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Let's make some sense of this market. We are very pleased to be joined now by Mike Wilson, the chief US equity strategist at Morgan Stanley. Great to have you back with us on daybreak, Mike, on a morning after big tech earnings, a morning where crude oil is trading close to wartime highs, morning where the Fed maybe thinking about what it wants to do in terms of policy for the rest of this year. Where should the investor focus be this morning?
Good morning, Thank good morning, Nathan. I look, I think the market is doing a very good job of trying to digest all of these, you know, different variables. But at the end of the day, you know, as we you know, we focus on earnings as always probably the most important variable, assuming that you know, the interest rate environment is stable, and I think that's where we are. So I find it very interesting you kind of pointed this out. I mean, the the S and B five hundred,
it is close to highs, and so is oil. I mean, Brent Oyle went to one hundred and twenty six dollars overnight. I mean that's fifty percent higher than it was a few weeks ago when the SMP was making its low. So you know, my view has been, we've been writing about this for a while, is that basically that the
equity market has moved past the war. That doesn't mean the war is over, still not a concern, but for now it has compartmentalized that and said we're moving forward and we're focused on earnings, and this is earning season. And last night we had the four you know, the four big hyperscalers in area we've been very bullish on the last three or four weeks, put up really good numbers again and that's just you know, the market will
not deny that. And so yeah, two of the names are down in the pre market, two of the names are up, but they've all rallied substantially in the last four weeks. And it's not just about the hyperscalers. It's about the earnings picture across the market. I mean, many, many sectors now are participating in what we've been calling
a rolling recovery from a year ago. And I think that aspect of you know, the economy and what's going on in the real world is still being underestimated by a lot of investors because they've been distracted by these other events. But at the end of the day, back market's going to you know, trade off of earnings and earnings growth, assuming you know, policy is somewhat predictable and stable. So we can talk about the fit a little bit more in a minute, but that's my general take.
Well, I want to talk a little bit more about the volatility and the commodities market as well. Obviously we've seen a lot of that and the big spike as you mentioned overnight as well. If we do see crude oil and commodities in general at these kind of sustained elevated levels, does that have an impact on the earnings outlook?
It will, And I think, I mean that's the you know, sixty four trillion dollar question is you know, how long will it take for oil prices to subside and get to a level that's manageable. One hundred and twenty six dollars is not manageable. That will have a probably at least a ten percent hit to earnings growth in the US. We've calculated that, you know, the one. The other thing think about the US is somewhat insulated you know from this uh you know, from this conflict from geographically and
we have our own oil supply. It doesn't mean the oil prices won't rise here too, But you know, there is going to be a bid for US assets over international assets if this thing persists. If oil prices stay at these levels for another three or four months, Yeah, the stock market's going to trade lower for sure. But I'm saying I was saying earlier, is the market is assuming maybe right, maybe wrong, that this will end up resolving itself over the summer.
Let's talk about Fed policy. Obviously we got the the no change as expected from the Fed. You talk about an assumption that FED policy stays stable. How strong is that assumption? With worsh coming in and J. Powell staying on.
Yeah, I think this deserves a bit more attention, and perhaps it's it's getting And we've written about this too, that of all the you know, we've gone through a lot this year, right, We've had the AI disruption in terms of the labor markets. We've had obviously the private credit concerns and now war and you know we've we've written about this that the transition at the Federal Reserve is is a is a big deal potentially because it creates a lot of uncertainty, and we you know, we
kind of got some more of that yesterday. J Powell is, you know, leaving his post as a chair. He says, it's you stay on. I think that's a piece of uncertainty. You know what what is that going to do to the committee and the new chairs ability to kind of navigate a you know, and and manage that committee's voice. So that's that's a that's a potential risk. And you know, there's this presumption that you know, Kevin Wosh is going to come in and cut rates because President Trump is
telling him to. And you know, Kevin Walsh kind of pushed back on that is confirmation hearing, and I take him to it as his word, and quite frankly, we don't really need to cut rates at the moment. So what the market's been doing is repricing this this probability of rate cuts coming in this year. And right now the market is pricing in no rate cuts for this year, and that's a big change from a few months ago. That's fine, assuming they don't have to move to rate heights.
The other variable that I think is worth considering is that, you know, Kevin Warsh has talked about being a balance sheet hawk, meaning he doesn't want the balance sheet to be so big, and that liquidity, you know, has provided a lot of elixir for markets in the last several years. So if he's true to his word there, to me, that's the potential bigger risk for markets. I don't think that's a risk this year. I don't think he's going to do anything, but that's something I think about for
twenty twenty seven. And finally, I would say every time a new FED chair person comes into the role, the market typically tests that person. You know, they want to see how they communicate, they want to see how they know react to things, and so we could just see higher volatility and I wouldn't be surprised when the back end kind of moves out to see how they want
to try and deal with that. They may try and test them with you know, other you know, maybe challenging certain other parts of the market to see how they deal with that, and that volatility probably going to be at this until until Kevin Warrish is firmly in the seat and he's probably had a meeting or two