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Wealgan Stanley's Mike Wilson rising impoor cost exposure for S and P five hundred industries. It's more limited thus far, given the combination of the countries in scope and the exemption seemingly still in place. Mike John is SNAW Football Mike, Good morning, morning John. Have we actually been tested? That's the question I've got for you, based on the note you put out over the weekend.
Yeah.
I think we keep getting tested back and forth, And I think Amrie did a brilliant job of kind of describing yesterday as just another example the president controlling the narrative back and forth, you know, maybe the timelines now, I mean he lets things go even shorter than he comes back in reverses, And I totally agree. I think it's about trial balloons. It's no different than FED policy makers.
It's no different than other policy makers coming in and they trial ballooned to see how it will impact the market. So have we been tested? Yeah, We've been tested severely. In the first three or four months of the year, we had a bear market stockture down thirty five to forty percent over the prior year. So, I mean, we had a bear market, and so now are looking for the I go, well, you missed the bear market.
We had it.
You know, we bottomed in April, and all the indicators we look at from a ready to change standpoint, if inflected sharply. That's what we wrote about our mid year update, and it's even surprised us to the upside. I mean, the arn answer vision breadth is explosive, and so you just can't deny that. You can't deny the fact that companies are good at mitigating terrors. For example, import prices really aren't up that much. So the question is who's
eating these terrors? That's the big question. I hear now from clients like, well, we're collecting all these terrors, but where where are they? Some of them are on the balance shese of companies that hasn't flowed through the cost of goods sold yet, some of them are from exporters. They've discounted their pricing. They're eating the terrors, and then some it's going to get passed on to the consumer.
That's to be determined still, And so as we've been saying, the third quarter is probably the quarter of risk where you'll see some of this flow through to the cost of goods sold. I don't think this is, you know, a massive correction. It's a five seven percent correction for some companies that could be bigger. But this is the quarter of risk for where the terrorists will start to hit and then but the markets are you thinking about?
This is a temporary impact and twenty six now Ernie' grows standpoint is looking better.
Is that a correction you'd be looking to buy?
Then?
Absolutely, we're looking to I mean, I'm hoping we get a pullback to some degree. I think a lot of clients are looking for a pullback of some kind. They've been surprised we haven't gotten one. But this is what the beginning of a new bowl market looks like.
Right.
It's just explosive. It doesn't let people in, right. The rate of change is accelerating beyond what you expected. So it's just I think the pullbacks will be short and shallow. Maybe there'll be another surprise, another test of some kind that will cause something more severe. But I really can't see more than a five or ten percent correction given what I see now in the landscape.
When you think of tariffs, though, I think you're talking about the visa the country tariffs, right, the reciprocal what about the sectoral tariffs? Does that make it more complicated?
Absolutely?
I mean, and that's one of the reason why I think a lot of investors have thrown up their hands and the market is kind of looking past this.
Because there's so many carbauts.
I mean, even the USMCA, right, the exclusions, and that's what we've word about this weekend. So a lot of the tariffs on China go you know, they go through backdoor through Mexico. Well, a lot of that's been excluded, so the twenty five percent tariff doesn't even end up hitting that.
And then we have the two two exclusions.
We just saw that now you know, you can sell semiconnectors into China again. So like there's these carve outs and it's very confusing. My base case view and has been this all year, is ultimately I think that what they're going for is a ten percent import tax, basically a consumption tax, and that's where we're going to land rit large. Now we're not quite there right now if you do the math, it's like sixteen seventeen percent. But ultimately, if we get to a ten percent import tax. Companies
can deal with that. You raise three to four hundred million dollars in revenue per year. I mean, it's not a bad it's not a bad strategy.
Does the One Big Beautiful Bill tax cuts offset that import tax?
Well, that's exactly the strategy, which is that you're instead of taxing companies and private companies and individuals, you're sharing the tax now through exporters, importers, and consumers and then let the market figure that out, like figure out where the.
Tax can get allocated.
So what we're moving from is an economy where capital has been allocated by government to an economy where capital is being allocated by private corporation. That's the beauty of the Big Beautiful Bill is that you're basically shifting the economy mix from a publicly driven economy to a privately driven economy.
SOMEBOE we talked about six eight months ago.
But is there a fiscal impulse given the fact that really the crux of the One Big Beautiful Bill is an extension of current policy.
That's right, So there's no incremental fiscal in the traditional way you think about it. However, there's a massive positive impact to cash earnings for corporations and an incentive structure to start investing something that companies have not been doing for the last three or four years is investing in capex. The bill basically encourages them to spend money in capital goods in R and D, something that we need to do to grow down the road.
Let's build on some of this. She talked about the broad based earnings revisions. Is that more than just AI, more than just big tech? Where are you seeing that?
So it's been led by the mag seven so to speak, But no, it's actually fairly brought now. It is a larger company driven sort of revision factor. So the small the small companies still aren't seeing it yet. That's what we've been underweight. We've remained underweight with the smaller BIS say, is now that could change if the FED starts cutting rates. That's something we're thinking about for twenty twenty six. But
it is a fairly broad expansion. It's financials, it's industrials, it's some of the software stack which was kind of left behind over the last year year and a half.
So it is it is broadening out.
And this is I think a function of Look, there's been there is pent up demand in the economy, there is pent up capex in the economy, and somebody's incentives. Now, some of these tax changes, I think do give clarity to companies now saying Okay, we can move forward with our business. The legislative agenda is done. Now we now we can look forward for at least three years, maybe not beyond that, but at least for the next three years, and we got to get out with our life.
What are the kind of companies you like at the moment.
Industrials and financials really are the two areas we've been really focused on. And software because I think a lot of folks are too bearish on software.
I understand why. I mean AI, you know, coding and all that.
But at the end of the day, this is the part of the tech cycle where you've done the compute and now the application layer has to get built so that you know, dummies like me on tech can actually use this technology and become more productive.
One of them will can POSSI the Hudson down the Hudson in downtown New York, and I look across the river to back office city compliance. All of those workers that are working for these major financial institutions and forgive me because many of them are watching right now and this might be a rather brutal conversation. How close are we to seeing some big cuts to the amount of people to work at these institutions?
Well, I mean, compliance is definitely one area that will be hit not only from AI but also from just a change in regulatory environment. Potentially, we don't really know. We're not seeing it yet. Okay, I would say that the AI concern about employment I think is real. We're seeing it. Here's here's the lead indicator. So the largest companies who are very fascial with data Okay, you're Nvidios,
your metas, etc. Are showing the ability to use this data. Microsoft, right, They're laying off people more and more because they're able to use this data.
So the question is can.
That translate into the average company in the economy to be determined, But you know, I think that, like I don't want to make a statement here, that's not great for employees necessarily, but man, if you think about what it does for S and P earnings, well, this is it might.
Really really positive.
That's why the multiple keeps expanding because that's what it's looking forward.
To the conversation for further down the road, and this is the next several years, you can have this really strange dynamic where the labor market data stinks, but the yearnings coming out of these companies might be really powerful. I just wonder how far you can push that, How far can we push that.
Well, we're going to find out, I think, because I think companies or US companies are really good at cutting costs, whether it's employees or you know, other types of expenses, and so I mean that's what they're that's what they're going to do because we're still in kind of a slow growth top line environment, so companies have to become more efficient. Plus they have to offset some of these other things like terrafs and things like that.
So but companies will figure that out.
That's why the market continues to go for the high quality businesses. One other thing that we haven't talked about yet is last week's Supreme Court ruling I think was really fascinating with respect to the government's ability to do these reductions in force you know from the DOGE.
And this this this could be.
Also quite interesting development where this is like the return of DOGE. Because I would say most people are disappointed that those wasn't allowed to kind of complete the deal.
They were kind of blocked. They weren't able to kind of reduce government headcount.
And maybe this ruling by the Supreme Court allows those to kind of return and we could see headcount reduction in government, which is another type of a slowdown in labor, which won't affect the market. Right, That's not great for government employees necessarily, but that will liberate Okay, you know kind of the private economy.
Once again, two parts.
Of these conversations. When you talk about the fact that more capital being allocated to the private sector, not the US government. But if you have companies laying off people because of AI, who has to step in to help what potentially could be high unemployment rates.
It's going to be the US government.
Yeah, well, I would hope that, you know, instead of laying people off, you just make them more productive. I mean ultimately, so everyone says yeah, but I mean that at the end of the day, if you look at the private economy for the last three years, this is something that doesn't get a lot of airtime. The private
labor force has not really ground the most part. Okay, it's been a government heavy healthcare, heavy education like state and local jobs, and so the private economy has been operating with fewer employees already.
This is not a new deal.
I mean, companies once again are really good at being more efficient. So you know, my hope would be that we could just grow with fewer people. By the way, we have less immigrants now right because of the shutdown the border, so we kind of need this.
We need to fill that.
Gap of making the people who are in America more productive and so we can grow the economy.
Mike Wilson smile is always good to see you. Thank you, sir,