Morgan Stanley's Mike Wilson Talks Equity Trade

**SPEAKER_1** (0:02)
Bloomberg Audio Studios, podcasts, radio, news.

**Jonathan Ferro** (0:07)
We begin this hour with stocks adding to gains to kick off the first full week of the first quarter, the third quarter. Mike Wilson and Morgan Stanley writing, falling energy prices, peaking tariff inflation and contained services keep the Fed on hold rather than hiking this year. Lower real rates should support equities and further fuel the broadening trade. I'm pleased to say that Mike joins us around the table for the next hour. He joins us for more. Mike, good morning, good to see you.
Let's just start with the stability we're seeing in the rates market and how important that is to set the stage for what you're anticipating in the next few months.

**Mike Wilson** (0:37)
Yeah, I think you were saying it earlier as listening to the show. There's somebody expecting a hike, there's someone expecting a cut and we're on hold. And this is, I think, what we got to get used to is that with the new chair probably not giving as much guidance is going to allow the market to kind of figure it out on its own and have these different views. We're in that adjustment period now.
And I think that's one of the reasons why the market's been a little choppy or even directing in the last month or so, is we're getting used to this new regime, which is going to be higher volatility and potentially the bond market. But over time, I think what's going to end up happening is the market's going to settle down. It's actually more estimates, a wider dispersion of estimates, actually leads to lower volatility in the pricing over time, but we're in that adjustment period. So we think rates are lower, ultimately, particularly at the back end. And oh, by the way, we've talked about this on the show many times. New Treasury Secretary, new Fed chair, this kind of new Fed Treasury accord to really anchor the back end. That's what they're focused on. You gotta get the back end down, or at least anchored, because you have so much debt that you have to basically finance.

**Jonathan Ferro** (1:39)
Do you think in the meantime, we're confusing a reduction in guidance with an increase in hawkishness? Just in the meantime.

**Mike Wilson** (1:44)
Yeah, I think that's right.
And the market is pricing that now. So that's the good news, is that we've already had that adjustment, and that adjustment started four months ago, right? This is why precious metals have traded really poorly. You know, the day that Warsh was announced as a nominee, the gold market peaked. And that was a sign the dollar has been stronger. So once again, the market has really gotten ahead of this.

**Jonathan Ferro** (2:05)
So rates have reset. We've come down from around 4.2% to 4.1%.
There's a belief this morning, at least, we've removed the urgency to hike as soon as July. So we can put that story to bed. Crude's declined. Massive reset in crude from triple digits down to the 60s on WTIs. Does that open the door within the equity market? And let's talk about the stock market exclusively. Does that open the door to the broadening trade again?

**Mike Wilson** (2:26)
Yeah, that's our call, basically, is that that was happening at the beginning of the year. Then we had Venezuela and then Iran. By the way, the market priced Iran before the invasion even happened or the attacks happened because once again, it was pretty well signaled.
And so that's when the broadening trade stopped. The broadening trade literally stopped the day that the attacks happened and we had the big spike in oil and then the pricing of the Fed to hike rates since I say mid-May, which we reiterated the broadening call. We had a different view than most. We thought oil prices would come down and that has allowed now Fed pricing to sort of stabilize and that has allowed the broadening trade to reignite.

**Jonathan Ferro** (3:03)
Small caps have performed nicely. Just had a massive quarter up by more than 20% on the Russell. We've seen the broadening trade speed to the performance. We've seen the equal weight on the S&P 500 as well. Let's talk about the Mag 7, which increasingly was called the Lag 7 You've got a note out this morning talking about maybe the money going back into the hyperscalers. Just walk us through how you're thinking about what's happening in tech and that divergence between the big spending companies and the beneficiaries of all that spending and the divergence that's really widened in the last few months.

**Mike Wilson** (3:31)
Yeah, I mean, there's a symbiotic relationship between the spenders and the beneficiaries, and typically they trade sort of in lockstep. And a couple of things we've been writing about for the last several months. Number one, capex to sales, that particular factor has been straight up since the big beautiful bill was passed, right? That basically the government's incenting businesses to spend money today rather than later. And so that capex of sales factor has been driving a lot of stocks higher. That looks like it's peaking now. And by the way, the hyperscaler stocks started to trade poorly about a month and a half ago and into this idea. But that's not sustainable. You can't have the spender stocks trading poorly and the beneficiary stocks continuing to go straight up. And now what we saw last week, Metta announced that perhaps they're going to sell some excess capacity, maybe turn into a provider of capacity. That is just a reason for these things to take a break. Also, peak rate of change on revision breath, right? The memory stocks, revisions have been spectacular, but they can only go so high. So all of that's kind of happening at the same time. And I expect the hyperscalers now to stabilize. That's what's going on the last couple of weeks. And the semiconductor stocks are going to correct.