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We're back with Morgan Stanley, CIO and chief US equity strategist Mike Wilson. And Mike, you've been on a world tour. You've been traveling a lot for work to see clients. It's interesting to me that US strategists, even you, who are kind of a known bear, think we're going to still go up to sixty five hundred. All these European banks, Barkley's and Ubs cutting their targets HSBC double downgrade. Did they just see it differently than we do here?
Well, I would say their path has been different, right, So once again, I think majority of strategists and clients came into the year probably too bullish about the kind of the trajectory. And look, we overshot all of our base case targets into last year. We talked about sixty one hundred as our bowlcase. We were bullish at first of all. We were bullish in the second fl last
year for very different reasons than most people. Most people were bullish because everybody's saying, oh, the economy is great, earnings are wonderful. No, what was going on was the FED was cutting interest rates, Okay, there's an election that we had a clean result in which caused a lot of shortcovering and hedging coming off, and we had a recession getting priced out from the summer, so we just overshot,
and then we have all these growth headwinds. So what I what I view is I think this that I think a lot of people are just catching up to what's happened, and so now of course they're marking themselves to market. We always had a fifty five hundred to sixty one hundred target for the first half of the range. For the first half of the year, we get the low end of that range. So we've got to be true to our original call. Once again. We can take out fifty five hundred in a hard landing. Okay, we're
not there yet. I would say the risk of that has gone up. It's probably thirty thirty five percent now, is probably more like ten to twenty percent at the beginning of the year. So that's what we're watching. We're we're just being more tactical, I think than most people. Once again, you know, clients right now don't care about year end. They care about is making money in the next quarter or two. That's our job, and so we've
been in the right sectors. We've been in the right you know, factors for the most part, really for the last year. And I'd like to say proof is in the pudding, right. The numbers don't lie. Like our focus list is up seven percent year to date, right, so
I mean that's pretty good. And over the last seven years it's up eighty percent relative to the S and P five hundred, So you know, those are the numbers, right, The numbers don't lie, And because we had had the right call and that's just in the last twelve months, but really over the last seven years understanding what's really going on in the economy and earnings, and understand policy and the impact on valuation.
You mentioned that you're being tactical, and I want to talk about how tactical you're actually being, because there was a really interesting noteut from Julian Emmanuel from Evercore overnight. He says, to buy options when the vix is low, stocks when the vix is high. Are you that short term that seems like a very specific narrow you have to be quick on your feet there or are you looking out when you say tactical maybe.
A month or two? Well, It depends on the client, right, So most of our interaction now is with institutional clients who have you know, timeframes from one day to two months. You know, most people don't have month. I mean, they're not trading their portfolio turning it over that much, but they are looking to make money every month, and so that's how we gauge it. So it's usually a thirty day kind of window. And you know, we made this call two weeks ago when we hit fifty five hundred.
Actually we got literally to the number, and since then we have rallied to I think we could maybe rally fifty nine hundred they or take. I don't think we can go to new highs. You know, we're on record saying it's going to be really hard for us to go to new highs until Earning's revision breath not only bottoms but actually gets in positive territory again. And I think that's going to be challenging in the first half
of this year. Now, as I mentioned earlier, I think in the second half, as investors have to look forward to twenty twenty six, we could see revision factors start to reaccelerate, and that will be when we could potentially make new high sixty five hundred. Maybe it's the end of the year, maybe it's early next year. Timing is going to be uncertain, Mike.
My question is who's buying because the reality is s and P five hundred is still down more than three percent this year, the nasdack down almost six percent for the year. Hedge fund across the street have been clobbered through March, so I'm not quite sure what money they have to buy, and so is there really dry powder on the sidelines to buy into these dipths with conviction when you still could be worried that you break under that fifty five hundred.
So asset owners remain very active, whether that's retail pension funds. In fact, there's a rebalancing going on this week. One of the drivers for this rally in the last two weeks has been rebalancing from bonds back towards stocks. So and of course corporates are probably been the single biggest
buyer of stocks. And there hasn't been much supply, as you know, the IPO calendar, equity calendar has been pretty light, so we still have kind of a good supply and demand balance that will change, like when would the asset owners sell. The asset owners will sell when they think there's a major trajectory change ie recession. Okay, I e. The FED has to raise rates again because inflation is really coming back. Neither one of those conditions is in
place yet. But those are your risks, right, That's what we'll get the asset owner client to sell stocks. Is you get hard landing or you get the AT having to raise rates again.
By the way, so I always ask the same question shanally because we always talk about retail is fully invested. Foreign ownership of US stocks is at an all time high. But I think it's a good point that corporates will buy in this administration. They'll embrace that as opposed to the previous administration. And we were talking during the break about retail clients used to have sixty forty, right, forty being bonds and now you're seeing more like seventy thirty thirty being cash.
Yeah, well it's not seventy, it's low sixties. It's like sixty two. The big loser has been bonds. So retail investors who get a bad wrap are not that dumb. I mean, they basically have been letting their long duration portfolio roll off, as bonds have been by far the worst asset for the last several years. Now, could they buy bonds again at some point, yeah, potentially, But.
Or they can buy stocks. Right if you look at money market funds, we always pull up MMFA index on the Bloomberg terminal. It's up and to the right. And you know, any sucker can get four and a half percent now in a Marcus account or whatever.
Right, So they have a barbelle they have. They are overweight, they're a little bit higher than normal on stocks, okay, and they're higher weight on short duration fixed income i e. Cash in two years and in that sounds pretty smart to me, like that that's been the right barbell high quality stocks, okay, and short duration fixed income because you're getting paid a real rate of return now for the first time in like what fifteen twenty years. I mean,
it's not bad. It's not a bad barber. And then of course they're doing stuff in alternatives, whether it's private credit, which you're getting a pretty good return still, maybe some private equity, and of course they're in real estate.
We don't really have time for another question, but I just don't understand the pitch to go out into bonds when cash you're earning four percent what the ten year treasure yield is at four and a half four point three percent. I just I don't It doesn't make sense why you would move out at all.
Well, our strategies are bullish on bonds now because growth is slowing. The fat eventually will be cutting more and that will work its way in. So we could see we could see yields below four percent, maybe three and a half, even without or sent And of course if you get a recession, it's a great place to have some some duration.
Mike, super nice to have you in studio today. That is Morgan Stanley's Mike Wilson