Morgan Stanley's Mike Wilson says he sees several "clearing events" ahead for the stock market that could temporarily knock it down and create a great opportunity for investors to jump back in.
The firm's chief US equity strategist pointed to a series of factors that could pull the S&P 500 back about 9% from its most recent high to 7,100 points — mainly the midterm elections, pressure around artificial intelligence spending, and liquidity constraints.
Even so, despite the uncertainty created by the ongoing war with Iran that has weighed on US stocks at times this year, Wilson remains bullish: he believes that after these clearing events bring an end to the correction "that has been happening beneath the surface of the market for months," the market will drive the S&P 500 up to 8,000.
Wilson joined Morgan Stanley as an investment banker in 1989 and became chief US equity strategist in February 2017. He sat down for an interview to discuss the current risks and opportunities in the market.
Q: You've been talking about a series of clearing events that could first knock the market down and then send it back up. Tell us about the midterm elections as one of those clearing events.
A: Midterm elections have historically been a headwind. We put that document in our report, you can look at that table — the market always rises after midterms, a perfect record over 6 to 12 months. But November through December 31 isn't always positive; 2018 is a good example. And I'd say this midterm is a bit unique because the president said he's going to wait until after the election to do something. Classic Trump style, like "I'm going to do something big, nobody knows what it is." So that uncertainty is weighing on people.
Q: How much of a threat would a Democratic-controlled Congress pose to the AI trade and the broader market? Would a midterm-driven selloff be limited to the AI trade, or would it drag down the whole market?
A: First, this is no longer a surprise. The market has already priced in that Democrats will definitely win the House, and now they'll probably win the Senate too, but only narrowly. So I'd say 52-48 is already reflected in the market. 55-45, probably not. So if the numbers move toward that kind of level, would it be more destructive? Could it create some kind of decision momentum at the state and local level that makes building data centers harder? Possibly. There are other things too, like more regulation that could emerge. You'll see resistance to all kinds of expansion, all kinds of growth activity — and those are exactly the things we need to get out of our debt problem. So I think there could be obstacles. But I have another argument: I think what we're seeing right now is "maximum pain," maximum resistance to data centers, because it's political. A lot of candidates are running on this platform, "not in my backyard" (NIMBY), "we don't want prices going up in our community, so don't worry, I'm your candidate, I'll protect you." And then they win, and it's "where's my money?"
Q: You've talked about how the 6 to 12 months after midterms has historically been 100% positive. During this war right now, are you confident in that 100%?
A: Well, I'm not absolutely certain about anything, but I'd say the historical record is pretty good. And I'd say that at those midterm points, bad things have happened too, and they eventually got resolved. We may need to go down first before going up, but I'm fairly confident we'll have at least a pretty good 6 months, maybe 12 months — whether it extends to 12 months, we'll see. But yes, there will be a rally after the midterms.
Q: We've seen Meta, SpaceX, and now Anthropic's IPO — a lot of equity issuance. Are you concerned about all this equity supply? Will supply overwhelm demand?
A: Not yet. First, we have supply from the hyperscalers, but we also have a lot of M&A supply that's not AI-related. Capital is being consumed by the broader economy because our nominal GDP growth is 7.5% right now. I mean, this is the first time in a long time that the real economy is actually absorbing a lot of capital. The question here is, where are you in the capital-raising cycle? We've done a lot this year, so I'd say we're probably fairly late in it. That's why I say that over the next 30 days, I could argue we'll wrap up. We'll have a pause.
Q: Some of these companies are now net issuers rather than buying back stock. Does that worry you?
A: Well, they're still buying back stock, but yes, on a net basis they're now users of capital. But they're not issuing stock for financial engineering — they're issuing stock to spend, so there's a growth component here. I think one of the main reasons rates have risen this year is that the economy is growing too fast. That's not the consensus view. Most people think rates are up because of heavy government borrowing and all this issuance. That's part of it, but let's not forget that a lot of that borrowing is flowing directly back into the real economy. So the stock market accepts this, because its logic is: "Well, yes, rates are higher, but growth is better." So if nominal GDP is running at 7%, 8%, and the 10-year Treasury yield is at 5%, that looks okay. It's not good for everyone, which is why we're seeing a quality rotation. It's good for quality companies because they can grow in this environment; it's bad for your low-quality small caps that can't operate with borrowing costs at 8%, 9%, 10% — and that's the rate they're paying now. So there's a K-shaped economy dynamic here, not just at the consumer level but at the corporate level too.
Q: Do you see similarities to the heavy equity issuance during the dot-com bubble era?
A: As someone who was involved in that period — because I was basically doing those deals, we were the biggest tech investment bank on Wall Street at the time — it depends. The market is the arbiter, and right now the market is funding these things. I mean, these deals are oversubscribed. Those overnight bond deals? Boom, $40 billion. My reaction is, okay, that looks fine to me. I mean, for now it's fine. That can change. Pricing is part of it. So we're seeing spreads widen. That's saying: "Okay, you weaker player, now you have to pay X. Do you still want to do this deal? Probably not. It doesn't work for me. So I won't do the deal." So there's a natural adjustment mechanism, and I'll probably feel better in about 30 days. If you're a bond investor today, two things are different. First, in the late '90s the government had a bunch of surpluses; that's not the case now. So there's competition for capital. They have flexibility now: they can issue at the front end, and they can do some tricks, and they are doing that. But don't underestimate that this is "fighting for capital with bare hands," so that's not great. On the other hand, real yields today are among the most attractive levels in 20 years, which is why money swings back and forth between credit and equities. So if the stock market starts to choke a bit and says, "You know what, we don't want you issuing stock," and share prices start falling, these people aren't stupid — they'll say, "Okay, then let's issue more debt." And buyers have a huge appetite for 7% to 8% all-in funding for this kind of corporate. These people are now swinging back and forth between debt and equity, which is actually quite constructive, because they're paying attention. They'll say: "Hey, debt is cheaper right now. Let's go raise $40 billion over there." Then they come back and say: "You know what? Our capital structure is a bit odd now. Let's do some equity."
Comments