Bloomberg Audio Studios, podcasts, radio news. Bringing in now Mike Wilson, the chief US equity strategist at Morgan Stanley, as we continue to monitor a market that shows no sign of stopping when it comes to setting records at the index level. Mike, good morning. We just heard from Karen forty sixth record of the year for the S and P five hundred. Despite all the risks that we talk about throughout the year.
What are you looking at this morning as we watch this market continue to trade at record highs.
Yeah, good morning, Nathan, Well look at me.
This, This, I guess was our bulcase and we laid it out back in May and our meteor update. You know, this isn't necessarily a popular view, but you know, we remain, we believe we remain in this fiscally dominant world where you know, fiscal policy remains very generous, and you know, they found ways to finance that in a way that does not disrupt the bond market, so that you know,
liquidity is very robust and multiples continue to expand. I think one thing that doesn't get discussed much is that almost all of the you know, return in the last year has been driven by multiple expansion as opposed to higher earning revisions. Now we've rolled forward earning revisions. But you know generally that the earning sesspice for twenty twenty four have come down this year, and they're starting to come down after twenty twenty five.
But hey, who am I to say that the market's overvalued?
And you know, the thing that's really going on now is we have coordinated or I don't know it's coordinated, but we have basically most major central banks are now easing policy. Even the Bank of Japan has kind of backed off it's tightening campaign after the wobble we had this summer, and now we have China joining the party with its own policy initiatives, both on the monetary and the fiscal side.
So it's a it's a.
Policy driven rally, and it's very robust, and it's even riddening out now. So multiples are now twenty two times at the index level, which you've only seen a couple of times in history. But that will continue until basically either you get something a real shock on the economic front or you know, fundamentally speaking, or you get a restriction on the liquidity front.
And just one last statistic there.
So we look at money supply growth globally in US dollars, so US dollar liquidity, and that bottomed, you know, almost two years ago and is now growing again very robustly at about eight percent. And it's really shot up in the last month and a half. And that's mostly due to China and Japan starting to expand their bannl sheet and the weaker dollar. So one other thing that could cause them the rally to you know, kind of slow down is that the dollar where to strengthen again, and
that's starting to happen. That's probably the one thing that we're watching now that could kind of throw a wrench into this pace of of the new records every day.
To take your point, Mike about whether this is a fiscally driven rally, does that raise a question for you about whether things could change depending on the outcome of the election next month, whether fiscal policy could change depending on Kamala Harris or Donald Trump becoming the next president, or a change in power on Capitol Hill.
I don't think so, you know, neither party has really shown any you know, willingness or ability to slow the freight train on fiscal spend. I think The bigger concern is how do they fund it, you know, and they've they've been very creative over the last year and a half. Of course, people have talked about the reverse repo facility. We've discussed that at length, and we think that was a very creative way to.
Help fund the government.
They've funded it at the front end, and for now, the bond market seems to be okay with that.
I don't know if the election is going to be is going to be.
The trigger for a while, all of a sudden, the bond market, you know, starts to worry about the sustainability of these fiscal deficits.
Okay, I mean, I mean, I don't think there's a big.
Difference between the two candidates or congressional who's running Congress to say that that's going to stop. I think the big risk, as it typically is when the bond markets starts pushing back on the size of these deficits, and that you know, who knows what that will be. And maybe they can pull it off, Maybe we can inflate our way out, and we can we can get better growth next year.
We'll see.
But that's the game that we're playing, and right now, that's that's a bull market.
And the time we have left, Mike, I want to get your view on earning season as well as the focus is going to turn back to the big banks and the idea of companies raising their guidance a lot more than a lot of strategists, at least according to Bloomberg Intelligence data, are predicting. Here is Wall Street underestimating earnings or are the companies over promising? Got about a minute left.
Probably somewhere in between.
I mean, you know, historically speaking, bottoms up estimates do come down over time they manage those earnings. We're seeing the same thing in the third cour order this. You know, this season of earnings have come down significantly, but as you roll forward, you know, the marketcount of.
Looks past that.
So you know we're probably slightly below you know, estimates for the fourth quarter as well as for twenty twenty five. I don't think that's wildly out of consensus, although I think we're below the Street in terms of top down forecasts.
But look, I mean, as long as ournis are growing and.
There's liquidity, I don't think that necessarily derails us what we think is the most interesting thing to be talking about.
Forget the index is what's going on under the surface.
We have been overweight defensive stocks most of the year and that worked out extremely well. We downgraded that about three months ago or three weeks ago, and then we upgraded cyclicals a week ago, and that probably is where we're spending most of our time is trying to find out how to beat the S and P five hundred rather than trying to figure out the direction of the S and P five hundred.
And right now it's you know, cyclical stocks.
Are having a bit of a rebound, led by financials, some of the industrial areas, and maybe even some of the commodity space. So that to me is the story now is like where do I own? Not how much do I own?
And right now it looks to be the Cyffroult for having a bit of a remap.
Really appreciate your time Mike this morning. Thanks so much for being with us. Mike Wilson there a chief US equity strategist at Morgan Stanley