Morgan Stanley's Mike Wilson Talks Forward Earnings, Market Swings

**SPEAKER_1** (0:02)
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**Matt Miller** (0:07)
Part of what's happening around this and other giant IPOs that we're expecting this year is investors are trying to free up cash and selling other stocks.
But Wall Street is also digesting the latest inflation print. So we're looking at kind of an up and down trade here as well as in a situation in Iran that could be good, could be bad, or could be just the same as it is. Joining us now is Morgan Stanley, Chief US. Equity Strategist and Chief Investment Officer, Mike Wilson. Mike, even if we claw back some of the losses today, we're still seeing this rotation. It looks like maybe out of tech into something else, or maybe it's investors freeing up cash for big IPOs. How do you explain the drops that we've seen today, yesterday, and especially on Friday?

**Mike Wilson** (0:57)
Yeah, I mean, I think so, first of all, we've had this concentrated market in the last month, and it's part of this rotation that's been going on all year from one cyclical group to the next. And I would actually say it's from one commodity to the next. Okay, we can go through that in a minute. And so now, what happened last week, and we wrote about this this week in pretty good detail, is that the earnings revisions that we've been probably the most bullish on, I think, than anybody this year have even exceeded our expectations. And they've gotten to a point now where the revision breath, the leading indicator, second derivative, is now at a level that's unsustainably high, okay? So I'll give you an example. Semiconductor revision breath got to 70%. That's only happened three or four times in the last 25 years. The S&P 500 revision breath is close to 30%, also very, very high. So it's going to roll over. Now, last week, we had a couple companies report in the semiconductor industry. They were fine, but the revision breath started to roll over. So it's the second derivative, and then there's leverage in the system in that trade, and that's sort of starting to unwind a bit. So for me, this is going to be a transition now to some new leadership.

**Matt Miller** (1:56)
All right, maybe it's a little too much math for my brain, but I was looking at earnings revisions, and since last time you were on, you pointed out, they were pretty much convex, right? I mean, just continued to climb. We have a chart of that, and we'll probably pull it up in a second.
It looks like we're getting near a plateau, at least for 2026 earnings revisions, which I guess makes sense. What do you make of that? You know, how much longer can we continue to head upwards with earnings revisions, and what do you mean by revisions breadth?

**Mike Wilson** (2:29)
So, revision breadth is just the breadth of the revisions as opposed to the absolute level, and it leads to the second derivative, the rate of change on the actual growth. So, I do not expect the first derivative, i.e. the forward earnings growth, to come down or fall.

**Matt Miller** (2:42)
We're showing it here in white 2026, in blue 2026

**Mike Wilson** (2:46)
That white line is going to continue to go, but the revision breadth is rolling over, there's a deceleration, a second derivative, which is what the market's picking up a little bit. That's a correction. That's not a change in the trajectory. So, as we go forward into next year, that NTM, forward earnings, is going to continue to rise. And that's our call. That's why stocks can continue to rise into year end. Multiples don't have to rise. It's just a forward, you move forward into 2027, as you look forward for 12 months. But the rate of change matters. In the short term, it matters. And that's what's going on right now.
That to me, that's going to lead to some leadership change, just like it did earlier in the year when we went from gold and silver stocks to metals to energy, and then we went into DRAM and semiconductors. By the way, all four of those are commodities.

**Matt Miller** (3:27)
I see, yeah, because you said earlier, we're going from one commodity to the next.

**Mike Wilson** (3:30)
That's right.

**Matt Miller** (3:31)
But semiconductors, DRAM, high bandwidth DRAM, is the hot commodity of the moment, right? Are we gonna shift out of that into something else?

**Mike Wilson** (3:39)
Well, it's happening. I mean, Friday's sell-off is a sign that's exhausted. We did a chart this week, it was pretty interesting. We looked at silver stocks versus semiconductor stocks. And it's like right on top of each other. And we made this call at the end of January. We said, gold's probably gonna go down 30%.