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Chapter 1: What is the main topic discussed in this episode?
Hello and welcome. This is The Michelle Hussein Show. I'm Michelle Hussein. I speak with people like Elon Musk. I think I've done enough. And Shonda Rhimes. That's so cute. This will be a place where every weekend you can count on one essential conversation to help make sense of the world.
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As traders await the release of key economic data, albeit highly stale, we begin this hour with stocks eyeing a rebound as we head into that shortened Thanksgiving trading weekend. The team at Morgan Stanley releasing their outlook for 2026, writing, we raise our S&P 500 price target to 7,800, driven by strong earnings growth. We believe that we're in the midst of a new bull market,
and earnings cycle, especially for many of the lagging areas. Mike Wilson of Morgan Stanley joins now. Wonderful to see you, Mike.
Thanks, Lisa.
So let's start on the optimism. You have been optimistic for quite a while, talking about the rotation into the adopters, not just the AI tech behemoths. Why are you getting even more optimistic as the year goes on?
Well, I would say it's just a changing, it's an evolving narrative we've had, which is that we think that the policy is still misunderstood, right? That they essentially came in this year, did the growth negative stuff first, and now we're looking at the growth positive stuff. I'm not worried about the economy. What I am a little bit worried about is that the Fed is kind of dragging its feet.
So I would agree with Neil's comment, like the Fed needs to cut, but not to save the economy, but to see the full rotation into these lagging parts of the market, the interest rate sensitive parts of the market, which is really our story for 2028 or 2026. We think the 7800 is dependent on the earnings cycle broadening out.
So there's a lot to unpack there. I want to start with you agreeing with Neil, because Neil had a pretty negative assessment of the overall economy, saying he suspects the trains already left the station with respect to the pain from the Fed keeping rates where they are for as long as they have, and that we could be looking at a recession. You seem to disagree on that. So where's the nuance here?
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Chapter 2: What is Mike Wilson's outlook for the markets?
I mean, many parts of the economy have been suffering, housing, All the interest rates, durable goods, consumer goods, which have been under pressure, commodity sectors, transportation. There's been no volume going through the economy, no velocity in the real economy.
And the way that the administration is changing the policy, in addition to the Fed now cutting hopefully next year, you'll see the private economy now doing much better, the government no longer crowding out these areas that have been under pressure. But we do need to get that trend. The Fed needs to do more. The Fed needs to cut rates, and they need to probably provide some balance sheet.
I'd say one of the things that Neil talked about was his fear that even if they cut in December, they're not going to lay out a path for continuous cuts. And Fed Governor Waller seemingly enforcing that, speaking on Fox moments ago, saying you might see more of a meeting-by-meeting approach once you get to January.
If you do get that posturing from the Fed that maybe they cut in December, but it's a meeting-by-meeting approach, they're not necessarily going to cut in every single one, is that enough to allow for that rotation or do you need a clear path of cuts to get it?
Chapter 3: Why is Mike Wilson optimistic about the S&P 500 target?
No, we need the latter. And I think we're going to get there one of two ways. Either the labor data is going to basically support our view or my view that we had a rate of change trough in the labor markets in April. And so that data then will allow the Fed to cut more or signal they're going to cut more. The second one is that we get more financial stress. That's what's been going on.
We wrote about this back in September, early October. We thought the market was going to have a 10% to 15% correction because the liquidity wasn't there. The that the balance sheet was tightening. And we think there's evidence that that correction is well advanced. Okay, all the momentum stocks, you know, crypto obviously is the topic of the day, down 30% for Bitcoin.
I mean, these things are telling you that the market is worried about this liquidity. So as usual, the markets will dictate, you know, the Fed's timing. So if the market really wants, and look, markets are like children, right? They'll have a little temper tantrum and then the Fed will respond to that. So is this like a mini 2018 in that regard, right?
You kind of go into end of the year, and then there's stress in some of these financial metrics that the Fed cares about, and then they provide more balance sheets. So we think there's sort of this tug-of-war going back and forth, but ultimately it resolves in a more dovish policy path.
On the point of crypto, a lot was made, I mean, even from Bill Ackman basically saying things that he thought weren't correlated all of a sudden were, that Fannie and Freddie were selling off because the people who were buying crypto were the same people in those names.
Did last week and the week before's episode, given how much crypto falls, show some vulnerability within the market structure, within who owns these stocks and how fragile and weak some of those hands are?
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Chapter 4: What are the implications of the Fed's policies on the economy?
I don't think it's showing anything new. I think this has been there the whole time. People waking up to the idea that liquidity is important for the market, I mean, obviously, I don't know what they're doing. I mean, that's kind of crazy. Of course liquidity matters. I mean, liquidity is, and especially the last 10 years or so.
I think that the hard part about liquidity is it's sort of this nebulous thing. It's hard to measure. And I've spent the last two or three years trying to develop a better skill set around that. And I think we've got a better handle, but I would say it still is one of these things that's sort of the invisible hand.
And so what you have to do is you have to look at the market to tell you when liquidity is tight or not.
So you kept mentioning the balance sheet. Are you saying QE is going to start again?
Well, they may not call it QE, but yeah, the balance sheet needs to expand, not only to support financial markets, but to support the better growth that I think is coming next year, right?
So if CapEx really picks up for the first time in 10 years, okay, let's be honest, we haven't seen much capital spending, but the big beautiful bills incenting that, that's a usage of capital that needs to be supplied by somebody. So the balance sheet needs to grow just to help the economy and the markets. And so we can call it QE, call it not QE, but generally they need to expand that.
How much is a 7800 target predicated on the idea of the Fed cutting rates and using its balance sheet to help support liquidity?
It's very important. I mean, I would say if we don't get at least one of those items surprising the markets, meaning more than three cuts or we get more balance sheet expansion, call it QE, call it something else. OK, yield curve control, whatever you want to call it. OK, if we don't get some combination of that, then we're not going to reach our target.
So I'm assuming that we get there either through the labor data or through some financial stress.
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Chapter 5: How does Mike Wilson differentiate between recession and economic recovery?
How are those stocks reacting? Is the market enforcing discipline on the AI spenders, which then trickles down into the CapEx beneficiaries? But we think this is going to happen. The money's been raised now. The debt markets are now involved. So that money's not going to sit on these balance sheets. It's going to be spent.
The question is, what's the payoff look like, and what's the timing of that payoff? We think we'll see some of that in 2026, 2027. And so now it's just this transition. You're kind of trading back and forth. So I want to make it clear. We think there's a broadening out. That doesn't mean that all the AI stuff gets killed and everything else does really, really well. It can work in harmony.
In fact, it needs to work in harmony to some degree.
If you do get a scenario, though, where, let's say, I don't know, Meta, that seems to be one of the poster children for not getting that return, doesn't get it as much, and they need to pull back on their spending, but everybody else is still spending, do you only need one pillar to fall to really hurt this trade?
Or can just any sort of spending happening within this trade, regardless of who the winner is, continue to lift all the boats?
Well, look what's been going on, right? So we've seen a massive bifurcation or dispersion in the performance of not only the hyperscalers but names within that. To me, that's healthy. Not everybody's going to win. There's no trophies here. You have to actually win the game. But all of these companies are competing for the trophy.
So in that competition, I think we continue to see this velocity of spend. And then we're going to see the most exciting part about this AI spend, to me, is we don't even know yet Okay, these new businesses that are going to be created, these new industries that are going to be created, the efficiencies we're going to get in areas like healthcare or education or manufacturing, that's on the come.
That's really where wealth creation is going to be coming from.
So next year, or maybe the end of this year, when we find out who the next Fed chair is going to be, how much will that matter to you in terms of whether your bull case will get realized? I mean, who will necessarily be good for that and who might be a little more problematic for that?
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