Episode summary
We're in the 'final innings' of the market correction, says Morgan Stanley's Mike Wilson
Summary
Mike Wilson says the market’s recent selloff and sector rotation are likely in the “final innings” of a correction that began in June. He points to weak breadth, worries about the durability of AI capex, geopolitical risks and election anxiety as factors already digested by stocks, and expects the market can still finish the year strongly if it gets through the next 2 to 3 weeks.
On the AI trade, Wilson argues the market is shifting from the “enablers” of AI spending, such as semiconductors and power stocks, toward the “adopters” that will use the technology to drive revenue growth and profitability. He says the biggest concern is not the idea of AI itself but whether all players in the infrastructure buildout can earn acceptable returns, with widening credit spreads in parts of the AI complex a bigger near-term risk than Treasury yields.
Wilson also frames higher rates as a sign of stronger-than-expected growth rather than a purely restrictive shock. He says nominal GDP is running around 7%, so 10-year yields near 5% are not egregious, though the speed of the move and bond volatility matter. He expects no October hike, sees December as still possible, and thinks liquidity and the Fed’s balance sheet will matter more than front-end rates for markets.
Key takeaways
- Wilson says the market correction that began in June is in its late stage, but he still expects 2 to 3 more weeks of volatility before a stronger finish to the year.
- He thinks the AI trade is rotating from infrastructure beneficiaries to the companies that will actually use AI to lift revenue and profitability.
- Wilson says widening credit spreads in parts of the AI complex are a bigger risk than 10-year Treasury yields because they affect funding for the spending boom.
- He argues higher rates are being driven by stronger growth, with nominal GDP around 7%, not just by restrictive Fed policy.
- Wilson sees no October rate hike, but says December remains on the table and the Fed’s balance sheet is the bigger liquidity risk.
Notable quotes
“I THINK THE AVERAGE STOCK IS DONE. I MEAN IT'S BEEN A REALLY NASTY CORRECTION. IT STARTED IN JUNE RIGHT”
“WE'RE IN THE FINAL INNINGS OF THIS, BUT WE STILL GOT TO GET THROUGH THE NEXT PROBABLY 2 TO 3 WEEKS”
“THERE IS A TRANSITION GOING ON WITHIN THE AI TRADE FROM KIND OF WHAT WE CALL THE ENABLERS TO THE ADOPTERS, RIGHT”
“THE REASON WHY RATES ARE HIGHER, I THINK THIS IS A DIFFERENTIATED VIEW FROM A LOT OF FOLKS, WHICH IS THE REASON WHY RATES ARE HIGHER IS BECAUSE GROWTH IS SO STRONG”
“NO OCTOBER HIKE. BUT I THINK DECEMBER IS ON THE TABLE”
How the episode opens
Sales and earnings guidance for the full year as demand drove double digit organic sales across both the commercial, aerospace and defense segments. Joining us now, Mike Wilson, Morgan Stanley chief u.s. Equity strategist on set.
Mike, it's good to see you. So yesterday or on today's tuesday, you basically think that whatever would you call it, a sell off? I guess some rotation or weakness in the overall averages.
You think that's over. And it's we're going to start having better market performance at this point.
Well I think the average stock is done. I mean it's been a really nasty correction. It started in june right.
I mean this is sort of the rotation from early to to mid cycle. You had the the momentum unwind. You've had this now concern around the sustainability of the ai capex.
You have a couple wars going on. You have the midterm election anxiety. So yeah, there's a lot that's been digested by the markets.
And if you look at the breadth of the market's been terrible. So I think we're in the final innings of this, but we still got to get through the next probably 2 to 3 weeks. And then I think we can still finish the year pretty strongly and definitely into next year.
The the ai trade that's already seen. That's its worst days in terms of consolidating or worries about debt and everything else. And it will lead the market. Again. — It depends on what part we're talking about. Right. There is a transition going on within the ai trade from kind of what we call the enablers to the adopters, right? So all this spending that's been going on has been incredible for semiconductors. Some of the power stocks, all the ones that benefit from the the spending itself.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- market correction
- ai trade
- oil prices
- economic outlook
- market trends
Companies and tickers mentioned
- MS
- Morgan Stanley
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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