Transcription
SIGNIFICANTLY. But the Dow Jones is now up. You know why? On Sherwin Williams. Join us now. Mike Wilson, Chief Investment Officer, Chief U.S. Equity Strategist for Morgan Stanley. Mike, it's good to see you.
I'm going to summarize just to get it out of the way quickly. So you were right about this rolling recovery. And I think you were early because people thought it was more likely that there was going to be problems in the labor market, and we might be in a recession. You said we already went through a kind of a rolling recession. Now we're in a rolling recovery. And you still think that's the case?
Absolutely. And now we're going into the next stage. So this week we addressed that by just like in 2021, right? The big recovery off of COVID, the market. Then about halfway through, about middle of 2021, we had a peak in the revision factors, right? We've talked about this over the last month or two. One of the reasons we've been negative on semiconductors is because the peak rate of change is now in for revisions. And that has now led to what we call a quality rotation. So the broadening out story is still working, but it's morphing, just like you were just talking about the earnings, right? We're seeing Sherwin Williams do really well. And then we see some of these tech stocks put up great numbers, but they sell off. So what is that all about? It's all about the peak rate of change. It doesn't mean the CAPEX cycle is over. It just means we over-discounted it. Stocks traded in the future. They discounted a lot of this, just like a year ago. Multiples went up. Now multiples are coming down in anticipation of a deceleration next year. So this is, this is the adjustment we were expecting.
So initially, you figured that it was going to get out of some of the Mag-7 and megacap stocks into economically sensitive areas. That's already happened.
Well, the early cycle. So remember, the economy goes early cycle, mid-cycle, late cycle through a recovery. The early recovery part of this rolling recovery is now behind us. Okay. By the way, it doesn't mean that all those stocks have to go to zero. It just, it just means that they are no longer the leadership quality.
Sherwin Williams is quality.
It can be. I mean, we posted a list of there are across a lot of different industries. It can be. It's not so much sector-specific. It's now more company-specific. And as you know, the hyperscalers, the reason why those stocks have underperformed is because while the earnings have been good, the free cash flow generation is atrocious. And so the market has punished them. I think a lot of that is kind of behind us. And that's now they're going after semiconductors and some of the storage names. That also is pretty well advanced. I mean, these corrections are pretty severe. Look what happened in Korea last night. So now that people are getting, you know, kind of agreeing with us on this, I'm probably more inclined to say we're probably closer to this correction being over. And then ironically, you know, the S&P 500 is the highest quality index in the world. Okay, let's be clear about that. But at the end of these corrections, you typically get a pop on even the index. So I still think we're chopping around. My guess is because of the Fed uncertainty, because of the war uncertainty, still, we're going to chop around for another month or so. But I'm still very constructive on where the S&P ends up for the full year.
S&P is not even down 3% from its high.
It's pretty amazing, right? You think about the corrections we've had in the leaders. And that is a good sign though, Becky, that there is a pretty good underlying backdrop for the economy in my view.
So quality defined, just means visible, big, well-known, not probably not completely overvalued because of, you know, a like a meme stock or some type of, of story stock. So there's actual fundamentals underlying the stock prices. Is that what you mean by quality? It could be anywhere. We'd like to be in any group.
It could be in any group. But we'd like to be a little more specific quantitatively. So what we mean is it's earnings quality, earnings also balance sheet quality and balance. What the market is focused on now is earnings quality, free cash flow generation, earnings stability, earnings predictability. Those are the key features.
So the 500 top stocks.
Well, the 500 top stocks, top top quintile, the top 100 stocks on a quarterly basis are now starting to outperform, which is right on schedule with the recovery in my view.
As far as worries go, we don't know a sustained rise in oil would possibly make you nervous.
Well, yeah. Well, I mean, I think it is making the market nervous. I mean, that's the.
Could it get worse?
It could get a little worse in here. Like I'm pretty comfortable saying that 7,000 on the S&P 500 will be defended. Okay. And if it gets defended there, I'd be pretty. I mean, if we get down to those levels, I'm going to be very aggressive. You know, reiterating our bullish view for the full year. I still think we can hit 8,000 by year-end even if we go to 7,001. I mean, that's our just our general view.
And also, don't you don't expect Warsh to do any Warsh and Company to do anything. But even if they did, we end higher by the end of the year at 8,000.
Yeah, because I don't think I don't think if they do, let's say they hike this week, which is not our view, but there's a, you know, a 50/50 shot on that. Okay. They're not going to take three times. So so.
6535 you said 5050. Yeah. 65.
But let's but let's talk about let's talk about the the insurance cuts. Everybody says their insurance cuts. Oh yeah. Why is this an insurance hike? It's kind of the same idea. This is not 2021.
So you're not worried about a progressive move higher. This would be something to slow, slow inflation and be able to get some chips on the table and say, we've done this.
Yeah, we've, we've, we've, we've backed our serious view that we're going to defend inflation. Okay. The credibility issue. And by the way, we're still learning about Kevin Warsh and how he's going to communicate with us. We already know that. And that digestion, by the way, a lot of people were predicting this, including us, that, you know, when the new Fed chair comes in, you get market turbulence. That's what we're having. So this is not surprising that people are uncomfortable still with how he's going to talk to us and how he's going to manage the reaction function. But I do think a 25 basis point hike is sort of an insurance hike. It also allows them to keep control of the back end of the bond market, which in my view, is the most important thing. It shows credibility that they're going to be willing to fight this if they.