Nvidia-China return adds more fuel to AI capex fire, says Morgan Stanley's Mike Wilson

Key Concepts

• Nvidia's chip sales sanction reversal
• CapEx cycle deceleration and recovery
• Tariffs and their impact on earnings
• "Big Beautiful Bill" and its effect on earnings growth
• Earnings revision breadth
• Trump's negotiation strategy and business-friendly approach
• Tariffs as a consumption tax (VAT)

Nvidia and Semiconductor Industry

• The reversal of sanctions on Nvidia's chip sales is a positive development for semiconductor companies.
• Nvidia had previously taken a significant write-down (half a billion dollars) due to these sanctions.
• The ability to sell these chips will provide a "huge positive kick" to Nvidia's margins.

CapEx Cycle

• Morgan Stanley identified CapEx deceleration as a key theme at the beginning of the year.
• CapEx troughed in April, which explains the sell-off in the first quarter.
• The recovery in CapEx has contributed to the market's recovery, though it hasn't received much attention.
• The Nvidia announcement is expected to further fuel the CapEx recovery.

Tariffs and Policy

• The market has largely moved on from tariffs, believing the worst is behind us.
• The "Big Beautiful Bill" is expected to have positive effects on earnings growth in the second half of the year and into next year.
• President Trump's approach is likened to a new CEO "kitchen sinking" negative news initially, with the "Big Beautiful Bill" representing a positive transition.

Earnings and Financials

• Earnings revision breadth has turned positive, supporting the market's upward trend.
• Earnings are expected to beat estimates by 4-5%.
• The impact of tariffs on earnings is expected to be most evident in the third quarter, particularly for consumer goods companies.
• Financials are not expected to be significantly impacted by tariffs.
• A potential "corrective activity" is anticipated around earnings in August.
• Earnings are expected to re-accelerate in the fourth quarter and into 2026.

Trump's Business-Friendly Approach

• President Trump appears receptive to business concerns, as demonstrated by his interactions with Jensen Huang (Nvidia) and Tim Cook (Apple).
• He seems willing to make carve-outs and concessions to support businesses, even in the context of tariffs.
• Examples include rare earth metals and magnets, where concessions have been made.

Tariffs as a Consumption Tax

• The market anticipates that the tariff situation will settle somewhere in the middle.
• The ultimate outcome may resemble a 10% consumption tax (VAT), shared between exporters, importers, and consumers.
• A 10% tax on all imports could generate $400 billion in annual revenue.

Conclusion

The market is optimistic about the future, driven by factors such as the reversal of sanctions on Nvidia, the recovery in CapEx, and the positive impact of the "Big Beautiful Bill" on earnings growth. While tariffs remain a concern, the market believes that the worst is behind us and that a reasonable resolution will be reached. President Trump's business-friendly approach and the potential for tariffs to serve as a revenue generator further contribute to this positive outlook.