Morgan Stanley's Wilson on Markets, Earnings, Election

Show Transcript
Bloomberg Apr 24 04:00 · 13.4k Views

Mike Wilson, chief US equity strategist at Morgan Stanley, talks about stock picking in this volatile environment, how the presidential election could impact markets, and the prospect of a Federal Reserve rate cut. He is on "Bloomberg Surveillance."

Disclaimer: This content is for informational and educational purposes only and does not constitute a recommendation or endorsement of any specific investment or investment strategy. Read more

Transcript

  • 00:00 We begin with our top story stocks higher after the S&P 500 snaps a six day losing streak.
  • 00:05 Morgan Stanley's Mike Wilson saying this, we believe equity markets have been trading poorly in April primarily due to the repricing of Fed cuts with 10 year yields now well above our key four 35440 target.
  • 00:16 Stock appreciation from here would largely have to be earned through earnings upside
  • 00:20 rather than multiple expansion.
  • 00:23 Mike.
  • 00:23 And police to say is with us around the table.
  • 00:24 Mike, good morning to you.
  • 00:25 Good morning.
  • 00:26 How high is the bar or low for those tech firms through this week?
  • 00:29 Well, it's mixed.
  • 00:30 As you were saying, it's,
  • 00:31 it's not all one trade anymore.
  • 00:33 It's sort of the magnificent 3 or 4.
  • 00:35 Some are falling by the wayside for fundamental reasons.
  • 00:37 Some are falling by the wayside for rate reasons.
  • 00:39 And look, they've got, they've got tougher comparisons now.
  • 00:42 So I think that, look,
  • 00:43 is it always the case, right.
  • 00:45 It's not so much about the earnings results,
  • 00:47 it's about the reaction of the stock to the earnings results.
  • 00:49 And I think that's what I'm really fascinated to see how much goodness is already priced into even the winners.
  • 00:54 And there are some big winners in that group.
  • 00:56 I agree with you, Lisa.
  • 00:57 I think what's more interesting is what's going on away from those stocks that will, that will inform us more about what's actually happening in the economy.
  • 01:04 You know, what the expectations are around Fed, for example, and also some of the geopolitical risk, which I think, you know, that's not our number one concern, but it's also one of the reasons we're overweight energy.
  • 01:12 You said we can learn something from the earnings themselves and have a stock response to them.
  • 01:15 What have we learned so far as we get deeper into earning season?
  • 01:18 Well, it's about 5050.
  • 01:19 So 50% have been up,
  • 01:21 2 + 150% have been down.
  • 01:22 That's worse than normal.
  • 01:24 This is in line with what we've been saying for quite a while now as we think now we're in a period of multiple contraction,
  • 01:29 right?
  • 01:30 If you think about the last six months, all that really happened was,
  • 01:33 you know, the Fed pivoted treasury, I would argue sort of squeezed the bond market.
  • 01:36 We had a duration rally in the year end and that affected a huge multiple expansion.
  • 01:42 You know, it doesn't get a lot of press, but 2024 estimates for the S&P 500 haven't really gone up, OK.
  • 01:47 They've been sort of flat over that six month periods, all multiple expansion.
  • 01:51 So our call basically is that we first always had seven cuts was silly.
  • 01:54 I think a lot of people agreed with that.
  • 01:56 And now we're down to 1 1/2.
  • 01:58 So why wouldn't multiples come down in that environment?
  • 02:01 And I think that's what we're facing now during earnings season is you've got to really put up a serious
  • 02:06 beat and a revision to the upside for the stock to go up.
  • 02:09 I'm very curious to see how that plays through the next two weeks.
  • 02:12 What we're seeing right now in the earnings is not a cohesive story.
  • 02:16 I mean, honestly, you're seeing some areas where it's cost cutting that's keeping margins afloat in other areas
  • 02:21 where you see, you know, for example, demand for trucks in the US going gangbusters.
  • 02:25 Are you seeing any themes that you can kind of grab onto so far?
  • 02:28 The theme is that it's a very unbalanced economy.
  • 02:31 And that's the thing we've had for a while.
  • 02:33 So post COVID, it's just been a very unpredictable environment for a lot of reasons.
  • 02:36 Some of those things we got really right.
  • 02:37 Some of those things we got really wrong
  • 02:39 and I think we're we're trying to figure out kind of what the next stage is.
  • 02:42 Let's let's look at the last year as an example.
  • 02:44 So a year ago, hard landing recession was the consensus view market overpriced that then we got a soft landing pricing in two.
  • 02:50 Q Then we had a sort of a fiscal sustainability problem where growth got too hot
  • 02:55 and rates went up and we had a big correction.
  • 02:57 Then we went back to the soft landing and now
  • 02:59 we're no landing.
  • 03:00 So this is our view at the beginning of the years, like there's a third of a
  • 03:04 percent, there's a 33% chance of all three of those happening,
  • 03:07 soft landing, no landing, hard landing.
  • 03:10 And I think it's the same.
  • 03:11 So in other words, right now we're trying to price that no landing scenario,
  • 03:15 but I'm not confident that we're going to stay in that environment.
  • 03:18 And companies are a reflection of that, right?
  • 03:20 Some companies do better in that scenario.
  • 03:22 That's why they're doing better things like energy, materials, financials.
  • 03:25 But is that sustainable?
  • 03:26 We're going to find out.
  • 03:27 You know, we said that we're going to see how much multiple expansion can continue and whether we see multiple contraction.
  • 03:32 The multiple expansion has been really concentrated in big tech.
  • 03:36 It has been really concentrated in some of the quality names that you like.
  • 03:40 It has not been concentrated in the Russells 2000, which has not experienced that same kind of run.
  • 03:45 Do you start to like some of those areas
  • 03:47 because suddenly it is an economy that's OK, maybe supported by a couple rate cuts
  • 03:53 and frankly you haven't seen that multiple expansion?
  • 03:55 Well, we did.
  • 03:56 I mean, November and December was one of the biggest short squeezes I've ever seen in the lower quality parts of the market.
  • 04:01 So we did absolutely see multiple expansion.
  • 04:03 Now we're giving some of that back,
  • 04:05 right.
  • 04:05 And that's our call, which is that
  • 04:07 I don't really want to go to the low quality world, OK?
  • 04:09 And that includes small caps.
  • 04:11 Not all small cap companies are low quality, just to be clear.
  • 04:14 But as a group, OK, Russell 2000 is a low quality index and that's why it's underperforming again, because rates are too high for them, right?
  • 04:21 They like R star.
  • 04:22 People talk about R star.
  • 04:23 OK, Well, R star is different depending on who you are and what kind of company you run.
  • 04:28 It's very, it's extremely variable and the market's been really efficient, Lisa
  • 04:31 in saying, look, rates are too high for a majority of the economy,
  • 04:36 whether it's consumers or small businesses.
  • 04:37 So we're sticking with that until rates really get cut.
  • 04:40 We think that the the trade is still you got to go with self funding businesses that have idiosyncratic kind of growth opportunities or pricing power.
  • 04:47 And, and, and this playing out again this year in space.
  • 04:50 A lot of people
  • 04:51 think about you as a bear because yesterday
  • 04:54 for the last year I should say, you are really calling for some sort of downturn in the economy.
  • 04:58 Where are we in terms?
  • 05:00 Of that cycle in terms of just how close we are to a downturn, are you basically saying, you know what, this isn't something you can really call with any definitive
  • 05:08 conviction that you have to sort of just look at specific companies and stay away from that stuff?
  • 05:12 You know, it's made a humbling business.
  • 05:14 And I think, I mean, 70% of the street, I think was in the recession camp a year ago.
  • 05:17 Our economists were not, but like a lot of people were in that camp
  • 05:20 and we had to reprice that out.
  • 05:22 So where are we?
  • 05:23 We think we're still very much late cycle.
  • 05:24 I heard you all chatting.
  • 05:25 One of the questions we've had is why can't it be early cycle?
  • 05:28 OK,
  • 05:28 well, there's a lot of reasons why we don't think it's early cycle.
  • 05:30 Labor market is very tight.
  • 05:32 The yo curve is still inverted.
  • 05:33 We don't have a lot of supply in the labor market.
  • 05:35 We have immigration may be supporting that, but generally it's a tight labor market.
  • 05:38 You know, margins are still at record high levels.
  • 05:40 So all of the things that we would look at from an early cycle perspective are just not there.
  • 05:44 So we're still late cycle.
  • 05:46 And what does that mean?
  • 05:47 It means this can last for another two years or it could be over tomorrow if we have another shock.
  • 05:53 So we're probably going to sit.
  • 05:55 We're not going to be as aggressive trying to make that shock because we don't know what it is.
  • 05:58 We thought it was a regional banking crisis last year,
  • 06:01 turned out to be not the case.
  • 06:02 The economy turned out to be stronger.
  • 06:04 I would also argue that we have an incredibly imbalanced policy mix,
  • 06:08 which has helped the economy to sustain itself.
  • 06:11 So economic data does not look like the earnings data to us.
  • 06:14 OK, Economic data is much stronger than the earnings data.
  • 06:17 Why is that?
  • 06:18 An enormous amount of fiscal support into the economy is keeping the economic data looking strong, which is preventing the Fed from really cutting rates for an early cycle rotation.
  • 06:28 And that's we're just kind of stuck in that.
  • 06:29 And we could be there for a while.
  • 06:30 Like, I don't see that breaking.
  • 06:32 I don't see any discipline in Congress.
  • 06:33 We're spending more money this week with this bill.
  • 06:36 I mean, so that that is where we are.
  • 06:38 The question is, is it, is that overpriced?
  • 06:40 And I think it is because I'm not going to should I pay a higher multiple for what I call low quality growth,
  • 06:45 government sort of driven growth?
  • 06:47 I would argue no.
  • 06:48 For some companies, you can pay higher multiple because they're idiosyncratic to that.
  • 06:51 And that's what's happening.
  • 06:52 Companies that don't need government support are doing better.
  • 06:54 Companies that you know, are getting constrained by higher rates are, are underperforming.
  • 06:58 Let's talk about fiscal and the fact that it doesn't matter who wins the election, there's going to be more money coming out of Washington.
  • 07:05 It's one of your questions you asked in your note.
  • 07:06 How are you thinking about the election as a driver of markets this year?
  • 07:09 Is it too soon to start preparing for November?
  • 07:12 Yeah, I mean, historically, we put this in a note.
  • 07:13 I mean, typically the the volatility in the market picks up two to three months before the election.
  • 07:18 My experience is that until we have the conventions and we really see the platforms
  • 07:23 at the stock level and we don't see a lot of action.
  • 07:26 Now interestingly, this year the market has rallied in in the beginning of the year.
  • 07:30 Typically it doesn't do well in the first half and it does better in the second-half as it becomes more clear.
  • 07:34 So is that going to reverse this year?
  • 07:36 We have a tougher second-half maybe.
  • 07:38 But I, I agree with your your first, you know, sort of position, which is I don't see a lot of difference between these two
  • 07:44 campaigns in terms of the fiscal and even the monetary mix.
  • 07:48 The one thing I would say is focus on the areas where the president can do things that are executive order.
  • 07:54 OK.
  • 07:55 And the biggest one in my mind is immigration
  • 07:57 and and tariffs.
  • 07:58 The second one.
  • 07:58 That's the second one.
  • 07:59 So tariffs and immigration can be done without congressional voting.
  • 08:03 So that's where I think
  • 08:04 because I'm not, I'm not confident that we're going to get a sweep either way.
  • 08:07 That's probably the least likely outcome.
  • 08:08 It's probably 10% chance to be very close.
  • 08:11 But to get one party as a sweep, I think is going to be challenging.
  • 08:13 So the executive order lever, if you're, if you're thinking about Trump or Biden, that's where the that's where the action is going to be.
  • 08:19 I just want to work that through an extra step.
  • 08:21 Are you suggesting that maybe if we get a President Trump volume to
  • 08:24 that, this supply side Nirvana that some people in the world of economics are embracing might be threatened?
  • 08:29 I think that's exactly right.
  • 08:30 I, I would argue that there's a chance that maybe something is done prior to the election
  • 08:34 for political because this is a, this is a hot issue for the election, right?
  • 08:37 Immigration is a hot topic.
  • 08:39 And the question is, do they try to
  • 08:41 curtail some of that inflow prior to the election?
  • 08:44 I have no idea, but we're going to learn more about that, I think in the conventions in terms in terms of how they're talking about it.
  • 08:49 So your point then, Mike, this could change quickly in the space of a couple of months.
  • 08:52 I'm just trying to work out how quickly that would show up in the data, how quickly the market might respond
  • 08:56 to that change.
  • 08:57 Well,
  • 08:58 here's the real take away, John.
  • 08:59 I feel like there's been a lot of marking to market going on, right?
  • 09:02 So
  • 09:04 I would argue everybody's been wrong about the fundamental picture in many, many ways over the last two years, including ourselves.
  • 09:09 OK.
  • 09:09 And that marketing to market,
  • 09:12 all of a sudden you market yourself to market.
  • 09:13 Why are you any more confident you know what's going to happen next,
  • 09:16 Right.
  • 09:16 And, and that's where we have a problem with valuations.
  • 09:18 Is there, there seems to be this perceived certainty again, being priced in.
  • 09:22 It's like, I'm not certain at all.
  • 09:23 Maybe I'm the dummy in the room, I don't know.
  • 09:25 But like, I, I feel like there's a little bit of complacency around just knowing what's going to happen.
  • 09:28 By the way, that's not all bad.
  • 09:29 There could be some positive surprises,
  • 09:31 but those positive surprises may lead you to a different group of assets that you want to own.
  • 09:36 OK.
  • 09:37 I mean, I think bonds are just to spend a minute on bonds.
  • 09:40 My goodness.
  • 09:40 I mean, this is 1 where I literally can flip a coin and I would.
  • 09:44 OK, that's it.
  • 09:45 You know, because I could see rates higher from the standpoint of fiscal sustainability problems.
  • 09:49 We have a term premium increase like last, no last year.
  • 09:52 Or I could see things slow down again because rates are now higher, right?
  • 09:56 The wealth effect is kind of being priced out of the market and maybe things slow.
  • 10:00 Again, our house call is we're going back to sort of 415.
  • 10:02 I think you just had a guessing 375.
  • 10:05 Yeah, I mean 375 would argue that we're probably back into a soft landing or hard landing scenario.
  • 10:10 4:15 is kind of more of the things just kind of slow down a bit.
  • 10:13 Can I put you on the spot just a little bit?
  • 10:14 Is it easier to foresee them being 100 basis points lower than being a hundred basis points higher
  • 10:19 or you actually think it's a point split?
  • 10:21 Yeah,
  • 10:22 hundreds big, OK.
  • 10:23 And those are the tails, right.
  • 10:24 So 100 on the upside would be
  • 10:26 the market is really concerned about funding sustainability,
  • 10:30 almost like the UK, OK,
  • 10:31 two years ago.
  • 10:33 And I think 100 basis points lower from here is kind of a hard landing.
  • 10:36 Give me the next 50.
  • 10:37 Yeah, so 50 I'm,
  • 10:39 I'm, I'm, I'm still leaning to hire,
  • 10:41 but our house call is lower.
  • 10:42 So,
  • 10:43 you know,
  • 10:44 and and I got to go with the house call, not trying to cause trouble in my no, they're bond, but they're, but I mean, but the bond guys, I mean, that's their job.
  • 10:50 And so I got, I got, I got to bet with them
  • 10:52 and and so that would be OK.
  • 10:53 So what happens to that scenario for stocks?
  • 10:55 Well,
  • 10:56 all of a sudden our no landing scenario probably isn't the case and we probably would downgrade energy and we probably would go back to some of the things that we're doing better last year.
  • 11:03 And so it's just, I think you just got to keep a really flexible open mind.
  • 11:06 That's what we try to do now with the with the stock picking.
  • 11:09 We haven't really talked much about index in the last four or five months because we're trying to focus on the relative value trades and we've got a lot of those, right.
  • 11:15 And
  • 11:15 hopefully, knock on wood, we can continue to do that.