Morgan Stanley Chief US Equity Strategist Mike Wilson discusses Scott Bessent's nomination and 2025 earnings growth with Bloomberg's Jonathan Ferro, Lisa Abramowicz, and Annmarie Hordern.
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Stocks higher as the post election rally picks up steam investors welcoming President elect Donald Trump's treasury pick Scote Besson. Mike Wilson of Morgan Stanley went in on the equity outlook, writing with heart landing risks reduced this fall, the FED cutting interest rates, business cycle indicators showing science of life and the potential for an animal spirits rebound post the election. The path of earnings growth should be upward as we head through twenty twenty five. Mike joins us now for more. Mikeel morning, Good Morning's good to see how unusually wide are the range of outcomes for twenty twenty five for you in the team, Well.
It's about the same as it was in the mid year.
I mean we moved to this sort of view because the outcomes of the you know, the election, the economic outcome, rates policy, ETCA is also wider. So you know, we have to take that into an account and we did a pretty good job I would say this year of moving that around, meaning as the economic outlook changed through the summer into the fall. I mean that's really the game now is just trying to get ahead of these sort of it's because it's going to remain uncertain. You all were just discussing the new cabinet positions. Yeah, I mean they don't even know yet. I mean they're going to try to figure this out. That's the challenge. And I think the markets are going to as usual trade that.
So we're we're trying to do that as well for clients.
So you'll message the client's gone into twenty five being nimble. You've got some sect depicts in there. The other way you like is financials, the underway the sector you don't like the consumer, both staples and discretionary. Can we start with the consumer? What's not to like?
Yeah, well, I mean it's been week. I mean the consumer has been softer. And this fits into our sort of you know, our call we've had for a while, which is that the government has just sort of crowded out a lot of the economy, right, I mean, the low end, mid end consumer, low end mid.
End businesses quite frankly.
So that's something we are now thinking about, right, this changeover, I mean, this is this is why Trump won, This is why the Republicans won. They want change, Consumers want change. So let's see if they can execute. But that's something that we're we have a short leash on now. On the consumer side, i'd say we're looking to maybe upgrade certain consumer stacks if they can pull off some of these policy challenges that they're going to try to navigate. And look, I think on the financials, that's we've been overweight financials. It's been a terrific group and the question there is and was how much further can it go? But look, once again, policy deregulation, you know, Basil three coming off.
I mean, these things are all positive drivers that should.
Continue to help that sector at least on a relative basis.
Policy challenges and changes for the consumer, what changes would you need to see? Well, well, grade a bigger cohort of those names.
I think that once again it's this crowding out things. So this is this is a big picture of you. But if they can shrink the government, and by the way, it's gonna take years, so this is not going to happen in six months, and that's why we were not upgrading consumers yet. But if you're able to shrink the size of the government, kind of get them off the back of small businesses to some degree you can't this animal spirit thing is real. And then of course if you can get you know, balance sort of you know, the rate situation under control, where term premium is you know, balanced with with the budget. You know, that's those are the kinds of things that can actually spur consumer spending, consumer confidence, which has really been in the doldrums.
How much is it? Also tax policy?
Essentially, if people pay fewer taxes, they can go out and spend more on.
Gucci or anything else.
I mean, I mean, quite frankly, the consumer has been having a hard time spending money on food, you know.
So let's start with that.
Let's start with just getting inflation sort of under control, you know, getting people's confidence about the economy going forward and willingness to sort of look forward and spend on things, invest in things. I think one of the biggest areas that is really undperformed is consumer durables because rates are still too high.
The level of rates are still too high.
Now, I don't think we're going to be able to see rates come down any faster because of this administration, but over time.
That's I think that's the key.
If we can get rates down to a plausible level, rate of wages increase to offset the inflation that's already in the economy, the consumer will fare better.
There are a lot of other questions like tariffs and how that could potentially affect some of these companies, But there's a broader point here, which is that specific sectors are going to respond very differently to policy changes going forward and don't necessarily have the same kind of macroeconomic overlay that they've had in recent years. And I wonder how much you're sort of seeing that play out to healthcare in particular, because it's been one outlier over the past two weeks, You've seen it go down some six percent because of the overhaul that clearly is lining up with some of the picks for cms and hhs. Do you lean into that or do you see these opportunities.
Well, there's both. I mean, there's going to be risk here too. I mean, by the way, once again, the markets are very smart about this. They've punished big food companies because of perhaps Bobby Kennedy's appointment.
Same thing for pharmaceuticals. So the bad news is.
Sort of already getting priced in that regard, but the positive story in healthcare quite frankly, it's just an efficiency story. It's no different than the government. This is going to take years. If we can make the deployment of health care, the delivery of healthcare more efficient, that's going to create great opportunity for certain types of businesses. But this is to come right. This is this is why we need to be nimble and think about, Okay, we're going to it's not all going to happen at once. So there's going to be moments of fear, doubt and uncertainty, and that's going to create the opportunity.
We think through twenty twenty five.
You keep coming back to efficiency. Do you think Elon Musk and the vake Ramaswami could dogify the economy.
I think they're there's a good chance that we can not necessarily cut all the spending they're talking about, but if we can just freeze spending. Remember the key here is fiscal sustainability, which is just let's grow the government slower than that we're growing nominal GDP if you can get into that position. So Scott Besson has said, you know this part of his plan, let's just get the fiscal diffensit done to three percent.
We're not talking about going to zero.
But if we can just get the three percent, that's in a much more sustainable place, which is one of the reasons why I think that the bomb market is reacting, at least initially somewhat positively to this. One of the key negatives or risks that we see in the short term had been term premium.
If term premium contained to widen.
Out, that's a real risk for multiple So I'm encouraged by the reaction initially, but I'm also not confident to say that this is going to be Oh, it's a straight path from here to there.
What do you think the north star is with all is said and done of this administration, Because you have things like tax cuts, but things like as well as tariffs which in a blanket response many economists say could be inflationary, but they ran on getting inflation down. Is that the number one key thing that Trump wants to make sure inflation comes down for Americans to afford groceries.
Well, I think that because mandate was prices are too high. That's They're probably three main issues. Prices are too high, unacceptable immigration, We've got to fix that. And then this idea of these never ending wars and like spending money over like unnecessarily and many Americans' eyes, So he's.
Going to take try and take all three of those.
It's a kind of an America First policy with the sort of added twist that we're also going to try and redistribute the income in a way that's more like you taxing people and then distributing it that way is inefficient. If you can somehow reduce taxes and get the income redistributed at the wage level, that's really really good. I think that would be the goal. Once again, all comes down to execution.
When you say nimble and being nimble as an investor, are you saying trade frequently? Is this going to be the most active trading year that you can imagine for the team in twenty twenty five.
Yeah, I think that's a really good way to put it. I would say we've been more active in that regard trading the underlying as opposed to focusing so much on the index. We are probably we're going to be offering more trades for clients. And when I say trade is not day trade, it's three to six months, you know, rotating around the portfolio in a way that there's actually you can do that in size. We're not going to say, hey, you know, do these things that larger clients can't do. But three to six month trades is a lot faster than sort of a twelve month view.
Do you see the breakdown of correlations that have traditionally held true, whether it's with yields and the effect on stocks and some of the macro economic overlays. Are they going to become less relevant as there are these sort of rotating trades three to six months that kind of go through sectors and specific names.
No, I think they.
Become more important. I think the macro will always play a role.
I do hope.
And expect perhaps next year that we can see more micro opportunity.
And what I mean by that is that.
Because of the economy and the setup that policy that we've had. By the way, this is not just the last four years. This is the last twenty years. This crowding out right, it's the big get bigger that have and have not the k economy.
They're sort of familiar with.
That to me is going to be the key. Can we move from sort of a very narrow participation in the economy both from a consumer and corporate standpoint is something that's broader. If that happens, that's going to create more micro opportunity. But it doesn't mean you can ignore interest rates other policy changes because that's what's going to affect the micro opportunity.
Why does that leave to MAC seven some of these dominant companies.
I mean, I think you're already seeing it. It's like there's going to be more winners going. It's gonna be separations of winners and losers there too. One thing we know about, you know, cycles over time, is that the winner, the big winners of the last ten or twenty years, are not the big winners of the next ten or twenty years. And so we've talked about this a lot, we've written.
About it like AI.
To me, the big exciting part of AI is not the guys who are building AI today and the picks and shovels who have already won. It's the application layer who's going to who's going to develop and deliver the solutions that take advantage of this new compute platform to deliver the efficiency for corporate America for consumers, much like email did or web browsers or software as a service. I mean, you think about the big winners of the Internet. It wasn't the carriers who spend all this money and put it in the ground. It was the companies that built the application layers to build better mouse traps.
Going forward.
You rite about some of this earlier this year. You said the folks at the moment of the equity market was on the AI enablers, which was the chips companies, the videos of this world. Where are we in that process? Are we moving away from that yet?
Well, we're still in it. I mean there's still companies that are still benefiting. But that's all very narrow too. By the way, there aren't that many beneficiaries of the spin, which has been unusual. It's very different than the nineties we had hundreds of beneficiaries. So I think we're still in that phase, and we're going to transition to now the adopter phase, like who can actually use this stuff, which so far is only the hyperscalers the route. Once again, the really exciting part is is the ones who can actually take this platform, build applications and then deliver it to dummies like me.
And make me more productive.
Right, just the average person to say, I don't need to be a technologist, but I understand how this application works and how it can make me more efficient and doing my job, which is you know, looking at stocks, you know, these mass wants of data in a way that I can actually understand and deliver that to clients.
We've known each other a while. I have to say, you sound pretty excited about next year in a way that I've not heard you for a long time.
Yeah, I mean we're now always you know, one way, So I would say we're we've been excited about this for six months and it's just now we can kind of see it in a way where where we can see.
A broadening out. We see it in the numbers.
We've been waiting for this, So in the last two quarters we've actually seen a broadening out of the earning story for the first time, even before the election outcome. Okay, so this is this is a two step process. It's going to be you know, noisy stocks are expensive. Okay, that's you know, that's something we have to understand. The markets are ahead of this already. Let's not think that we're discovering the light bulb here. Okay, the markets have already done this. So but yes, I think there's a wider path now, A wider set of opportunities, which to me is more exciting.
You spent a lot of time speaking to clients over the last few months, I'm sure about the outlook for twenty twenty five. What are the most skeptical about. What's the biggest pushback you get?
Well, evaluation has been I've been skeptical in that quite frankly. So it's still people are uncomfortable with the evaluation in the equity markets. But then when you think about, well, okay, well what else is there out there, and then you look at the US versus other markets too, So that's probably the biggest one. The second one is just it still feels unstable, you know, I mean, like geopolitics, the political.
You know, angst in this country is like that resolved.
I mean, there's still this very bifurcated political environment. People's economic situations are very bifurcated.
That makes people uncomfortable.
So I think that's the part that people just it's hard to get uber bullish when you have all these things that are are kind of holding in your sense.
There's some clients and of course you're not going to name many, but you sense the summer finding it difficult to divorce their political bias away from their economic views. Have they learned the lesson of twenty sixteen seventeen?
I mean, most clients are more objective. Investment clients are more objective with that because they have to be right, because there's this thing called this, you know, the price that makes them be objective about the outcome. That doesn't mean they don't hold by personal biases.
We all do. That's natural.
I do think twenty sixteen maybe change that a bit, but we're all forced to perform, and whether it's a political bias or it's a style bias, you have to navigate that and be flexible.
Just to put a bow on this conversation, the essence of this conversation when you talked about the administration was the real potential for real change. When I asked you about whether some of these kinds are skeptical about twenty twenty five. Are they skeptical about anything in the administration's agenda? Do you think maybe they should be paying more attention to.
Well, we've wrote about this this weekend.
I mean there's a tremendous ment skepticism on whether they can actually streamline the government because it's just I mean, people have tried this before.
This is not like a.
New idea, right, so it's difficult. I mean, and we all know about these roadblocks that are kind of built into the system that you know, the appropriation is the way you get the money.
They have to be spent.
You know, the civil liberties laws, which are good laws to protect people's rights on jobs.
But it's just it's almost like.
You're fighting against this giant blob, and people are very skeptical that you could beat the blob. And I think that's an area where we need to be a little bit more open mind. I'm more up prominded about that because this is what the American people want. When I want when I forget about talking to investment clients, when I talk to people on the ground, people look at the government and they say, hey, government does a lot of great things for me, okay, but I have to worry about my job all the time. I have to operate in a different world. Why should they be operating in a different environment. And I just think there's opportunity and this is also potentially liberating for people in the government. There are really good employees in the government, Okay, they just play for a bad team. You know, it's like, let's take a good player and a bad team and let's putting them on on a better team and then probably get more productivity out of that person.
I think that's exciting. It's a lot of risk.
Okay, it's going to be a really messy road yep, but that that to me is
Interesting looking forward to confident with you, it's good to say my worst in there of Morgan Stanley on The Lasist