Morgan Stanley CIO Mike Wilson Talks Market, AI Trade

Morgan Stanley CIO Mike Wilson speaks on the fragility of the markets, bonds, and AI trade with Bloomberg's Matt Miller and Katie Greifeld

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.

Speaker 2 (00:08):
Let's discuss now with Morgan Stanley, Cheap US equity strategists
and CIO Mike Wilson. And Mike, it didn't feel like
things were that fragile in May, a gain of six
point two percent on the S and P five hundred,
despite what we were just talking about in the last flock,
all this uncertainty that's out there, all this caution from
Corporate America. What do you make of where we stand
right now?

Speaker 1 (00:28):
Well, I would say the fragility got priced. You know,
we had a big sell off twenty percent sell off
plus thirty thirty five percent in most stocks. And I
think that the fragility now has moved to the bomb market,
you know, like that's where the main concern is now,
whether it's the global bomb market with jgb's you know,
kind of getting out of bounds and of course now
with you know, term premium in the US treasury market,
I think that's where the risk is the greatest. The

(00:49):
growth fears have subsided because look, we did take the
off ramp on the tariff concerns, and and from my perspective,
I mean like we were probably weeks away from having
a recession if those one hundred and forty percent plus
tariffs has stayed on, I don't think there's any you know,
it's very little doubt that corporates would have had to
take action with the labor cycle. But now that it's

(01:09):
backed off and the stock market's up. You know who
watches stocks more than me and us? CEOs? Yeah, okay,
so stock market recovers Loosen's financial conditions. They say, you
know what, hold off on the layoffs because things may
be turning around. And I think we bought ourselves quite
a bit of time, and that's why the markets responded
to that. I don't think it's unusual. You know, CEOs
rarely admit that to us. That's why I was laughing.

Speaker 3 (01:31):
And they always say, I don't watch the stock on
the day to day basis, but of course they do.
Like you think that the bottom is in and that
the second half is going to be better, or at
least you said started the year saying the second half
is going to be better than the first half. Do you
still think that. I mean, obviously we came down a lot,
but we came back a lot, and now we're, you know,

(01:52):
flirting with six thousand again.

Speaker 1 (01:53):
That's right. Markets and economies are reflexive. Okay, we know that,
and you know, I think we have a unique view
coming into this year. Our view is that things already
slowing dramatically, and particularly on earnings. Arning's revision breath was
rolling over, the AI story was losing steam, okay, But
all of those things now have bottomed from a rate
of change standpoint, and that's what Stock's care about. That
was the focus of our mid year outlook was that

(02:14):
the rate of change is now bottomed, bottomed in economic
terms and in fiscal monetary policy. I think is bottomed
in terms of the most hackeys we're going to see,
and that is all going to now lead to a
better rate of change in the second half, which the
stock market is already discounting.

Speaker 3 (02:30):
Bank of America says the latest turn by the Trump
administration to favor tax cuts and lower tariffs could spell
trouble for markets. The flip and US economic strategy could
incentivize traders to ditch bonds and pile back into AI
and crypto trades, which would risk inflating a market bubble.
According to the team led by Michael Hartnett, are we

(02:52):
already back to a bubble. We're here with Morgan Stanley's
Mike Wilson. That seems wow, that's a that's an interesting call.
That's a way to get noticed on a Friday.

Speaker 1 (03:03):
I mean, bubbles are you know, apparently every year now
and certain things. I mean, I do agree with Michael
in the premise. Okay, we've been in an environment for
I would say, POSTGFC where policy has sort of elicited
you know, mini bubbles in certain assets. The money moves
to the hot kind of toy, whatever it might be.

(03:24):
But it's nothing like the late nineteen nineties. Like I
don't think what we're seeing in AI anything like the
late nineteen nineties. It's just not as broad. I mean,
there are four large companies spending all the money. There
are maybe eight to ten big beneficiaries of that spending.
That's it was like a mini bubble. We talked about
that at the end of last year. One of the
reasons we were a little bit more negative on some
of those stocks coming into the year was because there
was a deceleration and growth. But it's not like in

(03:46):
the nineteen nineties when you had every enterprise over spending
on equipment, you had this huge IT spending bubble. So
I don't agree that we're in a bubble, but I
do think the policy we've chosen, okay, which is to
kind of at every sign of trouble come in and
stop it, it does elicit that type of behavior where
that's why you get this chasing going on, because you know,

(04:09):
by the dip is a function of that policy that
we've been doing for fifteen years.

Speaker 2 (04:13):
Yeah, and I mean largely if you take a look
over the grand scope of time, by the dip has
worked because socks go up.

Speaker 1 (04:19):
In the long run.

Speaker 2 (04:20):
But I take your point. It kind of feels like
bubbles in the eye of the beholder here. But I
am curious where you think we go from here, especially when.

Speaker 1 (04:29):
It comes to the AI trade.

Speaker 2 (04:30):
That narrative had been out there that you know, it
was getting kind of tired. There was a lot of
existential worries over deep seak and cheaper models coming in exactly.
But it feels like, especially with these in video results
that were this week, somehow it feels like a long
time ago, we're still putting our foot on the gas here.

Speaker 1 (04:47):
Well, what I would say is that the AI is
transitioning from the infrastructure place. Okay, so the investment cycle
to the adopter phase, and that's what we've been talking
about for the last six months is now we're now, okay,
we have the compute power. It's built. There's gonna be
mo to be built. But that initial surge is kind
of done, and now it's going to continue but at
a slower pace. And now the fun part starts. Let's

(05:07):
build the application layer. Let's build the killer applications that
then can make you know, we could diffuse the technology
into the economy. You know, the price is coming down.
That's when technology takes off. That's the that is the
essence of More's law and tech diffusion. That's when you
can actually get the productivity benefits. And so we've always
had the view that twenty five was going to be

(05:29):
in terms of the productivity, but twenty six and twenty
seven is when we think that productivity benefit can start
to come through.

Speaker 3 (05:34):
Is that what drives us to sixty five hundred. I
mean that combined with the fact that tariffs turn out
to be not so bad at least at these levels,
and no one cares if we blow out the deficit
another couple trillion dollars.

Speaker 1 (05:47):
Well, it's another part of our rate of change argument, right,
so that AI now is moving to focus on the
rate of change. That's the title of your note exactly.
And so like AI was a negative in terms of
ROE and return on investment capital, it was a cost.
And now the rate of change on AI from a
broader market perspective is turning into a tailwind for margins
and productivity. And that's what the market is. That's another

(06:10):
factor in our more positive view over the next twelve months.

Speaker 2 (06:13):
Well, I actually want to go back to the bond market,
speaking of the deficit. You know, you mentioned before the
break that things are actually looking a little bit fragile,
not so much in the equity market, but perhaps the
bond market. And I'm curious, in your rule as chief
US equity strategists, how much time are you spending looking
at the tenure yield?

Speaker 1 (06:31):
Well, I spent a lot of time looking at the
ten year in any environment, because it is the pricing
mechanism for all assets. You know, as we've said for
years now, four to fifty is kind of that crossover point,
and it still continues to be a crossover point when
you get north of four fifty and a ten year
you start to see negative correlation to equity multiples. Okay,
so we're right around that level. And by the way,
I'm pretty sure the authorities know that as well, so

(06:53):
they try to defend those levels. I don't think we're
going to see a real defense.

Speaker 3 (06:57):
Authorities meeting the FED, you know, all of it, Fed treasurysury,
not Congress.

Speaker 1 (07:03):
Congress is a different animal, you know, and I've made
this statement before. It's may controversial. I believe Treasury is
somewhat captured by Congress or they got to fund it,
and the FED is somewhat captured by Treasury. They got
to help out, so they work. You know, it's sort
of it starts with the spending and then it trickles
down and so, you know, I don't think we're going
to see an aggressive action until we get to fire.
If we get to five percent. We said this last time,

(07:24):
going to five percent is gonna be bad for stocks
in the short term. However, if we get to five percent,
I'm pretty confident they're going to intervene well, and that
will be positive for better worse.

Speaker 2 (07:34):
It feels like we are just glued to four and
a half percent we just tog around in a range
around until we get over it, until we get when
we watch, but then we go back down and we're
back at four and a half percent at least. That's
been the story of the past couple months. So I'm like,
what do you make of that?

Speaker 1 (07:48):
Well, I would say the other side of that too,
is like, let's not ignore what's going on in Japan, okay.
So you know they've been they're way ahead of us
in terms of using you know, the money printer to
kind of backstop bomb market doing it for thirty years,
right and qwe they were the originators of that, and
we followed suit. And so now the question is, okay,
now they have inflation, Okay, in the end, by the way,

(08:09):
is you know a big part of that. So the
question is can they control the yend's movement. I don't
know if they're more focused on the end going south
of one forty okay, or they're more focused on keeping
jgbs from blowing out the higher levels. But it appears
to me as an observer of markets, that you know,
when the ten year yield or thirty year yeld gets
to a certain level in Japan, or the end gets
closer to one forty against a dollar. We also see intervention.

(08:31):
So these are all related. These are all related. But
the fact that we were seeing these things get pinned
around these key levels suggests to me that they're observing
it and they're they're gonna, you know, they're gonna try
to control that. All right, keep an eye on Japan.
We'll be doing that over the weekend. Hope you have
fun too.

Speaker 2 (08:47):
That is Morgan Stanley's Mike Wilson.

Speaker 1 (08:49):
Great to speak with you.