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Let's discuss now with Morgan Stanley, Cheap US equity strategists and CIO Mike Wilson. And Mike, it didn't feel like things were that fragile in May, a gain of six point two percent on the S and P five hundred, despite what we were just talking about in the last flock, all this uncertainty that's out there, all this caution from Corporate America. What do you make of where we stand right now?
Well, I would say the fragility got priced. You know, we had a big sell off twenty percent sell off plus thirty thirty five percent in most stocks. And I think that the fragility now has moved to the bomb market, you know, like that's where the main concern is now, whether it's the global bomb market with jgb's you know, kind of getting out of bounds and of course now with you know, term premium in the US treasury market,
I think that's where the risk is the greatest. The growth fears have subsided because look, we did take the off ramp on the tariff concerns, and and from my perspective, I mean like we were probably weeks away from having a recession if those one hundred and forty percent plus tariffs has stayed on, I don't think there's any you know, it's very little doubt that corporates would have had to take action with the labor cycle. But now that it's backed off and the stock market's up. You know who
watches stocks more than me and us? CEOs? Yeah, okay, so stock market recovers Loosen's financial conditions. They say, you know what, hold off on the layoffs because things may be turning around. And I think we bought ourselves quite a bit of time, and that's why the markets responded to that. I don't think it's unusual. You know, CEOs rarely admit that to us. That's why I was laughing.
And they always say, I don't watch the stock on the day to day basis, but of course they do. Like you think that the bottom is in and that the second half is going to be better, or at least you said started the year saying the second half is going to be better than the first half. Do you still think that. I mean, obviously we came down a lot, but we came back a lot, and now we're, you know, flirting with six thousand again.
That's right. Markets and economies are reflexive. Okay, we know that, and you know, I think we have a unique view coming into this year. Our view is that things already slowing dramatically, and particularly on earnings. Arning's revision breath was rolling over, the AI story was losing steam, okay, But all of those things now have bottomed from a rate
of change standpoint, and that's what Stock's care about. That was the focus of our mid year outlook was that the rate of change is now bottomed, bottomed in economic terms and in fiscal monetary policy. I think is bottomed in terms of the most hackeys we're going to see, and that is all going to now lead to a better rate of change in the second half, which the stock market is already discounting.
Bank of America says the latest turn by the Trump administration to favor tax cuts and lower tariffs could spell trouble for markets. The flip and US economic strategy could incentivize traders to ditch bonds and pile back into AI and crypto trades, which would risk inflating a market bubble. According to the team led by Michael Hartnett, are we already back to a bubble. We're here with Morgan Stanley's Mike Wilson. That seems wow, that's a that's an interesting call.
That's a way to get noticed on a Friday.
I mean, bubbles are you know, apparently every year now and certain things. I mean, I do agree with Michael in the premise. Okay, we've been in an environment for I would say, POSTGFC where policy has sort of elicited you know, mini bubbles in certain assets. The money moves to the hot kind of toy, whatever it might be. But it's nothing like the late nineteen nineties. Like I don't think what we're seeing in AI anything like the late nineteen nineties. It's just not as broad. I mean,
there are four large companies spending all the money. There are maybe eight to ten big beneficiaries of that spending. That's it was like a mini bubble. We talked about that at the end of last year. One of the reasons we were a little bit more negative on some of those stocks coming into the year was because there was a deceleration and growth. But it's not like in the nineteen nineties when you had every enterprise over spending
on equipment, you had this huge IT spending bubble. So I don't agree that we're in a bubble, but I do think the policy we've chosen, okay, which is to kind of at every sign of trouble come in and stop it, it does elicit that type of behavior where that's why you get this chasing going on, because you know, by the dip is a function of that policy that we've been doing for fifteen years.
Yeah, and I mean largely if you take a look over the grand scope of time, by the dip has worked because socks go up.
In the long run.
But I take your point. It kind of feels like bubbles in the eye of the beholder here. But I am curious where you think we go from here, especially when.
It comes to the AI trade.
That narrative had been out there that you know, it was getting kind of tired. There was a lot of existential worries over deep seak and cheaper models coming in exactly. But it feels like, especially with these in video results that were this week, somehow it feels like a long time ago, we're still putting our foot on the gas here.
Well, what I would say is that the AI is transitioning from the infrastructure place. Okay, so the investment cycle to the adopter phase, and that's what we've been talking about for the last six months is now we're now, okay, we have the compute power. It's built. There's gonna be mo to be built. But that initial surge is kind of done, and now it's going to continue but at a slower pace. And now the fun part starts. Let's
build the application layer. Let's build the killer applications that then can make you know, we could diffuse the technology into the economy. You know, the price is coming down. That's when technology takes off. That's the that is the essence of More's law and tech diffusion. That's when you
can actually get the productivity benefits. And so we've always had the view that twenty five was going to be in terms of the productivity, but twenty six and twenty seven is when we think that productivity benefit can start to come through.
Is that what drives us to sixty five hundred. I mean that combined with the fact that tariffs turn out to be not so bad at least at these levels, and no one cares if we blow out the deficit another couple trillion dollars.
Well, it's another part of our rate of change argument, right, so that AI now is moving to focus on the rate of change. That's the title of your note exactly. And so like AI was a negative in terms of ROE and return on investment capital, it was a cost. And now the rate of change on AI from a broader market perspective is turning into a tailwind for margins and productivity. And that's what the market is. That's another factor in our more positive view over the next twelve months.
Well, I actually want to go back to the bond market, speaking of the deficit. You know, you mentioned before the break that things are actually looking a little bit fragile, not so much in the equity market, but perhaps the bond market. And I'm curious, in your rule as chief US equity strategists, how much time are you spending looking at the tenure yield?
Well, I spent a lot of time looking at the ten year in any environment, because it is the pricing mechanism for all assets. You know, as we've said for years now, four to fifty is kind of that crossover point, and it still continues to be a crossover point when you get north of four fifty and a ten year you start to see negative correlation to equity multiples. Okay, so we're right around that level. And by the way, I'm pretty sure the authorities know that as well, so
they try to defend those levels. I don't think we're going to see a real defense.
Authorities meeting the FED, you know, all of it, Fed treasurysury, not Congress.
Congress is a different animal, you know, and I've made this statement before. It's may controversial. I believe Treasury is somewhat captured by Congress or they got to fund it, and the FED is somewhat captured by Treasury. They got to help out, so they work. You know, it's sort of it starts with the spending and then it trickles down and so, you know, I don't think we're going to see an aggressive action until we get to fire.
If we get to five percent. We said this last time, going to five percent is gonna be bad for stocks in the short term. However, if we get to five percent, I'm pretty confident they're going to intervene well, and that will be positive for better worse.
It feels like we are just glued to four and a half percent we just tog around in a range around until we get over it, until we get when we watch, but then we go back down and we're back at four and a half percent at least. That's been the story of the past couple months. So I'm like, what do you make of that?
Well, I would say the other side of that too, is like, let's not ignore what's going on in Japan, okay. So you know they've been they're way ahead of us in terms of using you know, the money printer to kind of backstop bomb market doing it for thirty years, right and qwe they were the originators of that, and we followed suit. And so now the question is, okay, now they have inflation, Okay, in the end, by the way, is you know a big part of that. So the
question is can they control the yend's movement. I don't know if they're more focused on the end going south of one forty okay, or they're more focused on keeping jgbs from blowing out the higher levels. But it appears to me as an observer of markets, that you know, when the ten year yield or thirty year yeld gets to a certain level in Japan, or the end gets closer to one forty against a dollar. We also see intervention.
So these are all related. These are all related. But the fact that we were seeing these things get pinned around these key levels suggests to me that they're observing it and they're they're gonna, you know, they're gonna try to control that. All right, keep an eye on Japan. We'll be doing that over the weekend. Hope you have fun too.
That is Morgan Stanley's Mike Wilson.
Great to speak with you.