Mike Wilson Talks Earnings and Government Shutdown

Robust corporate earnings will power the US stock rally in 2026 as risks around an uncertain rates outlook prove short-lived, according to some Wall Street strategists.
Morgan Stanley’s Michael Wilson said there were “clear signs” that an earnings recovery was underway and that US firms were enjoying better pricing power. He also pointed to a trough in earnings revisions, which is the number of analysts downgrading versus upgrading estimates. He speaks with Bloomberg's Nathan Hager on Bloomberg Daybreak. 

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Daybreak.
I'm Nathan Hager with Karen Moscow's we get ready for
the first trading day in which the federal government will
be open in forty three days. We're joined by Mike Wilson,
chief US equity strategist at Morgan Stanley. Really great to

(00:22):
have you with us on this first day after the
government shut down. Mike, Now that it's over, now what
good morning.

Speaker 2 (00:31):
Good morning, Nathan. Yeah, Well, I think most people probably
won't feel the effects. I'm sure the government employees are
happy to get back to work, and like I think
from our standpoint, from a market standpoint, I mean this,
you know, the longer that this kind of you know,
lagged into the holidays, it definitely became a risk factor
from both a growth standpoint and also from a financial

(00:53):
liquidity standpoint. So, you know, I think there is a
bit of a sigh of relief. You know, the markets
have traded better into this now that it's behind us.
But you know, let's be honest, I mean, I don't
think they've really solved some of the main issues. So
this is one that could pop up again in as
early as January, so you know, we'll keep an eye

(01:13):
on it, but I think we averted the worst of it.

Speaker 1 (01:16):
Could there be a lag when it comes to releases
of government data. We heard the White House say that
October CPI and jobs might never come out. Could that
have a market impact?

Speaker 2 (01:28):
Well, it's just more of the same, which is there
is this tension and we've written about this. We think
there is this tension between the markets expectation and what
the FED is doing. And part of that does relate
to the data itself. I would say that the issue
with the data is twofold number one. We may not
get it and so it's a further delay which will
delay the Fed's ability to you know, cut rates maybe

(01:51):
as much as the market wants. And also, you know,
I've made the case and I think other people have
two that you know, these data are somewhat they're very lagging,
and they're not they're not as accurate as they have
been you know pre COVID. You know, the since COVID,
some of these data the collection of themselves has been

(02:11):
a little bit erradic and a little less reliable in
that regard. So, you know, we do have a little
bit of a data problem with it without the shutdown,
and I think this all stems back from COVID, and
I think this is making the Fed's job harder.

Speaker 1 (02:25):
Does it change your view on what the FED does
on interest rates? I think you were calling for something
like what six maybe seven interest rate cuts next year?
Does that change now?

Speaker 2 (02:35):
Well, it's I think it's five to six now are
kind of kind of over the next year. But still
that's a that's that's more than what the market's anticipating. Uh,
you know, right now, the market's anticipating about three three
and a half cuts between now and the end of
next year. So I mean, look, I think that the issue,
it's not issue, but I think one of the concerns
that the market has had. One of the reasons why
it's been narrow is that, you know, the market kind

(02:59):
of wants more, said, in order to get the private
economy really moving, we do need kind of that base
rate a bit lower, and that's why we we've kind
of stayed at the quality curve and why the marketed
performance has been quite narrow. So, you know, look, I
think because of the effects of COVID, the kind of
the boom bust on inflation, itself. The feed is probably
going a little bit slower than they would normally, which

(03:20):
I don't think is necessarily, you know, the wrong decision,
but there is that tension, as I mentioned before, between
the market and how fast the feed is moving.

Speaker 1 (03:27):
Now, it's been an interesting move in the market and
the lead up to this shutdown coming to an end.
While the broader market's been moving lower, we've seen the
Dow Jones Industrial Average hit new record highs. Does that
point to a new direction, a new narrative for the market, Yeah,
we think so.

Speaker 2 (03:43):
I mean, we've kind of held back on trying to
make the kind of small cap, MidCap broadening call, but
now we think we're getting closer to that moment where
you know, we do think we're going to see you know,
broader performance in twenty twenty six, mainly because the earning
story now is improving. As we've been saying for quite
a while. You know, a good chunk of the private

(04:04):
economy has been in a recession for many years, and
we think that it's now emerging from that. Some of
that's due to some of the policy changes and quit
frankly just pent up the mand But the missing piece
there going back to the Fed again, not to put
too much pressure on them, but we do need lower
rates for that private economy to get moving. The good
news is, Nathan, is it in the third quarter so
far the reporting season, we are now seeing double digit

(04:27):
earnings grows on the year of the year basis for
the median stock and that's the first time we've seen
that kind of growth in four years. So I think
there are early signs that we're seeing a broadening of
the earning story and that's what ultimately will lead to
better broader performance in the stock market next year.

Speaker 1 (04:43):
Are you starting to think about a number in terms
of where earnings revisions could go into next year?

Speaker 2 (04:48):
Well, I mean, I think the consensus right now is
low double digits, and we think that's very achievable. We'll
leave it at that. We're actually working on our year
head piece that will come out at the end of
next week.

Speaker 1 (05:00):
Is the is the need for interest rate cuts there
for the market or can the market continue to rally
higher even if it's expectations aren't met in terms of
monetary policy?

Speaker 2 (05:15):
Well, I think, I mean, I don't think the market
essentially in trouble if they don't, you know, exceed expectations.
But I do think the broadening story requires the FED
to get ahead of the curve. As I'd like to
say it, I measure, you know, kind of the FED,
you know, in market terms, are they ahead or behind
the curve by looking at the two year treasury yield?

(05:36):
So right now, the set funds is still about forty
fifty basis points above the two year treasury yield, and
I would like to see the FED get below that
level and then you'll see that broadening out. But you know,
you know, the economy is not in bad shape at
this point. I think I think the worst of the economy,
you know, sort of slow down is behind us. And
that was you know, we priced all that in April.

(05:56):
We've written about this. That was the end of this
rolling recession in and we're into a new bowl market now.
So so but but you know, I mean markets like
to challenge uh authorities, uh, you know, monetary policy, et cetera.
And you know, if they're not happy, they'll they'll make
the they'll make that they'll make them know, uh and
and and then and then they'll get what they want,
you know. But right now, it seems like we've got

(06:17):
a decent balancing act that's going on,