We're in the 'final innings' of the market correction, says Morgan Stanley's Mike Wilson – Transcript

00:00joining us now. Mike Wilson, Morgan Stanley, chief US uh equity strategist um on set. Mike, it's good to see you. So, yesterday or on uh yeah, today's Tuesday, you basically think that whatever would you call it a sell-off, I guess some rotation or weakness in in the overall averages. You think that's over and it's it we're we're going to start having better market performance at this point.

00:24>> Well, I think the average stock is done. I mean, it's been a really nasty corrections. It started in June, right? Right. I mean, this is sort of the rotation from early to to midcycle. You had the the momentum unwind. You've had this now concern around the the sustainability, the AI capbacks. You have a couple wars going on. You have the midterm election anxiety. So, yeah, there's a lot that's been digested by the markets. And if you look at the breath of the market, it's been terrible. So, I think we're in the final innings of this, but we still got to get through the next probably two to three weeks. And I think we can still finish

00:51the year pretty strongly and definitely into next year. the uh the AI trade it that's already seen its its worst days uh in terms of of consolidating or worries about debt and everything else and it it will lead the market again or >> it depends on what part we're talking about right there is a transition going on within the AI trade from kind of what we call the enablers to the adopters right so all this spending that's been going on has been incredible for semiconductors some of the power stocks all the ones that benefit from the the

01:19spending itself but now that infrastructure is being developed and the question is is it economic for all the players? So the the market's doing a good job of separating some of the winners and losers and now what they're what the market's going to get excited about next year is the actual users of this technology leading to better revenue growth and profitability.

01:38Normally it with with the entire market worried about the Fed and future rate hikes and 3.7% inflation and you know whether the bond the 10 years starts rising again $108 oil would be a problem. Why is it why is it less of a problem? It seems like we've been grappling with that it because of AI. AI isn't as dependent on on oil, right?

02:05>> Well rates are restriction if there's no growth, right? But the reason why rates are higher, I think this is a differentiated view from a lot of folks which is the reason why rates are higher is because growth is so strong. I mean they come remember coming to this year there was there was thoughts about the Fed was going to cut rates. Okay, but then of course growth has been much greater than expected both earnings and from an economic standpoint the Feds reacted to that. They responded to that and so you know 10 year 5% with nominal GDP running seven that doesn't seem egregious. where the risk is is a speed

02:32in that adjustment and the bond volatility that's created anxiety in in the in the financial markets. And now what the one area I do think that that deserves some attention is we are seeing credit spreads widen in certain parts of the AI complex. That needs to calm down.

02:47That's probably a bigger risk than Treasury yields quite frankly because that's where the spending is coming from. So that needs to calm down. Like I said, we probably got two to three four weeks where we still got to resolve this. We have another Fed meeting coming up. We have the midterm elections. we have uh you know some capital that still needs to be raised in the AI space and and that needs to play through but I think we're going to get through it successfully.

03:06>> Part of the narrative about how you know Trump's approval and the the approval on the economy is we haven't had a good GDP print because that one GDP print that we had w was skewed by by inventories or whatever it was if you if you factored some things out it was like a really strong like stronger than you'd want even. So, do we need a print before? You just said 7%. So, what do you Yeah, you subtract the 3.7. You subtract core or headline inflation.

03:35>> Well, it's basically half real half inflation. So, this is the whole thesis of letting the economy run hot to try and grow out of your >> So, you think GDP is running hot right now. >> Oh, absolutely. That's why rates are up so >> and that's why rates are up. That's that's >> and that's why stocks are okay generally. I mean, they've been okay this year. We're up 10 12%. A lot of stocks have corrected now in the last two or three months because we're adjusting to a Fed that's now responding, right? We've always said, right, stocks are fine, okay, with rates going up as long as growth is good and

04:02the Fed's not killing the cycle. And that's what the that's what the market is questioning. Is the Fed going to pull away the punch bowl too quickly here and not allow the economy to run? We don't know. We don't know the answer. I think I think they're going to be pretty judicious about allowing the market to tighten forward. So, they're not going to look purely at $108 oil seeping intoflation and and causing, you know, $3.7%.

04:26That that's not going to be the primary number. It it it's going to be let this run because these are there's some positive things causing rates to increase. >> Think about it, Joe. If first of all, oil 108 doesn't really tell us the true story. As you know, product Yeah. Well, diesel prices and product prices, jet fuel, that's the constraint. that's going to do its own tightening. So, I think Kevin Worsh has the right philosophy here, which is like, look, I don't I can't control the oil market, right, as the Fed chair, I can't really

04:53control the speed of the economy. He knows rates are going up. He's allowing rates to go up and he knows oil prices are up. That's your natural governor. 7% probably 7 8% is probably too hot. So, let it let the market do the tightening for him, whether it be what if Fed funds are way out of kilter with where the long end is, though. He's going to I mean, you can let it run hot, but it looks like they're behind the curve.

05:14>> They're behind probably 50 basis points. That's what the 2-year yield is telling us, but that's okay. I mean, it's not out of control. >> You can stay behind because of productivity from AI. >> Yeah, we don't know the but we don't know how the war's going to resolve, how oil prices are going to, you know, trade over the next 6 to 12 months, which is the main driver.

05:30>> No October hike, Mike. >> No October hike, but I think December's on the table. And more importantly, I think balance sheet. What are they going to do with the balance sheet? Are they going to keep funding the the deficit through the front end of the of the bill market or are they going to back off on that? That's liquidity is is probably the bigger risk for financial markets than than front end rates >> and and do we continue to see a a breath improve in the market. Does this broaden out or is is it still going to be >> not like we saw an earlier in the year

05:56that was the early cycle kind of expansion but we are going to see a rebroading I believe once we get through this you know once the S&P finally does its final move. I think we can see a rebranding. >> So, we're almost at the end of the year. Is your year-end target worth talking about or do we talk about next year? Do you have a 2027 year end? >> Yeah, I think I think what we we have 8,300 for midyear, May of next year and I think that's very achievable. I think 8,500 could be achievable by the middle part of next