Highest on the street. Well debate in our call of the day. Plus ten Growth Stocks that look attractive right now. The Investment Committee is ready to go. Halftime report starts right no now. It is good to have you with us on this wednesday steve weiss, carrie firestone. Also with us on set is mike wilson, the chief u. S. Equity strategist at Morgan Stanley we begin where else . The market stocks are reversing significant overnight losses to be mostly positive now, s p and nasdaq hitting new alltime highs clearly this seems is the marke making a bet, that while tensions with iran may continue, the conflict will not. Lets see if we can simplify a complex situation. Obviously the geopolitical tensions cause volatility. What keeps the market on stable footing is liquidity and the fed and everything its done to increase liquidity and give stability. Where you go in the short term is a balance between those two were seeing struck right now. In the long term, we know what we need. Earnings growth this year over last year. We need that 6 to 8 Earnings Growth in the s p 500. I think you only get that if you get Capital Expenditure picking up Fourth Quarter earning season starts next week. Is it time to relax, look at the big picture, gold is lower today and as we said the nasdaq goes above 99100 for the first time time to look back at some offense . I think so. Im pretty sure of it. Im longer than ive been since i dont remember when. Weve got a new paradigm in the market what we see with tesla, microsoft and others and it doesnt come to valuation. It comes to momentum of fundamentals as long as the fundamentals continue to move to improve, as long as Companies Continue to meet and beat their targets, youll continue to see the market rise because youve got liquidity, the fed and every central bank in your back pocket and the knowledge that youre slow and not picking up. Asia is picking up that replaces valuation. Again not completely because that would just be foolish you can tell me things never change, theyre always the same but i think were seeing a change here and have been seeing it i remain positive on the market and i like when others are negative i agree with you, if we have negative earnings. Or flat. Or flat that will take it down a little bit but thats an opportunity. There was no volatility in iran. I dont call the market being down 1 after the major move weve had volatility. Futures last night were pretty bold. Right. Instead of us arguing about that, i think well probably agree on this. Opportunities are going to arise. We can talk about those momo stocks the apples and microsoft. Mike santoli just said at the end of last hour, they continue to be bought. They do but here is the thing, after the runs those have had, its reasonable to trim, take that dry powder and say when another attack occurs i hate saying it but im saying it when another attack occurs, put that money you trimmed from those high flyers into a great opportunity. Theyre all over the place. I think what were really seeing is the momentum isnt just earning a valuation theres real momentum in demand. We looked at overnight fear and people thought i thought the market would open down today its obvious a lot of people who put in buy orders because they thought the market would be down and they would get to buy more attractive prices, theyre pushing the market up. Its many of the same names. Lets face it, there are people who have been very bearish on the market, have been trying to plow back in Fourth Quarter up 9 they are still buying when they think they have an opportunity, even if the market is making thelma pay higher. I think we expect when the calendar changes each asset class going to change. It feels as those theres nothing different about 2020 from 2019. It did 12 hours ago. It felt that way. 24 hours ago, it sure felt like it could be on the precipes of something. It highlights and really underscores the lack of relevancy that oil has to the s p. Its 4 of the s p its something that ten years ago, 15 years ago would have been so dominant in the conversation where the s p was going to go on that day. Crude is down 4 . Crude is over 5 . Gold is down 1 . So crude is off 5 from the high last night. Energy equities are down 1. 5 on the day and the s p is totally fine with that predicting the price of oil, which is something that i spent the better part of my career doing has now become as challenging as figuring out who the giants next football coach is going to be, okay crude was down 8 on Christmas Eve of 2018. Do you know what crude did over the next two weeks it went up 20 in the last ten years, crude has had a 5 decline from an intraday high over 50 times that would obviously extrapolate that its going to go lower . No it was 2 higher. Thats my view that its no an investment class. Its become something different. Real quick, because i shared this with you before the show. Its a great observation i spoke to mark fisher, a friend of the show, before the show he mentioned something thats really true. Gold has replaced oil in portfolios, for traders. It has become what oil once was. To your point its only down 1. 5 today thats the right trade if you think theres more volatility coming. I totally disagree with that. Im sorry. Me, too. Gold has become even more irrelevant i remember 20 years ago, those managers you talk to, you got to own gold doesnt yield anything its getting competition from things like bitcoin and other crypto currencies. Its losing its relevance. Was that reality in terms of price from 20 years ago . You know the answer. Hold on. Okay. I would like to get to mike wilson, who is sitting here patiently listening to you guys. Welcome back happy new year. Happy new year. 3200, 3250 is your bull case for the s p. So, were going nowhere, according to you, this year. Isnt today a perfect example that youre on the wrong train and maybe its time to get off at the station and get on to the train thats actually going somewhere s p well, we did. As you know, 3250 is our yearend target. Weve been explicit that we can trade 3500 in the first half because of the in the market we raised our target and said well have a liquiditydriven bull market into the first half of next year and so we raised our target to 3250 and said we would get there in short order we got there faster than we thought, quite frankly last month and a half ago we talked about as a target for the first half of this year. Were concerned about the back half of the year that the liquidity will be drained because it wont be on the Balance Sheet with other Central Banks and looking forward to 2021 where there will be more uncertainty about a sustainability of a latecycle environment. Theres no recession the late cycle extension has been extended. The fed got in front of it, has been very aggressive the curve steepened and we changed our view on that it doesnt mean that the fundamentals are driving this momentum the fundamentals improved. Its hard to argue theres going to be enough Earnings Growth to justify the move weve had in the last three or four months. To me its about liquidity and the fact that the fundamentals stabilized. What kind of Earnings Growth do you need . I think you need 10 to see the 3500 to be sustained. 10 10 this year i think well get lower digits, 2 or 3 . Thats what the markets have to deal with in the back of the year somewhat defensively oriented stocks microsoft and apple are the highest quality stocks in the marketplace. We love microsoft. We raised our price target today. Its expensive. But so what if theres liquidity. Its the highest quality name in the moorkt place people will continue to buy. Apple is a defensive name now . Its a highquality name not defensive. The market is paying for quality. Quality growth and thats what we want to pay for too we think high quality, large cap growth is what the market wants. By the way, apple as we speak hits 301, thats a new alltime high for apple as well. The fed you say, okay, qe or whatever is going to end theyre still going to be there, thoug though. How do you know well we dont but who cares about the back half of the year. Were bullish on the next six months for lots of different reasons, fundamentals have improved globally more than in the u. S. Right now most of the improvement in the pmis has been in china and europe, not so much in the u. S. Yet. The u. S. Will be a laggard in the recovery globally. Valuations are cheap and weve corrected that thats where we are now. I would argue that the market is fairly priced today but we think it will overshoot because of liquidity. What happens if it looks lets say first half of the year, most people agree, is the more sanguin part of the year, you dont have much in front of you. Into the summer you have to start thinking about the election thats when you think it can get a little rocky potentially. What happens if it looks like the president will get reelected its positive. You deal with base and bull. Right. Base case right now is that the president gets reelected. Dont you think . Yes, thats right, with consternation in the back half not knowing what the answer will be if the president gets reelected, yes, in december we have a rally on that 2021, we can agree that the economy is late cycle. Wouldnt we agree with that . Unemployment is at 3. 5 , lowest in 50 years. It could fall lower. If it falls to 3 by the end of the year, does that raise the risk of unemployment cycle or lower the risk i would argue it raises the risk again. Multiples come down. Thats all were talking about, comes back down to a more normal level from 17 times to 19 times. If youre assuming that your base case is that the market by the end of this year is down 7 thats what the numbers said you must assume that the economy weakens, that were in a recession or heading into a recession. For earnings to grow 8, 9 this year at that price, the market would be trading at 15 times earnings. In order for there to not be an attractive buying opportunity, earnings have to come down you have a much more negative look on the economy than i do. The economy is decelerating this year from last year the consensus view flat earnings we have flat earnings 2019. Correct. Youre assuming flat earnings in 2020, isnt it more negative than were assuming 2 to 3 growth this year from last year. Last year were predicted 0 earnings and it was. The model now is saying 2 to 3 . Congratulations. Whats the progression on that 2 to 3 per quarter . Is the First Quarter going to be up 5 , Second Quarter 7. 5 and then were down in the next two quarters its going to be flattish throughout the year unless theres an acceleration in growth beyond the 1. 8 , so we get more top line or costs get under control. The bigger question we have, and the way we think about the market is basically theres not income inequality in individuals. Theres Corporate Income inequality, okay so its predicated on small, Midcap Companies were not focused on were focused on the next six months, whats the market going to like right now and not going to like right now . At that point thats exactly where i wanted to go i dont understand how you think the market can get to 3500 but youre underweight the biggest part of the market, which is tech. Yeah. That doesnt make sense to me. Were not underweight the entire sector, right we own high quality tech within that for example, microsoft, which is a name weve had on the list for 18 months. So, underweight, overweight, doesnt mean you dont own anything, okay you could own the better performers within that, as an example. You dont have a wholly positive view on tech . No. We think tech has a higher propensity of risk because its crowded. The average company. Once again were talking about the average company within the sector equal weight versus market weight is very different whats the best like Fertile Ground for picking stocks from an average stock perspective where is the risk reward going to be good for the average stock within that sector you still have a defensive vent as well in terms of your sector determinations. Because rates are going lower, which they have, by the way, held up over the last 18 months even though they underperformed the last three or four months. So, for example, were here in the summer saying we think the old curve starts to resteepen and financials, and that worked. First of all, we look at things from the global standpoint our global weights are outside the u. S. The best way to take cyclical exposure is outside the u. S. , europe and asia, and you take more defensive high quality exposure in the u. S. Thats how were barbelled. What i dont understand, mike, is that youve got such a negative view in terms of, you can see that coming out in First Quarter conference calls. Not necessarily. You think the companies will be more optimistic than they have a right to be i think thats the Way Companies are. They dont like to lower the bar until they have to stock prices are up, emotions are higher and spending is up too. But not in cap x. It continues to disappoint consumer, yes. Market leaders, microsoft or apples, et cetera, are you Still Holding on to your price target because of small and midcap which are of less importance in the s p . Im not focused so much on yearend price targets but whats going to happen in the near term. So am i. Well have time to do that. Right now were not planning people being out of the market. Youre talking about next year, referencing 2021. Right thats the way the business is. Why do you think, if youre constructive and you feel like things are pretty good from an economic standpoint, why do you think rates are going lower . A, first of all, the rate differential between the u. S. And the rest of the world and growth in the u. S. Is slower on a rate of change basis than it is dploeblly the recovery so far has been more reserved in international economies. The rates are still very, very low externally if you want duration by the way, people still want yield, right . There are natural buyers of yield. Youre still too bearish. I love you, love talking to you. I vibe with you. But youre try ing ing to say ts a button hook coming, that the economy in the markets are going to come up and back down youre making it too hard. The big get bigger in terms of large caps and that money has to go 5 to google, 5 to apple why not keep it that simple . Why make it so hard that its going to go up and come down its not so different that its a front loaded year potentially. Have you to get two things right, the out and come back in. Why not time it wrong why not focus so much on yearend price targets and talk about whats happening right now . Were aligned very much with what you just said. What if you didnt have a price target at all and simply said the money will be wrong i like what you just said i think this is easy to say that the flows and forces get you to 3500 come in with the unadulterated and then come back down . The timing aspect of it is difficult. Were not telling people to worry about that right now lets be perfectly clear last two months, the market has a big liquidity surge in it, were going to 3500 and keep it at that. What do you want to own . We think small caps, because thats where the earnings risks is the greatest. Ill agree with you on that. I think its early, too early to do that why should you, if you can make money in these big cap liquid names theres no need to do that its a much more important menl for the audience than trying to figure out whats going to happen between the first and second half. Who cares . The suit is itching to get into this conversation. It sure is. Nice to see the suit again. Mike, i dont know whether it was the middle of december in 2018, middle of january 2019 you gave what i thought was probably the strongest argument to be invested, and that was client cash balances one year later what can we extrapolate from that perspecti perspective . A lot of that cash, mainly in institutional land and systematic strategies, etas, passive players and the individual has come in but not all the way. Remembrances of 2008 and i think they participate d. I always say people miss the rally. They didnt miss the rally our average client was up a ton because they were fully invested so i think the cash will stay hi high it may come down a little bit. The idea that theyre going to go back to normal levels immediately, i think thats misplace misplaced. We havent said the word trade until right now. Economists change their forecast base ond that the first year, that Global Economy will improve. World gdp all being driven by emerging markets the u. S. , we think, will go from 2. 3 last year to 1. 8 this year still decelerating but clearly not going to slide into recession. Trade wont escalate any further. Thats good. Its probably not going to be the kind of drive people were hoping for three or four months ago. Its not going to be the main driver of markets. Overall you think the days of multiple expansion, carrying the load for the market are over no. I think thats going to continue we get further multiple expansion. And youre going to cut that off . We dont know we dont know. Sounds like you want to be both bullish and bearish what we see, if you look at that base case, is a lower number so, there was no lower number there, and maybe its not yours and maybe its your firms, but you are both bullish about the market a 3,000 number is bearish, no matter how you cut it. Its hard for individuals to time that. To say bullish now will suddenly be bearish. Were saying that the risk of a revaluation is there. Of course. Assuming theres always risk there. Not because of some geopolitical event we can predict that the fed has told us theyre going to stop expansion at some point this year, assuming the repo market calms down and we think thats some time in april knowing that, we have to be prepared that that could be a potential harbinger of contraction. Thats all were saying. How would you put the last several days in perspective in the way youre thinking about the market with these geo political tensions the market did not believe for one second that this was going to be a sustainable move in oil prices. So we felt like that means the oil stocks probably arent going to go up that much here. Thats our view, were still neutral on energy, not because were positive on energy but theres so much short that could happen thats so volatile. This is not a group to be short or long necessarily. Its just there and its very small. The market is still very suspicious about the longterm price of oil