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Mike Wilson joins us here, chief US Equity Strategists and CIO at a little shop called Morgan Stanley. I started yesterday was my fortieth anniversary on Global Wall Street, and throughout my entire career, Morgan Stanley has, in my opinion, the best tech research on Global Wall Street. You think about Mary Meeker, Frank Quatron on the banking side and all that kind of stuff. Mike, what are you guys saying about AI these days? How was? What's that's the
theme arguably of our career more than Internet. What are you guys saying about that?
Yeah, I mean it's it's it's more of the same. So I mean a little known fact. I guess as I started the I was the original tech sales tech you know, desk analysts in the nineties, and so I saw front row seat to the whole all good boom and bust of that.
Henry Blodgett, who Frank Quatrone.
Yeah, I mean, so all these names and everything else. So anyways, the point is that this is just another Capex, This is just a this is the next tech cycle, okay, And so there are a lot of similarities. There are a lot of differences, but we're we're in the mix. That we're in the middle of it right now, and
that's what we've been saying, and that continues. And the reason why I feel confident it's not at the end of the road yet is because the capital markets are still funding this and the companies are being rewarded for it. Meaning and we look at this carefully. You know, capex to sales ratio is a factor is being rewarded in the marketplace, Okay. In other words, if you're spending more, the stock goes up. Now, eventually that will start. There'll start to be a head wind and we'll figure out
when that is and when that starts to happen. You got to worry. The other thing I would be paying attention to is credit spreads, right, And so for some companies, their credit spreads have blown out or cdss have gone up because at the margin we're seeing at the margins, some companies are not being rewarded for higher cappacks now because they're viewed as a loser. Okay, but that broadly speaking, that's not the case yet. So there's usually early warning signs.
There's canaries in the coal mine and tell you, Okay, they're overspending. I'll say this. This is probably not a house for you, but it's my view. There's one chance there's gonna be mal investment here. Okay, yeah, just like every major camp except but that's not a crazy statement. Okay, it's different in fracking. It's no different in railroads, no different electricity cycles. So but we're we're probably not there yet.
We don't know. And the other thing to keep in mind is that the marginal cost of compute, the marginal cost of the product itself, has to go to zero for it to work.
It will go to zero.
There'll be all you could eat plan. So, but we're in that transition period. You know, there's going to be I think we're now in the transition from the picks and shovels to the adopters. We're seeing, like actual adopters of the technology are becoming more efficient, you know, driving revenue, not just cutting costs by hiring fewer people. That transition could last probably several years, and then ultimately, you know, we'll have we'll have the other side of it.
By the way, Jim Chainos was on with Tom and Scarlett last Friday on Bloomberg Money, their new program every Friday at noon, And of course he's a short seller and he's talking his book to some extent, but he did say that, you know, during the dot com era, at the tail end, earnings were up thirty percent and the next year they were down forty because people were putting in these massive orders due to a huge Capex ramp up, and then all of a sudden they disappeared.
How do you know when we're going to get there? Because I know you look at forward earnings and earnings revisions that are still are they still to the upside?
Yeah? So we are seeing a peak rate of change though in a revision breath in a lot of different areas. And you know one of those is semiconductors where we haven't seen it roll over, but it's at such a high level it can't sustain. So think about this. Since chat chipet was announced in I guess November twenty two, now we've had three decent corrections in this bull cycle of Campex. Three different times we've seen these stocks go
down thirty to fifty percent. So we can have a thirty to fifty percent draw down and still have the long cycle intact, and that's what I expect to see, you know, I suspect we'll see another one of those scares. And by the way, you know in March the memory stacks were down thirty to forty percent should have bottom,
and then they went out five times. So you know, like trying to trade that back and forth is for the for the pros only, you know, we try to do that a little bit, but like for the average person. So I don't think it's the end. But but boy, I mean you to think that you can't have these big kind of you know, cycnical resets, it's pretty naive.
Morgan Stanley Equity trading desk.
Serious people, they know what they're doing.
Serious people. Man, I traded against them for years. I'm not sure I ever made it good on that. Hey, Mike, when you see meg IPOs like SpaceX, like anthropic, like open ayiic coming, does that tell you anything about the market in general?
Well, the appetite is still there. I mean, like that's what I said earlier, Like, you know, the market is absorbing a lot of paper. And it's not just in equities, by the way, it's in the.
Credit I mean video came out with a bond.
I mean, we've seen massive credit offerings, which means what it means that the market is funding these expenditures. It's it's unlikely these companies are going to raise the money and not spend it, okay. So that's why you're very so excited about semi conductors. But to your point, Matt earlier, like, you know, the market's not dumb okay like and people say, oh, this is what happened in the news today. I mean, do I care if I'm an equity guye do I
really care? Not really, because it's usually the market singing six months in advance. And that's why we look at these indicators like revision breath because they're lead their canary that tells me things are accelerating. I mean, one of the reasons we got so bullish last year we were debating this on on the on the other show, is we saw the revision bread just going and we had a different view, but that was our we're almost cheating, right. We can see like in three months, which can happen
to actual earnings. It's it's a tell. And so that's why I'm so focused right now that we're such at such high levels on rate to change, then it has to come off a bit. But I don't think it's the end. It's a it's a reset, a little bit on the on the rate to change.
By the way, I normally anchor Bloomberg Open Interest, which airs on Bloomberg Television weekdays from nine am to eleven am. Are you doing that today or Mike Wilson frequent guest, Yeah, I'm doing that today as well. But radio, well, I prefer radio, to be honest, I doubled I listened to this program every every day, so it's a real honor to be on with you. Lou Wang from Bloomberg News were a great piece last week. I think about all of the equity coming to market in the next two years.
JP Morgan estimates one and a half trillion dollars of net equity coming to market, as opposed to the last twenty years we've seen twelve trillion dollars taken out of the market through corporate buybacks. Is that about face concerning to you?
Yeah, I mean once again that can lead to correction. So I mean we've been very focused in the last two months. As you read our research, you'll know, like on liquidity. Okay. So and by the way, earlier this year people were kind of bearish on the economy, embarish on that basically that things were going to be softer on earnings. That turned out to be true. But what they should have been focused on was that the FED
was kind of transitioning. They were going from being less dubbish on rate guidance but then more dubbish on liquidity. So that actually helped stocks to bottom in March. I'll just tell you right now that that liquidity picture is
actually somewhat deteriorating now. So today's meeting with the new FED chair is going to be important to say, Okay, well, how are you going to think about the r ANDP, the reserve management programer purchases, and how you're going to think about, you know, managing kind of liquidity picture in the face of liquidity being sucked out of the marketplace. And there's three draws on liquidity now. One is all this issuance both in equity and fixed income. The other
one is is on the economy itself. Right, the economy itself is absorbing capital in the way that we haven't seen. So the other big change matt from not just the fact that we're seeing net issuance perhaps, but we're also seeing net consumption of liquidity in the real economy. We have been investing for twenty years right in a world of financial oppression, so that just means it's more volatile. They're going to get this more volatile world, but it
also leads to higher nominalo GDP growth. That's why I'm not worried about earnings growth at all. I'm worried about the multiple and these sort of draw downs that you get because of this volatility on liquidity and then the pequated change on revisions.