Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why
he still believes in a growth cycle for equity markets, even as
investors show growing concerns around AI.
Read more insights from Morgan Stanley.
----- Transcript -----
Mike Wilson: Welcome to Thoughts on the
Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S.
Equity Strategist.
Today on the podcast, I'll be discussing recent concerns around
AI disruption.
It's Tuesday, February 24th at 1pm in New York.
So, let's get after it.
Last week you could feel it, that anxious undercurrent in the
market. The headlines were noisy, volatility ticked higher, and
AI disruption, once again, dominated investor conversations. But
beneath the surface level unease something important happened.
The S&P 500 Equal Weight Index pushed to a new relative high,
keeping our broadening thesis alive and well.
On one hand, investors are worried about AI driven disruption,
CapEx intensity, and potential labor force reductions. On the
other hand, capital is still flowing into formerly lagging areas
of the market, just as the median stock is seeing its strongest
earnings growth in four years.
Let's unpack this. First, there's concern AI will lead to job
losses. But even if that's the case, there's typically a phase-in
period. Companies don't just eliminate labor overnight.
Importantly, before these productivity gains are fully realized,
we need broad enterprise adoption. That means building out the
agentic application layer, integrating AI into workflows,
retraining systems and processes. That takes time, and it is
still early days in that regard.
Second, what we're seeing now is typical of a major investment
cycle. Volatility increases as markets challenge the pace of
unbridled spending. Dispersion increases as investors debate
winners and losers. Leadership rotates, sometimes sharply.
There's also something different this time compared to the
internet bubble of the late 1990s. Today we're in an early cycle
earnings backdrop. We've just emerged from what was effectively a
rolling recession between 2022 and 2025. So, as capital rotates
out of the perceived structural losers, it's not just chasing
long-term AI beneficiaries, it's also finding classic cyclical
winners.
On the losing side is long duration services-oriented sectors,
particularly software. These areas are more sensitive to
uncertainty around longer term cash flows. This area also has a
large overhang of private capital deployed over the last 10 to 15
years.
There are other forces at play too. Small cap growth, arguably
the longest duration segment of the market, began breaking down
in late January around the time Kevin Warsh was nominated as Fed
chair. While major indices barely reacted, more speculative areas
may be responding to expectations of tighter liquidity given
Warsh’s, reputation as a balance sheet hawk. Finally, equity
markets are typically more volatile when new Fed chairs assume
office.
Bottom line, our broader thesis of an early cycle rolling
recovery remains intact. Market internals are supportive even if
index level action feels choppy. That said, near term volatility
is likely to persist as we enter a weaker seasonal window for
retail demand, while liquidity remains ample, but far from
abundant.
With this backdrop, a quality cyclical barbell with healthcare
makes sense. In small caps, the higher quality S&P 600 looks
more attractive than the Russell 2000. And any short-term
volatility could present opportunities to add exposure in
preferred cyclical areas like Consumer Discretionary Goods,
Industrials, and Financials.
Of course, risks remain. AI adoption could accelerate faster than
expected, pressuring labor markets more abruptly. Pricing power
could erode as efficiency spread, and policy makers could react
in ways that slow the CapEx cycle while crowded momentum
positioning remains vulnerable.
Nevertheless, the signal from the internals is clear. Beneath the
volatility this looks less like a market rolling over, and more
like one that is confirming an early cycle economic
expansion.
Thanks for tuning in. I hope you found it informative and useful.
Let us know what you think by leaving us a review. And if you
find Thoughts on the Market worthwhile, tell a friend or
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