Morgan Stanley's Mike Wilson Talks FOMC Preview, Tech Trade

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

**Nathan Hager** (0:07)
This is Bloomberg Daybreak. I'm Nathan Hager, alongside Karen Moskow, getting ready for a pretty important day for the market when we're waiting to hear from the Fed, Metta and Microsoft. Let's hear now from Mike Wilson, Chief US. Equity Strategist, Chief Investment Officer at Morgan Stanley. Really great to have you back with us on Daybreak Mike on a morning where we're seeing a modest lift to the futures this morning for the most part, but after a big sell off over the last few days, particularly in the chip space, what kind of pressure does that put on the hyperscalers while we wait to hear from them this afternoon? Good morning.

**Mike Wilson** (0:45)
Good morning. Yeah, man, I think the pressure is still on the semiconductor companies more than the hyperscalers because the hyperscalers are in control of their destiny. I mean, they can decide to spend or not spend. And I think that's where the uncertainty now lies.
The market has been sending a very direct signal to the hyperscalers. And that is, if you spend more money, your stock is going down. And so I think that what remains to be seen now for the rest of this earning season is, are those companies, the spenders, going to maybe curtail some of their enthusiasm for spending more money? We'll see. You know, we didn't see that last week with Google.
Maybe we'll see that this week with the other hyperscalers. But generally speaking, the semiconductor stocks have recognized that, hey, the rate of change, the second derivative of this spending is probably going to decelerate at this point. Not go down in negative terms, but deceleration of growth. And let's be honest, I mean, those stocks just got out of bounds. And so they had to correct, and that's what's going on.

**Nathan Hager** (1:53)
And in your note this week, you talked a bit about seeing a rotation to quality amid what's happening in the AI trade story. Where do you see quality in this market right now, Mike?

**Mike Wilson** (2:08)
Yeah, well, first of all, that call is a little bit more, I guess, not just around this correction we're seeing in the semiconductor stocks. This is a transition from what we call early cycle to mid cycle. And we've started to see the quality factor start to outperform over the last month. And that makes sense to us because when the rate of change and earnings revisions start to peak out after, say, a recovery from a recession, which is what we've had over the last year, then we see a transition to quality. And that's not a sector call, that's a idiosyncratic call. So in other words, we see quality outperforming now within each sector.
And in the case of technology, it's a little tricky because historically, software has been the area of quality. And so when you have these transitions, what happens is people go right back to software, but because software is threatened now by the invention of AI, that is not an easy call. And so what we're going to see now is, even within semis or even within software, we're going to see the higher quality stocks start to outperform the lower quality stocks. Same thing in retail, same thing in healthcare, same thing in industrials. And so we see this as a call across the market, not an intersector call.

**Nathan Hager** (3:33)
So when it comes to that, Mike, does that point to a broadening when it comes to what could potentially outperform in this market, possibly leading to further gains more broadly on the index level?

**Mike Wilson** (3:48)
Yeah, I mean, the broadening has been happening really off and on this year. Like before the war, we definitely saw a broadening. Then the war happened and oil prices spiked, and it got narrow again. And then the broadening began to expand in May.
And we think that continues even with a rotation towards quality, we can see a broadening. And yesterday is a great example. The equal weighted S&P made an all-time high yesterday. It was up, I think, about half a percent. And so this is really the story of 2026 that continues. Even with the transition to quality, we think more and more stocks are going to participate because the earnings story has been great, really this year, crossed many more than, it's not just tech stocks. There's actually a lot of stocks that have been growing earnings for the first time in three years.

**Nathan Hager** (4:37)
Only have about 30 seconds left here. We got a Fed decision as well, given what's happened with communication in the Fed, does that make things a little trickier for equity investors?