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Joining us now Mike Wilson.
He's chief US equity strategist at Morgan Stanley and exceptionally well timed here with a really smart Sunday note, a bit of go on, Alpha over beta. Explain the Greek letters, Mike Wilson to us, What is alpha?
What is beta? And why does alpha winy?
Good morning, Tom, Yeah, I think most of your listeners understand this. Beta is sort of your market level risk, where you just own the index and an alpha would be your stockpicking. It's that simple. And you know what's happened in the last three months is that the the index itself has gone sideways and and but there's been great opportunity under the surface. And that's really the job of most investors is to pick stocks and try.
To beat people.
So it's it's a good it's a good outcome if it can sustain for active managers. And by the way, people say, oh, stockpicking market, it doesn't mean it's easy, but I mean it does feel like what we're dealing.
With kids kills me, he puts at the end of his notepall enjoy your Sunday. Come on Mike's Sunday Mike, I'm looking at the Bloomberg launch pad and I got a one ninety nine on the ten year real yield. My idiot ambiguity meter is that's a slowing economy. When you look at Seth Carpenter and companies work, do you model in a slowing or level economy where we walk away from double digit earnings growth?
Yeah?
Well, I mean, remember the economy is not always the market or earnings. And what we've seen in the last I would say, really three years is an economy that looks fairly robust at the at the aggregate level you can talk about at the consumer level or just in terms of GDP. But then when you look at earnings growth in the last several years, it's been pretty lousy for most companies until recently recently we've seen a pickup.
More companies are starting to grow again. And I attribute this to essentially the government being you know, crowding out if you will, much of the economy. That is the reason we have inflation. For the main the main reason
we have inflation, too much government spending. Also, it has it has kept interest rates higher than they would be normally, so real interest rates at two percent is actually quite high, Tom, as you know, for in the last fifteen years, and we're such a financialized economy that you know, that has had a sort of a breaking effect on you know, businesses that don't have easy access to capital. So I think the FED right now is sort of in a you know, tighter place than they probably want to be.
They would like to cut rates, but they can't because inflation now is picking its head up again, so they're on hold. They're not going to raise rates in our view, but we're trying to find that equilibrium now, like how big should the government be? How you how can we liberate the private economy in a way where we have better velocity kind of in the in the real private economy than just government. Mike.
I'm looking also your chart book where you guys track what companies are actually saying on their conference calls. What's top of mind for corporate America, And I guess, not surprisingly, one of those key issues is tariffs. How did terriffs kind of factor into kind of your view of inflation and maybe how the FED will proceed and how that might impact stocks.
Yeah, well, I think the FED has told you, you know, pretty straightforward since December. That the uncertainty around Terrace is another reason why they're probably going to take a pause on the rate cutting campaign. Now, remember, they have another lever they can use, which I think they will, which is to basically end QT finally, which is you know,
a decent amount of repurchases and across the curve. They can probably start doing that in May or June, and that's another lever that they can sort of pull on. As far as companies go, I mean, companies are always you know, trying to incorporate these changes into their their business models and how they're running their own companies. And tariffs are front and center right now because not only is that a potential heat, but it's also so uncertainty because you know, one day we have them, on the
next day they're being delayed. And look, that's what companies have to manage that process. The good news is, I think in the last round of terrorists back in eighteen, a lot of companies did relocate some manufacturing, some final assembly at the areas like Mexico. I think that may be one of the reasons why the President is going after Mexico because that was kind of a backdoor way of avoiding tariffs on China. So it's just going to
be you know, six months of uncertainty. And that's why companies are mentioning it because you know, they don't want to get caught, you know, in a way where they're guiding too high and then terrif's end up being a headwind for their growth expectations and equity markets.
We have Mike Wilson with us and Morgan Stanley, Bob do All to join later. We welcome all of you on your commute accross the nation on all every different radio platforms and on Bloomberg podcasts. Subscribed to YouTube. Working for us each and every day. Subscribe to Bloomberg Podcasts on YouTube.
Paul Mike, We're gonna get We're gonna hear from Nvidia Wednesday after the close, since one of the last big big companies reporting earnings in this in this cycle. Here, what did you take away from this quarterly's earnings cycle? And you know, more importantly, maybe the guidance you've been paying attention to.
Well, first of all, it shows that the fourth quarter was boom times now some of that, once again was government fiscal deficit was up forty percent year every year, but also there was some excitement around you know, just a clean election, maybe you have more pro growth, you know, administration, and so there was more activity in the fourth quarter, and so what we're seeing now is kind of just that rolling off a bit. Then maybe we got a
little ahead of ourselves. Higher rates and hire a stronger dollar was weighing on some of the guidance for twenty five. You know, companies tend to do that seasonally anyways, they want to lower the bar a bit at the beginning of the year. But then the other things that have been we've been focused on really in no particular order, terrorists,
as you already mentioned. Number two, we have immigration enforcement, which has been a huge fiscal boost and also a labor supply boost, and then we have right the department government efficiency. They they're off to an aggressive start. I'm optimistic that probably more optimistic than the most that they can make some headway there. But remember the more successful they are in the short term, the more growth negative that is in the near term before you get to
the good stuff. And then of course the positive effects of policy like deregulation, maybe extending the tax cuts on those come later in the year. Those are those require congressional approval, and so that's just not you know, that's going to take six and twelve months, and so the bad stuff first and good stuff comes later.
Mike Wilson, to get back to your idea that ELFA is the way this works, and let's just generalize that as individual stock selection.
What is the Mike Wilson process?
There?
Is it securities research, Graham, Dot and Coddle bottom bottom up?
Is it a cell side concept of looking at what's gonna win?
Or is it more factor.
Based where you're looking at different items and trying to figure out, like say, well, more momentum or something else win.
That's a great question, Tom, and it has changed over time. I think the main thing that's changed in the institutional world anyways is the time horizon. So you know, twenty years ago, you know, I would say institutional investors were kind of in the six to twelve month time horizon. It's now, you know, one to three months and in
some cases one to three days. So that's what's changed, and that means you just got to be really laser focused on kind of news at the margin, whether it's fundamental news around a specific company, whether it's a macro changing event that can affect certain companies differently. So all those things we look at, I would say the quantitative analysis and factor analysis has probably picked up the most most institutional investors now putting ourselves as advising them use
that tool, and it's quite helpful. As you mentioned, price momentum is probably the most important factor variable because everybody likes to perform. And I would say, you know that can also get you in trouble because what is happening as you end up, as I'd like to say, using price as your analysts, as opposed to doing the analysis and then letting price follow. And I think that's just the where we live in now. Everybody's short termism. I don't think that's going to change any time soon.
Bottle that for all of you worldwide, whatever your sophistication. What Mike Wilson just said there and Paul Sweden and I lived this of where three years became eighteen months and twelve months became three months. And what are we doing the window dress at the end of the quarter. The short term ism now and how can you prosper by pushing against that? Is Mike Wilson alluded to there. That was extraordinary.
Yeah, a lot of it, I think coincident with the growth of hedge funds as well. Mike, what screens well for you guys these days.
Well, getting back to the stock picking, I mean, you know, now this particular factor always screens well, but it's extremely important now as earning your vision breath. So companies that are showing are showing the ability to kind of, you know, continue to raise numbers. You're getting paid for that more now that you normally do. You always get paid for that, but now you're getting paid for it more and you're getting punished for it. On the other side, the other
factor that's really working is quality. Quality has been working really well the last two or three years because of that sort of crowding out feature, but in the fall we saw a movement towards low quality, and then now we're giving that back. So large cap, quality, earnings, division breath. Those are the three most important factors, and of course price momentum still is important as well.
How about on the industry side, what stands out to you guys these days?
So it's been consistent really since November. Financials mainly the banks as opposed to other financials and capital markets companies. Software, particularly relative to say semi connectors and hardware, they're less affected by tariffs, and there's some reinvestment now as we go from the enabler to the adoption layer for AI. That should benefit media entertainment, you know, not just the yep. Media and entertainment in a traditional media entertainment names are
doing well. Remember those are mostly domestic businesses, yeah, mostly domestic. Yeah. And then of course services, consumer services, which is the one part of the private economy which is still doing quite well. Services is doing much better than goods.
Mike, I'm guessing from your clients you get an evaluation question or two every day. Boy, this market seems expensive. How do you respond generally?
You know, we don't get many questions on valuation anymore. I think people have given up on that metric. That metric is faded in its importance in the short term, okay, And as I like to say, you know, in the short term, valuation doesn't matter at all. In the long term, it's the only thing that matters. So we've seen, you know, as race went back through four and a half percent of the upside, we identified that as an area where valuation would matter, it has mattered, but not to the
degree that it has historically. So I'm not sure what's going to get us, you know, for that to become in vogue again, but it's it's not an important factor at the moment.
Told to us about breath of the market, Mike, A lot of folks in a tors And slot today was just out with the note from Apollo, just talking about the concentration within this equity market par typically in big cap US technology names, and how that's really relative to the rest of the world just getting more and more pronounced. How do you think about breath or lack of breath in this market.
Well, it gets back to quality. So and I would say the as bad as the concentration is in the US, you know, we have like five stocks or thirty percent, it's even worse in places like Germany where we have three stocks or thirty five percent or in parts of eight. And what's going on is the same thing that's going on here, which is that people are crowding into kind
of these large camp quality stocks. It just so happens that the US has more of them, so, you know, but in other places of the world there fer them. Why the crowding is even more so. So it's just more of the same. You know, basically people, you know, the markets are smart, they've crowded into what's working. What's working is large cap quality, particularly quality growth in that because they have scale and they can operate in this world where perhaps rates are high. The government is a
big part of the economy. You have a lot of uncertainty, multipolar world, geopolitics is you know, kind of putting pressure on certain regions, and you know, I think that continues for the foreseeable future. The thing they could change that which I'm getting a little excited about it is if we can shrink the government. So imagine this, you have a recession in government. I'm not sure that that would
be that bad for the private economy. I'm not sure we're going to get that, but if we did, that would potentially change that dynamic.
Mike Wilson very quickly here talk about enthusiasm. I mean Michigan State taking up Michigan and basketball. That was like Big Ten classic, wasn't it?
Well classic for if you're not a Michigan fan.
But they can still come back.
The Big Ten is always competitive time. As I like to say in both basketball and football and other sports as well. So and Big Blue has had a good run.
Yeah, I mean they're in second place. Mission, I mean they have the two teams up top.
Of Big Ten. Is important? Why is USC in the Big Ten? Does Mike Wilson understand? Please?
Hell the kids from Los Angeles that come all the way to Piscataway, New Jersey to play basketball, Oregon, it's in.
The Big Ten. Mike Wilson, this is Unamerican. I hope Michigan takes every victory from the way pushes those Westerners out of it. Mister Wilson is with Morgan Stanley. Thank you so much, Mike Wilson.