Bloomberg Talks
Morgan Stanley Chief US Equity Strategist Mike Wilson Talks Fed Rate Cuts
03 Nov 2025
Transcript generated automatically by AI and may contain errors.
Chapter 1: What is the main topic discussed in this episode?
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Mike, good morning, sir. Good morning, John. I want to pick up on, I think, a core view of yours for 2025. Going into 2026, recession's behind us. I think that's somewhat unique to you and the team at Morgan Stanley. Just build that out for us.
Yeah, I mean, you know, we try to work six months in the future. I think, you know, a year ago, I think, remember, we had this conversation after the election. You were saying, Mike, you sound more optimistic than I've heard you in a while. And it was kind of, we were thinking six months in advance.
We thought the first half would be tough as they transitioned from the kind of growth negative policies to these growth positive policies. All this CapEx you're talking about is right in line with the big, beautiful bill. I mean, they're trying to basically reduce consumption, increase investment. It's a totally different economy.
And what that is, it's a higher velocity economy for all the companies that haven't been doing well for the last, I would say, three years who've been sort of in a recession.
I would argue strongly, we've done the work on this, and we've done the analysis with respect to the rolling recession that has been in place for, I would say, three years, most of the private economy kind of suffering, government kind of carrying the water. And then we basically saw all of that come to fruition at the end in April.
April, capitulation day, as I call it, was basically the government recession. That was the final piece of the rolling recession. And if you actually look at the challenger job cuts and you look at the revision data now on the payroll data, it looks to me like a rate of change low in payrolls and a rate of change high in challenger job cuts came in April. So the market's figured all this out.
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Chapter 2: What are Mike Wilson's core views for 2025 and beyond?
And we've seen that in the market. We're still narrow. Quite frankly, AI, CapEx, is still is kind of one of early recoveries here. Semiconductors being an early cycle group. But we're not seeing the other quote unquote early cycle groups recover the way they typically do in a new economic cycle. Why? Because the Fed is behind the curve. The Fed is way behind the curve on rates.
They need rates much lower. If you really want to get the private economy moving, rates are too high.
Much lower. How much lower do you think that really is required to get that broadening out?
Let's just start with the two-year treasury yield. Okay, so my barometer is always the Fed is behind the curve if Fed funds is above two-year treasury yields. And in order to stimulate the private economy, I would say they need to be well below that.
So that's 50 basis points just to get to neutral and maybe another 100 plus to get to something that's more stimulative for the average company and the average consumer.
Are you right now betting on that broadening out and expecting maybe AI to underperform going forward as they invest more in some of these debt sales and the infrastructure side and the rest of the economy plays catch up?
Absolutely. Think about the trickle-down effect of this capital spending. I mean, it's not just going to be semiconductor companies. There's a lot of infrastructure. There's a lot of job creation. There's a lot of velocity in the real economy. And the lending channel starts getting going, perhaps for small, medium businesses, that job creation. Deregulation is another part of that story.
So absolutely, that's what should happen if things play out the way they could. Now, there's risk to that. Let's say the Fed continues to say, hey, we still think there's inflation risk. We don't like the inflation rate at 3%. We're not going to raise our targets there. And then we just kind of drag their feet. It's going to stay narrow then. It's going to stay up the quality curve.
And that's where we are right now, Lisa, is that people basically are trying to choose between those two outcomes. And I would say right now, most of the institutional community is still huddled into the high quality stocks. They haven't really made the transition yet. Have you? Well, we have in some of our guidance. Yeah, absolutely.
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Chapter 3: How has the rolling recession affected the US economy?
Those can happen without the Fed cutting significantly. But it would really solidify it for me. And if you go back and look at all these different economic cycles, Small caps and lower quality stocks typically don't outperform until the Fed gets below two-year treasury yields. We've documented this. So, by the way, it doesn't mean these stocks can't work in absolute terms.
It just means that relative outperformance you typically get in that early cycle rotation needs Fed funds to be much lower.
If you look at the Fed next year, are you just expecting a Federal Reserve that's markedly different than it is today?
Well, I think they're being patient here. They're doing their job. I'm not one to sit here and criticize the Fed left and right. What I see is just a very weird economic cycle. And I think we've solved the puzzle a little bit on this, and that's why I feel fairly confident that our narrative we laid out this year has played out now.
I'm getting evidence in the marketplace, and I feel more confident in that narrative. And that's sort of the difference. I just think they're not there yet. They're not where I am in my head. I could be wrong, but I'm pretty confident about that outcome.
Can we finish on big tech? Sure. These companies are changing. We're used to companies that were investing tons. Ultimately, they were giving it back to shareholders. Now we've seen a subtle twist, I think, from the likes of, say, Meta, who are spending tons and tons and tons and then come into the debt market to fund it. That's not what we're used to with these names.
Typically, they're asset like capital return heavy. Are you noticing the same change? And how should we treat those companies differently at all because of that?
So let's talk about the risks for the bull market. We think the bull market started in April, new economic earnings cycle. Okay, there are two risks. One is that the Fed drags their feet, liquidity, funding market stresses kind of pop up.
The second one is what you just talked about, is that the market starts to push back on the fact that free cash flow growth is actually decelerating for some of these businesses, and the asset light story is being called into question. We haven't seen it yet. The last week was the first time we saw pretty divergent performance between some of these.
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Chapter 4: How is AI impacting the current economic recovery?
We've underinvested in so many things, not just AI, but infrastructure and factories and automating production and robotics and things like that. I mean, this bill is designed to get that engine of growth moving.
And it's happening.
It's happening.
But just putting all these pieces together, this was a core theme, I think a core pillar for being long US equities for a long, long time. And now it's changed. Is it still good? I think that's what I'm trying to get at here. Is this still an argument to buy US equities?
I think that the valuation is telling you that the growth is going to be better than we think.
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Chapter 5: Why does Mike Wilson believe the Fed is behind the curve on rates?
My view is that earnings growth is going to be better next year than people expect. Now, on the other side of that, I do think we're in a different environment where we have these hotter but shorter cycles. So we're not in these 10-year economic expansions anymore. And so it's two years on, one year off. Two years on, one year off. That's what we've had since COVID, right? 2020, 2021, good.
22, bad. 23, 24, good. 24, 25, not so good.
Chapter 6: What interest rate changes are needed to stimulate the economy?
Now we're into a new two-year cycle. So you just have to understand that because inflation is right under the surface and now you have a higher velocity economy, that means you're going to have to trade it a little bit more. But right now, I think we're in a pretty good position.
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