Morgan Stanley's Wilson Worried Fed Is Dragging Its Feet

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00:00The team at Morgan Stanley releasing their outlook for 2026, writing,

00:04we raise our S&P 500 price target to 7,800, driven by strong earnings growth. We believe

00:10that we're in the midst of a new bull market and earnings cycle, especially for many of the

00:15lagging areas. Mike Wilson of Morgan Stanley joins now. Wonderful to see you, Mike. Thanks,

00:20Lisa. So let's start on the optimism. You have been optimistic for quite a while,

00:24talking about the rotation into the adopters, not just the AI tech behemoths. Why are you

00:29getting even more optimistic as the year goes on? Well, I would say it's just a change. It's an

00:34evolving narrative we've had, which is that we think that the policy is still misunderstood,

00:39that they essentially came in this year, did the growth negative stuff first, and now we're looking

00:44at the growth positive stuff. I'm not worried about the economy. What I am a little bit worried

00:48about is that the Fed is kind of dragging its feet. So I would agree with Neil's comment,

00:52the Fed needs to cut, but not to save the economy, but to see the full rotation into these lagging

00:57parts of the market, the interest rate sensitive parts of the market, which is really our story

01:01for 2026. We think that 7800 is dependent on the earnings cycle broadening out.

01:07There's a lot to unpack there. I want to start with you agreeing with Neil, because Neil had a

01:10pretty negative assessment of the overall economy, saying he suspects the train's already left the

01:15station with respect to the pain from the Fed keeping rates where they are for as long as they

01:19have, and that we could be looking at a recession. You seem to disagree on that. So where's the

01:24nuance here? What's the difference between preventing recession and really allowing the

01:29rotation into some of these other names? Yeah, I mean, I think our view has been

01:34differentiated that we think we have had a recession. We went through a rolling recession

01:38in the private economy. So I would agree with Neil's that the economy is weak, but it's rebalancing

01:44now towards the private economy. I mean, many parts of the economy have been suffering. Housing,

01:48all the interest rates, durable goods, consumer goods, which have been under pressure,

01:52commodity sectors, transportation. There's been no volume going through the economy,

01:56no velocity in the real economy. And the way that the administration is changing the policy,

02:03in addition to the Fed now cutting hopefully next year, you'll see the private economy now doing

02:07much better. The government no longer crowding out these areas that have been under pressure.

02:12But we do need to get that trend that the Fed needs to do more. The Fed needs to cut rates,

02:16and they need to probably provide some balance sheet.

02:18I'd say one of the things that Neil talked about was his fear that even if they cut and

02:22cut in December, they're not going to lay out a path for continuous cuts. And Fed Governor

02:26Waller seemingly enforcing that, speaking on Fox moments ago, saying you might see more of a

02:31meeting-by-meeting approach once you get to January. If you do get that posturing from the

02:35Fed that maybe they cut in December, but it's a meeting-by-meeting approach, they're not necessarily

02:40going to cut in every single one. Is that enough to allow for that rotation, or do you need a clear

02:45path of cuts to get it?

02:47No, we need the latter. And I think we're going to get there one of two ways. Either the data,

02:50the labor data is going to basically support our view, or my view, that we had a rate of change

02:55trough in the labor markets in April. And so that data then will allow the Fed to cut more, or signal

03:00they're going to cut more. The second one is that we get more financial stress. That's what's been

03:05going on. We think the market, we wrote about this back in September, early October, we thought the

03:09market was going to have a 10% to 15% correction because the liquidity wasn't there, that the balance sheet

03:14was tightening. And we think there's evidence that that correction is well-advanced. All the momentum

03:19stocks, you know, crypto obviously is the topic of the day, down 30% for Bitcoin. I mean, these things are

03:24telling you that the market is worried about this liquidity. So as usual, the markets will dictate the

03:31Fed's timing. So if the market really wants, and look, markets are like children, right? They'll have a little

03:35temper tantrum, and then the Fed will respond to that. So is this like a mini 2018 in that regard, right? You

03:41have that you kind of go into end of the year, and then there's stress in some of these financial metrics that the

03:45Fed cares about, and then they provide more balance sheets. So we think there's a sort of this tug of

03:50war going back and forth, but ultimately it resolves in a more dovish policy path.

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