Morgan Stanley's Mike Wilson Talks Moody's Rating Cut

Investors should buy any dips in US stocks fueled by Friday’s credit rating cut, as the trade truce with China has reduced the odds of a recession, according to Morgan Stanley’s Michael Wilson.
The strategist sees a greater chance of a pullback in equities after the downgrade by Moody’s Ratings pushed 10-year bond yields above the key 4.5% level. However, “we would be buyers of such a dip,” Wilson wrote in a note.
S&P 500 futures slid 1.2% on Monday following the debt downgrade, which Moody’s said was in response to a ballooning budget deficit that showed little sign of narrowing. The move has reignited worries about whether US assets are still popular at a time of lingering global trade uncertainty.
Wilson speaks with Bloomberg's Nathan Hager

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. This is Bloomberg Daybreak.
I'm Nathan Hager alongside Karen Moscow, getting you ready for
the trading day ahead. Our guest this morning for that,
Mike Wilson, chief US equity strategist at Morgan Stanley. Great
to have you back on with us on daybreak this morning, Mike.

(00:22):
And it looks like a lot of investors, particularly retail investors,
took your advice to buy the dip after the Moodies
down grade last Friday. Now, with futures moving a little
bit lower this morning, I guess the question is now
what for this market? Good morning, Good morning, Nathan.

Speaker 2 (00:39):
Yeah, Well, I mean part of the sort of buying
the dip is a factor of the retail community who
has been actively buying every dip really for the last
two years. In fact, they bought right through you know,
liberation week I would call it, you know, that whole
kind of episode. They didn't really flinch. And there's also

(01:01):
the systematic strategies, the CTA's and of course corporate buyers.
So there's just there's just a lot of demand, uh
that is just coming in and I don't see that
really changing in the near term. It doesn't mean we're
going straight up by the way they'll be, They'll be
pulledbacks and whatnot. But I do think going back to
the Moody's downgrade specifically, it was the third agency that

(01:23):
has downgraded US debt, and it was really the first
two that had a forced impact on you know, folks
having to sell because of that downgrade. So we just
felt like that was not going to be you know,
a major reason for for stocks to sell off. Now.
I do think the bond that bond yields about four
and a half percent on US treasuries. I do think

(01:43):
if that, if that persists and we go higher, that
that could lead to some corrective activity.

Speaker 1 (01:49):
Okay, as as far as the Moody's downgrade goes, though, Mike, uh,
does it feed into this narrative that we've seen play
out in the market following the Liberation announcement that the
US might be a shakier buy for foreign investors. What's
your view on that.

Speaker 2 (02:07):
I do think there's some there's some truth to that,
but I mean, I don't know if it's directly related to,
you know, the downgrade of US debt. I think there's
a lot of things going on that that suggests that
foreign investors may want to pair back their US dollar
asset investments. Number one, mean they just got too much
of them. I mean, you know, over the last twenty years,
they've acquired a lot of US assets, both treasuries and stocks,

(02:30):
and we know that, you know, a lot of these
indices are imbalanced because of that. So some of that,
you know, rebalancing is a good idea. And I would
just point out that a lot of that rebalancing has
already happened just through price. Right A lot of the
foreign stocks in US dollar terms did quite a bit
better than the US stocks in the first quarter of

(02:51):
the year. So as I like to say, you know,
the rebalancing happened through the price channel. And now the
question is are foreign investors comfortable more comfortable now where
we are today? I mean, you know they own less.
Is that enough? I think it's probably fine where they are.
We focus on the fundamentals, Nathan, as you know, I
mean earnings revision breath bottomed you know, about a month ago,

(03:14):
both on an absolute and on a relative basis, meaning
US stocks are showing better earnings revision breath now and ultimately,
if that's going to continue, which we think it could.
Some of that, by the way, is the weaker dollar helping. Then,
you know, I would suggest that US stocks probably continue
to do as good, if not better than foreign stocks.

Speaker 1 (03:33):
You mentioned the earnings breadth continuing. Of course, a lot
of what's been driving the rally once again, even in
the last few days, has been those magnificent seven names
that have been driving things for so long, sticking to
the fundamentals. How do you view those companies in terms
of their fundamentals.

Speaker 2 (03:53):
Well, that's just it. I mean, you know, the reason
why those stocks have performed so well for the last
ten years is really an ear story, and it's it's
really undeniable. Now, some have shown better earnings and more
consistent earnings than others, but as a group, it's you know,
these are monopolistic type businesses, and so you know, they
they they are earners, and and that's being shown again

(04:16):
that the revision breath for that group in particular has
turned up again once again. Some of that is a
weaker dollar helping, But you know, they go through these
cycles where they self correct and then the earnings power
just you know, resumes, and I think you know that
so in other words, this recent snapback by the Magnificent
seven is driven by the fundamentals. This is not just
passive flows going back in there. They are showing good

(04:39):
relative or inch of vision breath.

Speaker 1 (04:41):
And in terms of the broader market, do you see
that that fundamental story continuing even with some of this
uncertainty around trade negotiations continuing.

Speaker 2 (04:53):
Well, we've had a big snapback, So I think, you know,
we're the view that we're probably kind of back on
track to our original forecast for this year, which was
that the first half would be tough, and our original
range was fifty five hundred and sixty one hundred. We're
right smack dab in the middle of that again. But
we do still think, you know, we're going to break
out of that range in the second half. And this
is all related to the sequencing of the policy. A

(05:15):
few other things as well, AI camp Bax you know,
decelerated in the first quarter, but all those things now
sort of stabilized. And if you think about, you know,
this administration, they came in doing all the sort of
growth negative policy changes the start. You could say the
president is acting like a new CEO. He's coming in
and sort of kitchen sinking it. And then in the

(05:37):
second half is when the more positive strategies or policies
will start to flow through things like deregulation. We think
they'll be success in passing this tax bill or budget reconciliation.
And then of course we can get some of the
animal spirits going to people we're excited about four or
five months ago, and that should lead to better growth
in twenty twenty six. And I want to come back
again to AI camp backs. AI campbacks is probably detail,

(06:00):
but it's not going negative. And what we're looking forward
to now on AI is the productivity benefits that will
probably start to come through next year. The market will
start to figure that out in the second half of
twenty twenty five.

Speaker 1 (06:11):
Only got about thirty seven seconds left, Mike. But does
that positivity in the second half continue even with the
FED on the sideline? So you keep hearing a lot
of FED officials hinting that they may have to stay
on the sidelines for a little longer.

Speaker 2 (06:26):
Well, glad you brought that up. I mean, you know,
our economists probably are you have the least amount of
cut price in of the major folks out there. You know,
we have no cuts pricing for this year, but then
they have seven cuts price in for next year. So
it's coming, is the bottom line. And once again, even
if there's no cuts in the second half of this year,
the market will start to look forward to those cuts

(06:46):
next year. So I think the FED is another example
of where the rate of change is going to start
to turn into a tailwind at some point in the
next six months.