Morgan Stanley's Mike Wilson Talks Forward Earnings, Market Swings

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Introduces the context: IPOs, inflation print, Iran situation, and the recent rotation out of tech.

Matt

Mike Wilson

The market has been rotating from one cyclical group/commodity to another all year. Earnings revisions breadth (semiconductors at 70%, S&P 500 at 30%) is unsustainably high and will roll over, causing a short-term correction and leadership change.

This is a second derivative deceleration, not a change in the upward trajectory of forward earnings. The market is picking up on this, leading to the current unwind.

Asks for clarification on earnings revisions plateauing and the meaning of 'revisions breadth'.

Matt

Mike Wilson

Revisions breadth leads the second derivative of earnings growth. While the first derivative (forward earnings growth) will continue to rise into 2027, the rate of change is decelerating, which matters in the short term and will cause a leadership change.

This is a correction, not a change in trajectory. Stocks will continue to rise into year-end as forward earnings move forward.

Asks if the market will shift out of semiconductors/DRAM into something else.

Matt

Mike Wilson

Yes, the rotation is happening. Friday's selloff is a sign that the semiconductor trade is exhausted. He sees a rotation into consumer, transportation stocks, and regional banks, which were all up on a down day.

He compares the pattern to earlier rotations from gold/silver to energy to semiconductors. All are commodities.

Asks how much the Iran/geopolitical situation moves markets.

Matt

Mike Wilson

The market has moved past the oil spike, similar to how it moved past tariffs a year ago. The world is resilient; new supply and routes will emerge. His base case is not a major escalation.

If the kinetic war escalated significantly, oil could spike to $150, but that is not his base case.

Notes that despite a US helicopter being shot down, oil prices (Brent at $92, WTI under $90) are not reacting strongly.

Matt

Mike Wilson

Markets wait for binary outcomes. A major escalation would be a problem (oil to $150), but that is not his base case.

Asks about the impact of large IPOs on the market.

Matt

Mike Wilson

The market is healthy and absorbing supply. There is plenty of liquidity from buybacks/dividends ($1.7T/year) and retail inflows. A collection of IPOs in one quarter can cause disruption, but not a major problem.

Asks where all the cash for gold, Bitcoin, and equities is coming from.

Matt

Mike Wilson

There is a tectonic shift from the 60/40 portfolio to 60/20/20 or 70/30. Investors are not reinvesting bond proceeds (bear market for 4 years) and are moving into assets that protect against inflation: equities, gold, silver, real assets.

The average asset owner is smart and sees inflation as the biggest risk.

Asks about the inflation outlook, noting a 4.2% CPI print.

Matt

Mike Wilson

He is a 'headline guy' (not core). Inflation is very good for nominal GDP growth and earnings. As long as the Fed doesn't pull away the punch bowl, it's a recipe for higher stock prices. This is similar to 2021.

If inflation goes to 5%, the Fed will have to act, which could cause trouble later this year. But his base case is that inflation stays below 5% and the Fed does at most one hike.

Confirms that Wilson's base case is no major Fed action and continued nominal GDP growth driving earnings.

Matt

Mike Wilson

Yes, that is the base case. Forward earnings growth will stay north of 20% through year-end. He does not anticipate multiple contraction this year, but it could be an issue for 2027.

Asks if this base case is why Wilson likes transportation and shippers.

Matt

Mike Wilson

Yes. The economy is seeing real velocity in the private sector for the first time in years. This drives sectors like consumer goods, regional banks, and transportation. Tech can work too, but it got overcooked in the short term.

There is a rebalancing from a government-driven to a private-driven economy.

Asks about the consumer, noting the K-shaped economy and struggles with higher prices.

Matt

Mike Wilson

The consumer stock story is not hurt because 80% of spending is done by the top 20-30% of consumers. The earnings profile will not change. Retail/consumer stocks are doing well and will continue into the second half, especially if oil prices come down.

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