00:00Bank of America says the latest turn by the Trump administration to favor tax cuts and lower tariffs could spell trouble for markets.
00:08The flip in U.S. economic strategy could incentivize traders to ditch bonds and pile back into AI and crypto trades,
00:16which would risk inflating a market bubble, according to the team led by Michael Hartnett.
00:22Are we already back to a bubble?
00:24We're here with Morgan Stanley's Mike Wilson.
00:26That seems, wow, that's an interesting call.
00:31That's a way to get noticed on a Friday.
00:33I mean, bubbles are, you know, apparently every year now in certain things.
00:37I mean, I do agree with Michael in the premise.
00:40We've been in an environment for, I would say, post-GFC where policy has sort of elicited, you know, many bubbles in certain assets.
00:49The money moves to the hot kind of toy, whatever it might be.
00:54But it's nothing like the late 1990s.
00:56I don't think what we're seeing in AI, anything like the late 1990s, it's just not as broad.
01:00I mean, there are four large companies spending all the money.
01:03There are maybe eight to ten big beneficiaries of that spending.
01:06That was like a mini bubble.
01:08We talked about that at the end of last year.
01:09One of the reasons we were a little bit more negative on some of those stocks coming into the year was because there was a deceleration in growth.
01:15But it's not like in the 1990s when you had every enterprise overspending on equipment.
01:20You had this huge IT spending bubble.
01:22So I don't agree that we're in a bubble.
01:25But I do think the policy we've chosen, okay, which is to kind of at every sign of trouble come in and stop it.
01:33It does elicit that type of behavior where that's why you get this chasing going on.
01:37Because, you know, buy the dip is a function of that policy that we've been doing for 15 years.
01:43Yeah.
01:43And I mean, largely, if you take a look over the grand scope of time, buy the dip has worked because stocks go up in the long run.
01:50But I take your point, it kind of feels like bubbles in the eye of the beholder here.
01:54But I am curious where you think we go from here, especially when it comes to the AI trade.
02:00That narrative had been out there that, you know, it was getting kind of tired.
02:03There was a lot of existential worries over DeepSeq and cheaper models coming through.
02:07Canceling leases.
02:08Exactly.
02:08But it feels like, especially with these NVIDIA results that were this week somehow, it feels like a long time ago, we're still putting our foot on the gas here.
02:16Well, what I would say is that the AI is transitioning from the, you know, infrastructure place, okay, so the investment cycle, to the adopter phase.
02:25And that's what we've been talking about for the last six months is now we're, now, okay, we have the compute power.
02:29It's built.
02:29There's going to be more to be built.
02:30But that initial surge is kind of done.
02:32And now it's going to continue, but at a slower pace.
02:35And now the fun part starts, right?
02:37Let's build the application layer.
02:39Let's build the killer applications that then can make, you know, we can diffuse the technology into the economy.
02:45You know, the price is coming down.
02:47That's when technology takes off.
02:48That is the essence of Moore's Law and tech diffusion.
02:54That's when you can actually get the productivity benefits.
02:56And so we've always had the view that 25 was going to be an eh in terms of the productivity.
03:00But 26 and 27 is when we think that productivity benefit can start to come through.
03:04Is that what drives us to 6,500?
03:06I mean, that combined with the fact that tariffs turn out to be not so bad, at least at these levels, and no one cares if we blow out the deficit another couple trillion dollars.
03:17Well, it's another part of our rate of change argument, right?
03:20So that AI now is moving to...
03:22Focus on the rate of change.
03:23Exactly.
03:23That was the title of your note.
03:24Exactly.
03:25And so, like, AI was a negative in terms of ROE and return on invested capital.
03:30It was a cost.
03:31And now the rate of change on AI, from a broader market perspective, is turning into a tailwind for margins and productivity.
03:38And that's what the market is.
03:39That's another factor in our more positive view over the next 12 months.
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