those areas being financial, software, consumer services, and media and entertainment, and likewise punishing those areas with bad revisions like materials, energy, some of the lower quality small cap areas, consumer goods, etc.
Is some of that bounce back that you're calling for in earnings revisions going to be driven by tax cuts? I only asked 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 what your view?
No, we're not anticipating tax cuts packed estimates anytime soon. I mean maybe later this year, once the legislative process continues. But you know, the way we're the way we understand it is is that these are not incremental tax cuts. These are an extension of existing tax cuts. So I don't 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 that's not our expectation at the moment.
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?
Yeah, I mean that's the that's just kind of the bull case. You know, Secretary best And talked about this last week and that there's no sort of Trump put, but there may be a Trump call, meaning, you know, the short term pain of some of the things that need to do to rebalance the economy, which I think
is a good idea, could lead to benefits later. And the most simplistic way of kind of explained that would be that we shrink the size of government and that sort of liberates the private economy ultimately via deregulation and some of the crowding out that's been going on now for several years. I mean, this is, by the way, that's not a new phenomenon. The government has been growing
for the better part of my adult life. And so you know, the fact that we're finally talking about maybe shrinking the government, I'm not really sure you know who's against that, because we know that's a that's an inefficient way to allocate capital. And 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 I think the explanation for what they're talking about.
Speaking with Mike Wilson, chief US equity strategist at Morgan Stanley in your start to the week, note Mike, of course you talked about putting your bottom for the S and P five hundred at fifty five hundred, we're pretty close to there. Now, what's the risk it could go even lower than that?
Well, the risk is that this, you know, turns into a hard landing. That's not our view at the moment. I think, you know, we need to see more more damage here. But it also becomes somewhat reflexive, meaning the more the stock market goes down, the risk that that turns into you know, consumer spending at the high end coming down as well, so it becomes kind of self fulfilling. So we're in we're just in that reflective period right now.
I would say, you know, as I mentioned earlier, there's no quote unquote Trump put If you want to put it that way, I think there is a FED put, and I you know, I think if growth were to deteriorate meaningfully, and you know Chair Powell talked about this last week. I mean, they have a lot of firepower to respond, So it's going to be, you know, one of these one of these years where you just got to be really paying attention minutes to minute, day to day, week to week, kind of to the to the changes
here at the margin. The good news is that the markets have quickly adjusted to kind of what we've been forecasting, which is, you know, growth is disappointing in the first half. And look at me. While the S and P is only down eight percent, I mean a lot of stocks are down twenty thirty, forty percent. So, like you know,
when these corrections happen, they happen quickly. And my guess is that we're already seeing bargains in some areas that you know probably will end up being being good entry points right here right now.
Well, Mike, if you're looking for a FED put, do you think we could get one this half?
Well, like I said, the downside, you know, the risk is that we have a you know, the growth scare turns into a recession scare, and and we're not there yet, right And I think you know, Terry poul said that, he said the economy's fine at the moment. What I'm saying is is if it deteriorates quickly, I think the FED will respond quickly. But that's a you know, they'll respond to growth. Uh, then that they probably won't respond
to the stock market. So I think there's a there's a put as it relates to the growth risk.
So 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?
Well, we're pretty comfortable right now. I mean, we we have a focused list that's actually up on the year close to seven percent, so you know, and that's that's really a large cap quality somewhat defensive bid to it, you know, And so we feel like we've been positioned for this. And now the question is when do we pivot to get more aggressive and get you know, kind of go higher beta, maybe even go down the cap curve.
We're not there yet, but I mean that so we're we think we're set up for it, and and and and our portfolios are performing as a result. The key question is, you know, when is the time to get more aggressive like we did last fall kind of going into the election and the FED cuts that we saw, and you know, well, we'll let you know, 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. And as you know, we publish every week, so you know, stay tuned.
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 Mohammad Alarian, the chief economics advisor at Alliance, President of Queen's College, Cambridge, and columnist for Bloomberg Opinion. Muhammad, 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 sell off that we've seen
over the last several days. Do you think this is as far as it's going? Could it go down further? Good morning, Good.
Morning, Nathan. It's hard to tell it could go further or consolidate. And I don't want to sound wishy washy, but there are some really complex technicals here, and there's a lot of policy uncertainty. So these are One of these is a situation where the most important question is an investor that you need to ask yourself is what mistake can our fort 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, and people have to make sure that their mistakes are recoverable, because the good news is, with time, most investment mistakes are recoverable.
Are you implying that it was a mistake to expect that we would see broad stimulus right away from President Trump? The market seemed to be pricing in after his election in November, So.
I think, Nathan, the market understood that there were five policy areas that the president intended to pursue that would impact corporate profitability and financial markets. And you know them is trade and tariffs in particular, It's about public sector
reform and what DOGE is doing. It's about energy, it's about deregulation, and 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, they would benefit from lower energy prices, and they would be able to absorb the little disturbances that comes from tariff and DOGE. As it turns out, we're getting the tariffs under 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.
As we try to figure this out, Muhammad, is US exceptionalism something you've been talking about for quite some time is that at risk?
Now? I think what's that risk? Is one of the US's edges, And it's really important in financial markets, in global in the global economy to understand what your edge is is. And one of the US edges is predictability and the rule of law. And the more these two things are questioned, the more people are going to start questioning economic exceptionalisms. 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.
We're speaking with Muhammad al Arian, columnists for Bloomberg Opinion and president of Queen's College, Cambridge. Muhammad what brings us exceptionalism back more strongly for the market as we continue to watch these policy uncertainties play out For investors.
I'll quote a CEO friend of mine who simply said, I just want to know what operating environment I am in ore Tariff's going to stay and they're not going to stay. Is there going to be a massive layoff from the federal government or not? Is the federal government going to honor the commitments in terms of contracts or not. Clarity is what people want, Nathan, that you know, the US is agile enough to operate in many different environments,
but what business leaders need is clarity. And 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 not feeling income insecure, then we could easily walk ourselves or weigh ourselves into a recession.
Our 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.
That's happening, you know, There's been an enormous up ending of all the consensus trades that were in place at the beginning of the year. So in the beginning of the year, consensus was favor US equities over the rest of the world. It was usuels will go higher while Germany yels will stay low. It was the dollar with strengthen, especially against the Euro, which may reach parody. All those
trades have been turned on their head. People are favoring foreign equities relative to US that massively outperformed the US. We've seen a significant compression in the yield differential between the US and Germany and the dollars weekend. It's another half a percent week of today, and the euro, which was expected to go to parody, is at one o nine.
So the market has seen a reason to exploit what have been significant valuation difference is why not only because there's a growth sca in the US, but there's the hope for what's called the spot Nik moment in Germany, in particular the Germany. Will we sorry go ahead?
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.
Chair Power 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? I mean, what could get the FED off the sidelines?
So, Nathan, you know that for a very long time of complaining that the FED is open reactive, that by being so reactive, whether it's data dependence with wait and see, it tends to add and accentuate volatility rather than act as an anank of stability and as a nose star. But this is the reality of the day's Fed, after the big mistake they made in twenty twenty one twenty two by cooling inflation transitory that become very reactive. So we should not expect the FED to take the lead here.
We want to get into your latest column for Bloomberg Opinion. Talking about the FED, you are arguing that the fixation on the two percent inflation target is risky. Talk a little bit more about that view and why you see that risk, what the risk is.
You know, the two percent target is a historic accident. It was something that in the Bank of New Zealand, the Reserve Bank of Newton and came up 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, and two
percent seem fine. Now we are having not favorable supply shocks, but unfavorable supply shock. The global economy is fragmenting. Supply chains are being rewired, we're having tariffs, we're having trade ward, we have rapidization of investment tools. In a world like this, you have to ask you the question, is two percent
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 two percent is the right target.
Well, what would the market impact be if the FED did decide to change its two percent inflation target move things higher? How would the market react to that?
And that's the argument that's being used that 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 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 in two and a half, so call it a two and a half to three percent
inflation target. That is not something that will fundamentally decibilized market. And on second thing that we argue is it can be done in a phase manner that doesn't de stabilized markets.
I wonder if inflation expectations are starting to get unanchored now when we're seeing a lot of survey data showing three percent 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.
Yes, and we saw another one at four point eight 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 two percent inflation target, we would be speculating in the marketplace not about how many cuts are we going to get next this year, but we'd be speculating about when is the first hike. And we will get the CPI report tomorrow, and my hope is that
it's not hot. But there was a sense in the marketplace right now that actually two percent is not the target being pursued, but no one quite knows what is being pursued, and that's the danger that they right now in this environment.
So 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 sell off, that we could be heading into, if not a slowdown or recession.
So let's speak numbers, Nathan. The US economy grew by two point eight percent last year. Coming into this year, the consensus forecast was two point five. 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 two and a half the somewhere between one and a half and two. It's not recession. In fact, my
properlity of recession is twenty five to thirty percent. But it is close to this notion of stall speed, which is about one percent. So the US is looking right now at slower growth, and the US is looking right now at higher inflation than what was expected a few months ago. It's the good old fashioned stackflation. It's the smell of stackfation.
I want to stress those of us who lived through stackfas in the seventies and the early eighties think that this is nothing, but it is a whiff of stackflation. H an economy that has not had to deal with this.
Really appreciate the extended time this morning. Muhammed, great to have you with us on daybreak this morning. That was Mohammad Alrian with us this morning. He is the chief Economics advisor at Alliance, President of Queen's College, Cambridge, and of course he is a columnist for Bloomberg Opinion. You can find his columns OPI, n GO on the Bloomberg terminal