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Here's the latest this morning. Trade talks between the US and China stretching into a second day as President Trump's Friday deadline approaches. The COMMAS Secretary Howard Latinik thing a ninety day truce extension, which China is likely. Mike Wilson of Malkan Stanley is bullish, writing We're bullish into twenty six through the near term setup is not without risks. These include tariff related inflation. Mike joins us now for more. Mike,
good morning, Good to see you. You list a lot of reasons to be constructive here, just go through those leasons for us this morning.
Yeah.
I mean the reasons really haven't changed.
We've been very constructive since May when we did our midyear update. And I think the main thing to take away from our outlook that's maybe different than others. I think we came into the year feeling the first half would be tricky, second half would be better, and that was all function of the sequencing of the policy.
Right.
So the policy sequencing was what we said is a kitchen sink the first quarter. It took to the growth negative stuff first and then.
Flipped very quickly in April.
So the main reason we're bullish, okay, is that the earnings revision breath and we show this every week in our note and it goes up every week, has exploded higher off of what was a deep cyclical low that basically priced in a recession for the most part, So that revision breath is guiding us to the performance that we've seen.
This is just to put it in context.
Okay, this increase or V shaped recovery and arrange re vision breath is as significant as we've seen since COVID, the COVID recovery, and that was the last time that we were this far out of consensus being bullish, and it was right because of it.
It's the data. We're data dependent, So that's the main reason.
So this is not just me saying, oh, momentum stocks and price momentum, etc.
That's part of it too. So what's driving that earninge revision breath? Well, first, it's a.
Reflexivity just on people getting too bearish on the growth negative stuff.
And let's not forget the AI camp X cycle, which.
We came into your feeling negative about, also bottomed in April.
Okay, So those are two big drivers.
The second one is a weaker dollar dollars, a big tail wind for multinational companies, okay. And the third one now is we're starting to see operating leverage in more companies across the S and P five hundred. And this is a very unique view that we've had. So, you know, the rolling recession call that we've kind of been talking about, well, now it looks to us like we're having a rolling recovery, okay, And that will be further spurred by the FED cutting
rates at some point in the next year. And we don't know exactly when they're going to start, but I think it's fair to say that they're not going to be raising rates. So this three year what I would call soft recession that we've been living through, now we're sort of coming through that and we're getting more visibility
and that that's why we're more constructive on the next year. Now, in the next three months, I do think that some of the things that people have been worried about could start to play through earnings.
For example, we.
Can see cost of goods sold increase because of the tariff. You know, the inventory now is flowing through, the cost of goods sold.
We could see the back.
End of the treasury markets start to back up again because of the supply that we know is coming. And then of course we still have to deal with just this sort of concern around inflation and how does that play through, how.
Does the Fed respond to that? So there are risks there.
We're not saying there's no risks. And remember the market trade six months in advance. So that's what's happened. The market has figured this out, it's gotten ahead of it, and we've priced a lot of good news.
How much is this entirely tech driven versus a broad based kind of revisions increase and recovery. Given some of the mixed guidance that we're getting this morning from a number of companies, particularly those that are consumer facing.
That's right.
Well, it still remains mixed because we're still in this rolling recovery, right, So it's not everything at once. Tech and the MAG seven are leading, but we're seeing also other groups, industrials, financials, Okay Software, which has been in a software session for the last couple of years, we're seeing we are seeing a.
Broadening out for the Max seven. So it's not.
Where we need to be to see say, oh, we're going to move into small cap stocks, We're going to move into the low quality parts of the market. We're still staying up that curve, however, it's starting to progress. Just like the rolling recession saw degradation that was not all at once, but kind of more piecemeal.
So during the rolling recession, we saw gains of about twenty percent on the S and P five hundred first couple of consecutive years.
Could you see.
Gains twenty percent or more during rolling recovery? Does it matter if you're in a rolling reception or really recovery in terms of the returns.
What I would hope is that we would see areas that have been lagging start to participate more. And that's that's sort of our view on twenty six right, and that's sort of starting to happen now. Industrials has been the best performing sector here today. It's been our top pick for the right reasons, for the reasons that we've been citing, which is earnings there starting to look better. Let's not forget the tax bill, which I didn't even mentioned earlier.
This is a massive, okay.
Tailwind for cash earnings for US companies. I mean to the tune of five to ten percent increase.
So that's real money going into the pockets of companies.
They're now allocating capital, not the government, and I think everybody would agree that's probably a better outcome.
Do you think US exceptionalism is back? Is everyone else signing up to that?
Well, what I.
Would say is that maybe US exceptionalism has been missing. Okay, So now, I mean, no one wants to admit this, but the direction we're going in now, it looks like we are going.
To see better participation.
Across the economy. We've been waiting for this. We've been waiting for this for two or three years. You know, We've bend kind of back and forth, sometimes bullets, sometimes bears trying to pick stocks. And this is the first time I can say that I can now see the path of this transition. We're actually starting to rotate into more of an early cycle recovery.
Let me give you some more space to do this, because it's important the strategy of the White House and the rebalancing that you envision a year out, two years out, three years out. What is it you see?
Well, the rebalancing is both global and domestic. So the global rebalancing is obvious. Are trying to reduce our current account deficit, you know, get the trade negotiations are along those lines.
And I think that's rising.
That's a good strategy, getting more manufacturing, potentially in house or domestically. In the domestic rebalancing, it's really instead of just having the one percent right, it's you know, Main Street over Wall Street. I mean, people say, well, that doesn't sound like that's working right now. But the idea here is you get lending through the regional banking sector, you get lending smaller banks, lending to small businesses, to individuals, get rates down at the back end.
Okay, that is that.
Will liberate actually the domestic the sort of the middle part of the economy.
Where do you then place this idea that tariffs are pretty regressive, this idea that lower income individuals bear the brunt of it. BECs is essentially a sales tax on them. And you're already seeing companies really grapple with what that means for demand, particularly in the travel and leisure space. How do you square that with a sort of broad based dynamism that you're talking about.
So I think it's very simple in the sense that you have to think, Okay, what do you have to think about? What are the terrors trying to achieve? My view has always been that this is going to end up being an import tax. Now I would have said, you know, two weeks ago, this is a ten percent it's going to end up a ten percent import tax that's going to be shared between exporter, importer, and consumer, and the market will determine, okay, who can absorb those terrors.
Exporter will decide, hey, we got a discount because we're going to lose volume. Importer will say we can't pass it on. We're going to eat some of that, and the companies that have pricing power will pass it through. Okay, Now, we believe that the consumer areas have less pricing power, so I would argue that the pricing power is going to be more, probably in the industrial space, probably more in the you know, sort of the value added supply chain. So then what do they do on the other side, Oh,
they do a tax cut for the companies. So it's it's just basically saying we're going to tax this chain here, which is going to be a shared tax, but then we're going to actually give that away to corporations who could then reinvest and actually get.
The economy moving.
It's I mean, it is a capitalist type of approach. Now, I don't know if it's going to work perfectly, but I like the direction of it from a from an investors standpoint.
I love this. Okay.
Now, I'm not here to make judgments about who gets herot the most or whatever, and I don't really know, but I can see the path and why we're more constructive, why we've been more constructive on the twelve month you. I think remember last year you said, you know, Mike, this first time i've heard you sound a little more constructive because I had that vision.
Is overwhelming this morning, Mike, I've got to get to a brank We all need to PreK my Wolston and walk and standing. Mike, appreciate it. Thank you, sir. It's going to see you