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  • Morgan Stanley's Mike Wilson on Trump Trade, Fed, Earnings, S&P Call

Morgan Stanley's Mike Wilson on Trump Trade, Fed, Earnings, S&P Call

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Bloomberg Nov 5 08:52 · 34.6k Views

Morgan Stanley's Mike Wilson predicts the S&P 500 Index could rise 5% to around 6,000 by the end of 2024 due to post-election relief and year-end FOMO.

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  • 00:00 Let's get into this.
  • 00:00 The parallels between now and 2016, how strong are they?
  • 00:05 They're not strong at all because I mean, like, at the end of the day, the business cycle and earnings and also interest rates will determine kind of where stocks trade over the next year or two.
  • 00:12 And in 2016, as you recall, we went into that election with a lot of slack in the economy, right?
  • 00:17 Things were slow.
  • 00:18 We had a manufacturing recession around the world.
  • 00:20 In 1516, the Fed was, you know, rates were pretty low
  • 00:24 generally there was the
  • 00:25 economy.
  • 00:26 We had a lot of slack from a labor standpoint.
  • 00:28 So it was
  • 00:29 it could receive
  • 00:30 kind of a pro reflationary policy strategy.
  • 00:33 Today we don't have that slack.
  • 00:35 So prices are extremely high, consumers and small businesses are much more,
  • 00:39 I would say, sensitive to higher interest rates.
  • 00:41 So rising interest rates and kind of a pro cyclical strategy not going to do not going to be good for those types of stocks.
  • 00:47 And I think also the bond market now is, is in a much different position, right?
  • 00:51 We have way more debt, as you mentioned earlier than 2016, we had plenty of of, of, you know, slack in the, in the borrowing markets Today, we don't have that.
  • 00:59 Here's what doesn't make sense to me then about the Trump trade.
  • 01:02 If you get bond yields that climb,
  • 01:04 how can risk assets keep rallying?
  • 01:06 Well, I think it depends on why they're rallying.
  • 01:08 OK, so I do think the equity markets are still nervous about growth concerns.
  • 01:12 I mean,
  • 01:13 the labor market's all over the place.
  • 01:14 I mean, you can,
  • 01:15 people can make excuses for why it's better or worse month to month, but the general trend and labor is down.
  • 01:19 We're in a late cycle economy.
  • 01:21 So the, the equity market is worried about growth slowing.
  • 01:23 And, you know, that's why the feds cutting interest rates.
  • 01:25 OK, so the the bond market can't, I mean the bond market, the market market goes up because growth is better
  • 01:30 and people believe that then it could be OK for equities.
  • 01:33 If bond market yields go up because term premium is widening because of fiscal sustainability issues, then it's a problem.
  • 01:38 Well, I guess the reason why I ask this is because the Trump trade is the knee jerk reaction supposedly is bond yields go up
  • 01:43 and equities ripped, particularly in the more cyclical sectors.
  • 01:46 I'm thinking of financials
  • 01:48 based on the idea that you're not necessarily getting some sort of economic impulse that's immediately overlaid onto the scenario.
  • 01:54 Why should risk assets continue to rally if yields continue to surge simply on this idea that the deficits increasing, that bond vigilante suddenly could be back?
  • 02:03 Well, I mean, first of all, the financials a little bit different because that's AD Reg sort of call.
  • 02:07 And I do think that one's fairly visible.
  • 02:09 I think if you have a Trump presidency and maybe even a red sweep, you could get more lenient regulatory environment.
  • 02:16 Maybe MNA picks up.
  • 02:17 That's kind of the, the financial straight, but that's unique
  • 02:20 and we, we don't think the financials have really rallied that much on that trade yet.
  • 02:22 It's been more about the third quarter earnings season and the fact that we went into that earnings season with not a lot of high expectations.
  • 02:28 So I think there is there is scope for further follow through in certain quote UN quote Trump trades.
  • 02:33 At the same time, there's probably, you know, the other side, which is that I think a lot of the negative trades have played out for the Trump trades.
  • 02:38 I mean, bonds have sold off probably too much
  • 02:41 and the, the renewables and things like
  • 02:43 consumer goods companies will be hurt by tariffs have really been hammered.
  • 02:47 So if Harris wins, you could see a really a pretty big bound in some markets, you know, so it there's a lot of permutations here.
  • 02:53 This is it's not as clear cut.
  • 02:54 I think you said it exactly right.
  • 02:56 It's all about the setup, OK.
  • 02:57 Stocks and asset prices move based on positioning as much as they do about the actual news.
  • 03:03 I'm looking for a clearing event.
  • 03:05 OK.
  • 03:05 I'm hoping this is a clearing event and
  • 03:07 then we can kind of get back to doing what we, you know,
  • 03:09 get paid to do, which is analyze interest rates, earnings growth and kind of multiples trying to figure out, OK, what's the fundamental case here?
  • 03:16 And and my guess is that could take maybe a month to kind of clear.
  • 03:19 When it comes to a clearing event, would you agree with Kit Jukes that it's either likely going to be a Republican sweep or Harris with gridlock, AKA Republican Senate?
  • 03:27 Yeah, I think that's probably.
  • 03:28 I mean, that's what the prediction market statement.
  • 03:30 And who am I to argue with that?
  • 03:32 And, and, but there are, but it's not like it's a slam dunk, Okay.
  • 03:35 I think the, I think, but I, I do not agree with the view that a Republican sweep is the best outcome for equities.
  • 03:40 I think it's probably Trump with a divided
  • 03:43 Congress.
  • 03:44 But Republican sweep means a 15% corporate tax rate.
  • 03:46 Potentially, potentially, potentially.
  • 03:48 I mean,
  • 03:49 let's see if they can actually get that through.
  • 03:51 I mean, the, I mean, the bond vigilantes may come for them if they try to cut taxes in that sort of form or fashion.
  • 03:55 And they're not even talking about,
  • 03:57 they're talking about me at the margin trying to reduce some taxes, maybe extending some certain things.
  • 04:01 I think the bond margin the whole election has been a tax cut election.
  • 04:05 But I mean, I don't think that's price
  • 04:07 just like in 2016, Remember in 2016, nobody priced that bond cut until December of 17 when the Senate actually passed it.
  • 04:14 I mean, the whole year is like, there's never going to happen.
  • 04:16 It's never going to happen.
  • 04:17 I I think the markets are they always wait for the actual evidence to to actually trade those types of events, particularly when it comes to Congress.
  • 04:23 You said the most beneficial Trump with divided government.
  • 04:26 Yeah.
  • 04:26 Can you explain that just a little bit more?
  • 04:28 Well, I mean, the market's like uncertainty.
  • 04:30 They don't want one party in power.
  • 04:32 I do think that
  • 04:33 a Trump, we said this all along, Trump presidency is probably more pro growth, OK, maybe not as good for for bonds.
  • 04:38 Harris would be probably a little less growth, but probably better for bonds.
  • 04:41 And that's been been our general view even prior to the last couple of weeks as things have kind of traded through
  • 04:46 now at the market, is it going to be dramatically better?
  • 04:49 I mean, I don't know.
  • 04:49 The markets have already priced a lot, right, You know what I'm saying?
  • 04:51 Like that's the problem.
  • 04:52 We've already priced a lot of good news
  • 04:54 and, and, and let's
  • 04:55 let's take a step back too.
  • 04:56 We're training 20, almost 22 times earnings, OK, and 20.
  • 05:00 16 we were trading 16 1/2 times earnings, so you got 5 1/2 multiple points
  • 05:04 of, you know,
  • 05:05 we got to justify that no matter who wins this election.
  • 05:08 So we're just in a totally different setup going into this election.
  • 05:11 So edgy Adeni Videni research was on the program early this morning and essentially said to us choppy Rd.
  • 05:16 to nowhere, flat market into year end.
  • 05:18 Do you share that view?
  • 05:20 Well, choppy, meaning you're could still be some big swings.
  • 05:22 I mean, maybe we end up flat from here to there, but there's going to be some big trading opportunities between here and there.
  • 05:27 I think we could see 6000 potentially, you know, and some sort of a clearing event that isn't, you know, there's not a lot of consternation.
  • 05:34 People feel good about things,
  • 05:35 but then I think it's really hard for us to get past six 6061 hundred
  • 05:40 in any scenario because then you're, I mean, you're so stretched on valuation and I don't see growth accelerating in in a kind of way which would justify even higher multiples
  • 05:48 for 2025.
  • 05:50 Can you explain what this clearing event for a month looks like?
  • 05:54 No, I can't.
  • 05:55 OK All
  • 05:56 right.
  • 05:56 Well, can you give us a sense of what that could mean?
  • 05:58 I mean, is it basically just whipsawing every single day or is it basically that you see one trade in particular that you could see really getting blown up during that period of time?
  • 06:07 Well, I could see many trades getting blown up, not just because the election, but because once again, we're very stressed.
  • 06:12 We're into the FOMO season,
  • 06:14 right?
  • 06:14 People need to perform the next two months.
  • 06:17 There's a lot of things going on here.
  • 06:18 And So what I, what I could, I could see a blow off move of some kind post election, a clearing event, but then reality sets in that we're going to have some kind of fiscal consolidation next year.
  • 06:27 No matter who wins, in my view, I think that has to happen
  • 06:30 and that, you know, that's going to create uncertainty again and then positioning gets kind of whipped around.
  • 06:33 The other thing that's going on is a mag 7,
  • 06:36 which reported last week was a very, it was a mixed bag when I was, you know, we, we've been more pro cyclical.
  • 06:40 What I was worried about last week was that they would come in with such great results,
  • 06:44 they would suck all the oxygen out of the markets again.
  • 06:47 So that didn't happen.
  • 06:48 But if we were to get a new theme, for example, let's say a new theme pops up,
  • 06:52 I can guarantee this and money's going to flock to that theme very quickly because that's, that's what that's what we need right now.
  • 06:57 We need something to get excited about.
  • 06:59 And we're kind of lacking in that.
  • 07:00 We're kind of lacking in that.
  • 07:01 But something will happen, right?
  • 07:03 In other words, the market will find some a new shiny toy and we'll move to that shiny toy.
  • 07:07 Right now, the Fed is not the shiny toy.
  • 07:09 We have barely mentioned the Feds meeting on Thursday.
  • 07:11 How much does that matter to this entire equation, isn't it?
  • 07:15 You said it's Thursday.
  • 07:16 Thursday moved it back.
  • 07:17 Yeah, I know it's the election.
  • 07:19 Yeah, but I mean, but Wednesday, I mean, they're meeting.
  • 07:21 They're meeting on Wednesday.
  • 07:22 Yeah, they're meeting on Wednesday.
  • 07:23 But we have the decision.
  • 07:24 We're still meeting.
  • 07:24 They're going to know what happened or think they're anyways.
  • 07:27 Yeah.
  • 07:27 What do I think?
  • 07:29 I mean, they're they don't have any.
  • 07:30 They don't have any crystal balls.
  • 07:31 They don't.
  • 07:31 I don't think the election is going to change their decision making.
  • 07:34 So right now it's 25 basis points.
  • 07:35 Did they change yours
  • 07:37 mean look, I mean, at the end of the day, the feds on is somewhat on autopilot.
  • 07:40 Assuming we don't the economy doesn't take a really bad turn, then you got to cut even more rapidly.
  • 07:44 I think that the trick for the equity market is going to be what's their tone, the dovish tone or hawkish tone?
  • 07:49 Is it a hawkish cut or is it a dovish cut
  • 07:51 and that but that's one or two percent.
  • 07:53 That's not a 10% move
  • 07:55 on the Fed.
  • 07:56 the Fed is kind of over here now they're doing their thing.
  • 07:59 They made their decision.
  • 08:00 That was that was September, that was a shiny 20 September.
  • 08:02 But now we've kind of got off of that
  • 08:04 and now it's about earnings.
  • 08:05 And then as we go into year end, it's going to be how does 2025 settle in for the economy for earnings growth and where should multiples be based on how the equity, how the equity markets are interpreting the move in bond yields?