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Us tow Mike Wilson with Morgan Stanley with s exceptionally intelligent views on the market. He has not been a raging bull. He's been someone who has participated but done it with a bit of angst and caution as well. There's the Mike Wilson word. Mike Wilson nimble. If I'm nimble after five days down in a row or whatever it is, how nimble am I into Monday?
What do I do now? To reposition with confidence?
Welcome morning, Tom, Look, I think and happy New Year.
I you know, I think what you said earlier is listening to your chatting about.
Do I get in now? Do I? What do I do?
And that's really not ever the right strategy. The right strategy is to have something committed at all times and be balanced in your portfolio so that you can ride out turbulent times when they arrive.
And look, we've had a we've.
Had a little bit of a of a bad stretch here since the beginning of December, which doesn't really surprise me given the run that we had. You know, post election is just a lot of euphoria. So we're having a bit of correction here. I do think the first half of twenty twenty five will probably be a bit more challenging, and then the second half sets up pretty well, assuming that you know, a forecast around the economy and
earnings come through. Everybody knows the market's expensive. Everybody knows that. You know, we've had and sentiments crazy right now, and that's just part of the game. I mean, you have to you know, you have to deal with that, and that's why you have diversification in your portfolio.
You look at factors. I think of lizzaone, Saunders over Schwud as well. Which is the factor now with the closest Mike Wilson's study.
Well, we look at all of them obviously, and I would say it's been the you know, the factor that's been most in favor has been quality and momentum, and then recently both of those came off a bit because that's where people were positioned. Okay, that doesn't mean that those aren't still the places to be. It just means that we're having a bit of a pullback in here.
And like I think, I think going into twenty twenty five, there are some areas that got probably a little bit overdone some of the you know, some of the growth areas. Uh that that factor in particular, probably people are paying up for that too much. I think some of the size factors, you know, people are rotated probably a little bit too much into the small cap area and they're giving some of that back now too. So that's just
one sort of arrow in our in our quiver. And uh, you know, but but it's definitely something we watch closely.
Hey, Mike, I'm reading your your more most recent note about the breadth of the market. It gets gets me to thinking, here, I got the s and P five twenty four is up like twenty three twenty four percent, Yet the equal weighted SMP up only like you know, ten or eleven percent. A what does that tell you? I mean, is and how can earning is that for you?
Well, I mean it's not really.
Remember, breath is a symptom, okay, of what's going on, not the cause. And so the weaker breath tells us that, you know, certain things are going and we think we've this is something we think we've gotten very right over the last several years, which is that it's a very government heavy, you know economy, right so if you actually look at the private economy, the private economy has been sort of languishing, whether it's manufacturing or housing. Some of
the consumer goods areas, I mean, they're actually intercession. They've been intercession for two years. And the government, heavy handed former government, whether it be fiscal or monetary policy, has kind of kept things buoyed.
And the market has figured that out.
And of course you have things like AI, you know, maybe weight loss drugs, you know, certain themes that are very specific to certain areas, and those areas have carried the day.
Okay, So I think I think the.
Weak breath is symptomatic of this very unbalanced economy that we're dealing with.
Now.
One thing to point out, however, is the second and half really since September, the breath improved tremendously, and actually the breath in twenty twenty four is still way better than it was in twenty twenty three. So it's not all bad, but it is a like I said, it's a symptom of what I think is a very unbalanced kind of recovery that is ongoing.
So I guess you think about twenty twenty five, Mike, I think a lot of folks are saying this, Really, if there's gonna be any performance in twenty twenty five, it really has to be driven by earnings growth, because maybe the Fed's going to cut a couple of times, but I'm not sure how much more than that. Are you concerned that the earnings leg of this story is maybe a little ahead of itself.
Well, I mean, look the markets are they get ahead of that? Right?
So the markets, you know, multiple you know, rallied because it anticipated in earnings recovery. Of course, this summer we had some turbulence and then the fall things picked up again. We think most of the of the rally in the second half was driven by sort of liquidity factors and you know, to send picking up around the election, just hitting that behind us, you know, at the definitive outcome, et cetera. And so now we're a little bit ahead
of ourselves. So multiples probably have to consolidate a bit. The key for this year is are we going to get a broadening out in the earnings participation? Okay, so earnings have been pretty lousy for most companies over the
last two years for the reasons I mentioned earlier. Okay, interest rates are too high, for most businesses, Government is crowding out a lot of smaller businesses and even larger businesses to some extent, the global economy is still kind of stuck in the mud, so a lot of multinationals are not doing well. So the key for next year is can we see a broadening out of that earning recovery. We think we can, and that's our job. Our job is to figure out where is that earning is going
to pick up. Financials is one area where we've gotten more constructive recently because of the earning story, specifically.
Mike Wilson with US with Morgan Stanley.
If I need breadth to go higher, Mike Wilson is healthcare is so dominant that if healthcare doesn't perform, I don't see an intelligent gain in the market.
No, I don't think so, Tom. I mean, healthcare has been languishing for a while.
It's been you know, there's been some big home run winners, and as I mentioned earlier, some of the weight loss drug winners, et cetera. But healthcare has been languishing for the better part of a year and a half in a relative basis, and the market's been fine. So I don't think it's necessary condition. It would be helpful. We'd like to see it happen. I think for healthcare specifically, you know, with the appointment of Bobby Kennedy, Well, let's
see how that goes. I mean, I think that the sector is probably going to remain under pressure until that confirmation. Hearing interesting, and then I think from there we might get a bit of a bounce.
Yeah, Mike Wilson, tell me about the necessary condition for breath to work. What is the single item that you're studying with your team to say we have good breadth.
It's what you said earlier, Tom, we need we need better breath of earnings revisions. I mean, this has been a theme of ours for the last two years.
You know.
One of the reasons why we weren't maybe as enthusiastic as others in terms of the rally we've had is because we thought it would be narrow. In fact, our forecast suggested that that the earnings recovery itself was driven by heavy cost cutting in the mag seven and then of course they had AI which helped a handful of companies. You had a few of the themes that were driving you know, growth, You had government support, for infrastructure, spend things along those lines, and so it was very narrow.
So in order for the market breath the price breath to get better, you need earnings breath to get better. I don't think it's that complicated. And that's what we think should happen in twenty twenty five, assuming once again that you know, we don't get some policy changes that are maybe negative for the market in the near term.
And that's really our concern the short term is that we think some of the policy changes are probably going to be more negative in the beginning and then more positive in the second half.
Hey, Mike, as we all know, the S and P five hundred over each of the last two years has grown north of twenty percent. I'm not sure earnings have grown to that extent, are we? What's the valuation call right here?
As you think about the market here, Mike, it's expensive. I mean, that's not a great insight.
I mean, this is probably the single biggest miss by I think everybody in the last twelve months. I don't I don't recall anyone saying they thought we would trade to twenty three times earnings. But of course everybody rode the wave, including us, and you're happy to take it. And so now you're sitting here twenty two twenty three times earnings and you're like, oh, you know, well, now we need to see the earnings actually surprised to the upside.
And you're exactly correct on the fact that earnings have not been the main driver of the returns. The main driver of the returns has been equity evaluations, right. And there's been some specific names that have done a great job in earnings and those are unique, but overall, this has been probably one of the biggest multiple expansions we've ever seen x, you know, coming out of a recess.
Okay, so what does it do with cash?
For Mike Wilson, for Lisa Shallatt and Morgan Stanley Wealth Management?
Is cash your friend right now?
Well, I think you know, short duration fixed income in general has been our friend for the last several years. Being underweight you know duration, whether that's two years or one year or cash, they're all doing the same thing for your portfolio time but giving you a nice four to five percent return with very little risk. And so that's a great place to have some of your money.
Once again, not all of your money. You know, we're probably five to seven percent coming in that cash rate region, which is two years and end.
And and that's fine. That's a good place to be when you're getting compensated. I mean, just recall two years ago you were getting zero on that cash.
Now that's a bad deal, but today you're getting actually a pretty positive return. And there's a place in every portfolio for something like that. Just ask Warren Buffett.
Hey, Michael, it seems like the market's discounting too FED rate cuts this year. Is the market okay with that or do they need to think the market needs to see a little bit more or do you think the market is fairly discounting too it cuts.
Well, first of all, let me just make an opening statement about that. I mean, if there's one thing that the markets have been more wrong about than FED cuts over the last four years, I like to know what it is, so you know, I mean, this has been probably the single biggest whipsaw, both on the upside and the downside, that the markets have gotten wrong. So I think looking at the bond market right now, what they're pricing in is a waste of time because they don't know.
The FED doesn't even know what I would say However, one of the reasons why the breath is deteriorated. I talked about that as a symptom the cause of the breath deterioration. One of them is the fact that rates have gone up at the back end almost one hundred basis points since the FED has cut one hundred basis points. Think about that. That means the term premium has really gone up sharply, and that's been something we've been focused on.
When the term premium kind of gets up into this range, you actually now are at risk of having an equity valuation correction. So we think that's probably the main reason why the breath has deteriorated here recently, more so than earnings. And I think, you know, two cuts, sure, why not? Could we get zero cuts next this year? Possibly could
we get four or five cuts. Maybe it just depends on how things play out, but I think right now two cuts is kind of the best guess, and the bomb market is probably a little bit suspicious about that based on how the back end is training.
Mike Wilson, thank you so much. Chief.
You have secuity strategist Morgan Stanley generous to be with us.