2026 Midterm Elections: What’s at Stake for Markets

As the economic growth spread between Asia and the rest of the world widens, China’s reopening is unlikely to spur growth that spills over globally.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Along with my colleagues, bringing you a variety of perspectives, today I'll be talking about the outlook for global economic growth. It's Tuesday, April 4th at 10 a.m. in New York. How is the outlook evolving after one quarter of 2023? The key trends in our year ahead outlook remain, but they're changing. The spread between Asian growth and the rest of the world is actually a bit wider now. And within developed market economies, downgrades to the U.S. forecast largely on the back of banking sector developments and upgrades to the euro area, largely on the back of stronger incoming data, now have Europe growing faster than the U.S. in 2023. In China, the data continue to reinforce our bullish call for about 5.7% GDP growth this year, and if anything, there are risks to the upside, despite the official growth target from Beijing coming in at about 5%. Had it not been for the banking sector dominating the market narrative, I suspect that China reopening would still be the most important story. But China's recovery has always had a critical caveat to it. We've always said that the rebound would be much more domestically focused than in the past and more weighted towards services than industry in the past. We don't think you can apply historical betas, that is the spillover from Chinese growth to the rest of the world, the way you could in the past. I want to highlight a recent piece that quantifies how China's global spillovers are different this time. Two main points deserve attention. First, the industrial economy never contracted as much as the services economy in China did, and that means that the rebound will be much bigger in services than it could be in the industrial economy. And second, we do try to estimate those betas, as they're called for the spillover from China to the global economy, excluding China. And what we conclude is that the effect is smaller the more important the services economy in China is for growth. Put differently, the three percentage point acceleration from last year to this year will not carry the same punch for the rest of the world that a three percentage point acceleration would have done years ago. The modest upgrade we've made to the euro area growth is not as a result supported by the China reopening, but instead is coming from stronger incoming data that we think reflect lower energy prices and more sustained fiscal impetus. The modestly stronger outlook, though, doesn't change the fact that the distribution of likely outcomes over the next year, it's skewed to the downside. Seven months from now Europe will be starting the beginning of another winter and with it the risk of exhausting gas inventories, and with core inflation in the euro area not yet at its peak, stronger real growth is simply a reason for more hiking from the ECB. In contrast, we have nudged down our already soft forecast for the U.S. for 2023. Funding costs for banks are higher, the willingness to lend is almost surely lower than before, but that restriction in loan supply is coming at a time where we are already expecting material slowing in the U.S. economy and therefore falling demand for credit. So the net effect is negative, but banks willingness to lend matters a lot less if there are fewer borrowers around. So where does this all leave us? The EM versus DM theme we have been highlighting continues and if anything it's a bit stronger. The China reopening story remains solid and the U.S. is softening. Within DM the stronger growth within Europe compared to the U.S. is notable both for its own sake, but also because it will mean that the ECB hiking will look closer to the Fed's hiking than we had thought just three months ago. Thanks for listening. If you enjoy this show, please leave us a review on Apple Podcasts and share thoughts on the market with a friend or colleague today.

4 Apr 20233min

Recent increases in the Fed’s balance sheet may not have the same impact on money supply, growth and equities as in previous cycles.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, April 3rd at 11:30 a.m. in New York. So let's get after it. Over the past month, market participants have been focused on how the government will deal with the stress in the banking system and whether the economy can withstand this latest shock. After a rough couple of weeks, especially for regional banks, the major indices appear to be shrugging off these risks. Many are interpreting the sharp increase in bank reserves as another form of quantitative easing and are exhibiting the Pavlovian response that such programs are always good for equity prices. As we discussed in prior podcasts, we do not think that's the right interpretation of this latest increase in the Fed's balance sheet. In our view, all bank reserves are not created equal. True money supply as a function of reserves and the velocity of money which is difficult to measure in real time. As a comparison, inflation did not appear after the first wave of quantitative easing used during the great financial crisis because the velocity of money simultaneously collapsed. This was despite the fact that the percentage increase in the Fed's balance sheet dwarfed what we experienced during COVID. The primary difference was that the increase in reserves during the great financial crisis was simply filling holes left on bank balance sheets from the housing crisis. Therefore, the increase in reserves did not lead to a material increase in true money supply in the real economy. In contrast, during COVID, the increase in reserves are pushed directly into the economy via stimulus checks, PPP loans and other programs to keep the economy from shutting down. However, these fiscal programs were overdone and the result was money supply moved sharply higher because the velocity of money remained stable and even increased slightly. During this latest increase in Fed balance sheet reserves, the total liabilities in the US banking system have continued to fall. This suggests to us that the velocity of money is falling quite rapidly, more than offsetting the increase in bank reserves. In fact, these bank liabilities are falling at a rate of 7% year-over-year, the biggest decline in more than 60 years. Even during the Great Financial Crisis, money supply growth never went into negative territory. The kind of contraction we are witnessing today suggests this is not anything like the QE programs experienced during COVID or the 2009 to 2013 period. Secondarily, it also means that both economic and earnings growth are likely to remain under pressure until money supply growth reverses. This leads me to the second part of this podcast. Year to date, major U.S. stock indices have performed well, led by technology heavy NASDAQ. This is partially due to the snap back from such poor performance last year, led by the NASDAQ. But it's also the view that unlevered, high quality growth stocks are immune from the potential oncoming credit crunch. It's important to note that the rally to date in U.S. stocks has been very narrow, with just eight stocks accounting for 80% of the entire returns in the NASDAQ 100. Meanwhile, only ten stocks have accounted for 95% of the entire returns in the S&P 500, with all ten of those stocks being technology-related businesses. Such an erroneous performance is known as bad breadth, and it typically doesn't bode well for future prices. The counterargument is that technology already went through its own recession last year and it's taken its medicine now with respect to cost reductions and layoffs. Therefore, these stocks can continue to recover and carry the overall market, given their size. We would caution on such conclusions, given the increased risk of a credit crunch that suggests the risk of a broader economic recession is far from extinguished. Recessions are bad for technology companies, which are generally pro cyclical businesses. Instead, we continue to prefer more defensive sectors like consumer staples and health care.Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcast app. It helps more people to find the show.

3 Apr 20233min

Given recent signs of slowing in a previously strong economy, investors may want to look to history before wishing for weaker growth.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, Chief Cross-Assets Strategist for Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, I'll be talking about trends across the Global Investment landscape and how we put those ideas together. It's Friday, March 31st at 2 p.m. in London. Here at Morgan Stanley Research, we are cautious on global equities relative to high grade bonds. So what would change our mind? We think the bull case for markets is better than expected growth, even if that means higher interest rates. On the other hand, investors should be careful about wishing for weaker growth, even if that would mean easier policy. Central to our thinking is the observation that a sharp slowing of a previously strong economy has repeatedly been poor for stocks relative to high grade bonds. And we think signs of such an environment of a hot economy that's slowing abound. Inverted yield curves, falling earnings expectations, high inflation, tight labor markets, weak commodity prices and tightening bank lending standards are all consistent with a strong economy that's slowing and are all present to an unusual degree. Historically, the-more of these factors one has seen, the worst the forward looking environment for stocks versus bonds. In short, much of our caution is driven by concerns around the growth outlook and its deceleration. So if growth is better than we expect, we think that's a positive surprise. But wouldn't better growth mean higher interest rates, which were bad for markets last year? Shouldn't investors be wishing for weaker growth that would bring back lower rates and policy easing? First, we would view 2022 as something of an outlier, the first time in 150 years that both U.S. stocks and long-term bonds fell by more than 10%. Today, the starting point for valuations in both equities and fixed income is better, leaving more room to absorb the impact of higher rates. Second, the way that stocks and bonds are moving relative to each other is shifting and different from last year. Throughout 2022, stocks generally fell if yields rose, implying higher rates were a concern. But over the last 60 days, stocks have generally fallen with lower yields. That pattern is more consistent with growth being the dominant concern of equity markets. But wouldn't weaker growth help if it meant central banks start to cut interest rates? Here, we think the historical evidence is less supportive than appreciated. In 1989, 2001, 2007, and 2022, the Federal Reserve eased policy as growth weakened. All saw stocks underperform bonds, consistent with our current recommendations. In addition, the amount of easing already expected by markets matters. U.S. markets are already expecting the Fed to cut rates by about 1.7% over the next two years. Such large easing doesn't match times when relatively smaller levels of rate cuts did boost markets like in ‘95, ‘97, ‘99 or 2019. In short, we think the bull case through markets lies through growth that's better than our economists expect. Hoping for weaker growth and lower interest rates that might go along with it has a more volatile track record. Be careful what you wish for. Thanks for listening. Subscribe to Thoughts on the Market on Apple Podcasts, or wherever you listen, and leave us a review. We'd love to hear from you.

31 Mar 20233min

As regional banks contend with sector volatility, commercial real estate could face challenges in securing new loans and refinancing debt when it matures.----- Transcript -----Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about some of the challenges facing the commercial real estate markets. It's Thursday, March 30th at 11 a.m. in New York. Commercial real estate market, or CRE in short, is a hot topic, especially in the context of recent developments in the banking sector. As we have discussed on this podcast, even though banks were already tightening lending standards, given recent events their ability and willingness to make loans is diminished. Besides making loans, banks enable credit formation as buyers of senior tranches of securitizations. A regulatory response to recent events will likely decrease the ability of regional banks to be buyers of such tranches, if risk rates and liquidity capital ratio requirements are revised to reflect duration in addition to credit risk. It's against this backdrop that we think about the exposure of regional banks to CRE. Understanding the nature of CRE financing and getting some numbers is useful to put this issue in context. First, commercial real estate mortgage financing is different from, say, residential real estate mortgage financing in that they are generally non-amortizing mortgages with terms usually 5 or 10 years. That means at term there is a balloon payment due which needs to be refinanced into another 5 or 10 year term loan. Second, there is a heightened degree of imminence to the refinancing issue for CRE. $450 billion of CRE debt matures this year and needs to be refinanced. It doesn't really get easier in the next few years, with CRE debt maturing and needing to be refinanced of about $550 billion per year until 2027. In all, between 2023 and 2027, $2.5 trillion of CRE debt is set to mature, about 40% of which was originated by the banking sector. Third, retail banks' exposure to CRE lending is substantial and their share of lending volumes has been growing in recent years. 70% of the core CRE debt in the banking sector was originated by regional banks. These loans are distributed across major CRE sub-sectors and majority of these loans are under $10 million loans. That the share of the digital banks in CRE debt has ramped up meaningfully in the last few years is actually very notable. That means the growth in their CRE lending has come during a period of peaking valuations. Even in sub-sectors such as multifamily, where lending has predominantly come from other sources, such as the GSEs, banks play a critical role in that they are the buyers of senior tranches of agency commercial mortgage backed securities. As I said earlier, if banks' ability to buy such securities decreases because of new regulations, this indirectly impacts the prospects for refinancing maturing debt in the sector as well. So what is the bottom line? Imminent refinancing needs of commercial real estate are a risk and the current banking sector turmoil adds to this challenge. We believe CRE needs to reprice and alternatives to refinance debt are very much needed. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

30 Mar 20233min

Many investors are questioning if the online dating market has become saturated and, in turn, if there is still a growth runway for the industry.----- Transcript -----Welcome to Thoughts on the Market. I'm Lauren Schenk, Equity Analyst covering Small and Mid-Cap Internet stocks. Along with my colleagues bringing you a variety of perspectives, today I'll discuss the next leg of growth for the online dating industry. It's Wednesday, March 29th at noon in New York. Investors are understandably focused on turmoil in banking, but today we'll be taking a break from banks to cover a hot topic in any macro environment, online dating. Almost every investor call I get includes the question, "Is online dating just becoming saturated, mature or over-monetized?" Several data points have driven this market view. First, revenue growth at the top dating apps slowed in 2022 and provided more modest fiscal year 2023 guides and expected. Second, survey data suggests U.S. online dating adoption slowed over COVID. Third, app data implies U.S. monthly active users have been flat for five plus years, suggesting that monetization has driven all the growth and may slow from here. This data prompted us to dig deeper into the multiple growth drivers of online dating revenue growth to see if investor concerns are well founded. And we found that online dating is not just about users and user growth. Today, roughly 32% of the U.S. addressable single population uses online dating and 26% of that 32% pay for online dating either through a subscription or a la carte purchase. In fact, our analysis suggests there's still plenty of growth runway. There are effectively four key drivers of online dating growth between users and monetization, potential users, or total addressable market, online dating usage, payer penetration and revenue per payer. Most dating apps employ a "Freemium" model, meaning the service and platform are free to use, but the experience and success rate can be improved via a monthly subscription of bundled features or one-off a la carte purchases. To be sure, user growth has provided a solid boost to revenue growth over the last many years as mobile swipe apps expanded usage among young users. However, we see slowing U.S. single population growth and a slowing of user penetration from here. We estimate that user growth will likely contribute only 3% of industry revenue growth from 2022 to 2030, while the bulk of online dating revenue growth will increasingly come from monetization. With that said, compared to user growth, monetization growth is far more dependent on execution, which could make the industry growth inherently more volatile going forward, supporting our thesis that the leading apps' steep recent slowdown is not a function of oversaturation so much as mis-execution. Given all this, we believe the U.S. online dating industry will see durable, above consensus revenue growth medium to long term. We think the 2022 slowdown was due to mis-execution and monetization, with almost no payer growth and macro challenges, rather than saturation, as three of the four primary industry growth drivers, online dating usage, payer penetration and revenue per payer, are still on a growth path. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

29 Mar 20233min

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29 Mar 20232min

Amid uncertainty in the global banking sector, are European equities a safe haven for investors to weather the storm?----- Transcript -----Welcome to Thoughts on the Market. I'm Graham Secker, Head of Morgan Stanley's European Equity Strategy Team. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the implications on European equities from the increased uncertainty surrounding the global banking sector. It's Tuesday, March 28th at 3 p.m. in London. After the turbulence of mid-March, a degree of calm has descended over markets recently, which has lifted European equities back to within 3% of their prior high and pushed equity volatility down to more normal levels. In effect, we think investors are now in 'wait and see' mode as they try to assess the forthcoming consequences and investment implications of recent events within the global banking sector. Our recent discussions with investors suggests a potential lack of willingness to get too bearish at this time, with some still hopeful the markets can navigate a path of modestly weaker growth, with lower inflation and less hawkish central banks. For us, we view this outcome as a possibility rather than a probability and reflective of the fact that investors have been positively surprised by the general resilience of economies and equity markets to date. However, this viewpoint ignores the fact that something has changed in the overall macro environment. First, yield curves are starting to steepen from very inverted levels, a backdrop that has traditionally been negative for risk markets as it reflects lower interest rate expectations due to rising recession risk. And second, we now have clear evidence, we think, that tighter monetary policy is beginning to bite. Over the coming weeks, we may see anecdotal stories emerge of problems around credit availability, followed thereafter by weaker economic data and ultimately lower earnings estimates. We also suspect that more financial problems or accidents will emerge over the coming months as a result of the combination of higher interest rates and lower credit availability. These issues may not necessarily manifest themselves in the mainstream European banking sector this time, however asset markets will still be vulnerable if risks emerge from other areas such as U.S. banks, commercial real estate or other financial entities. As a result of this increased uncertainty, we have taken a more cautious view on European equities in the near-term and forecast the region's prior outperformance of U.S. stocks to pause for a while. Within the European market, we see a trickier outlook for banks, given crowded positioning and less upside risk to earnings estimates than previously thought. However, the area of greatest caution for us is cyclicals, with the group most exposed to rising recession risk and weaker equity markets, and we are particularly cautious on those sectors most sensitive to credit dynamics such as autos. On the more positive side, we continue to like longer duration sectors such as luxury goods and technology, and believe they will continue to act as safe havens while market uncertainty remains high. In addition, we think the telecom sector offers an attractive mix of low valuation, healthy earnings resilience and the potential for more corporate activity and increased policy support from regulators going forward. Thanks for listening. If you enjoy the show, please leave us a review on Apple Podcasts and share Thoughts on the Market with a friend or colleague today.

28 Mar 20233min

After the events of the past few weeks, earnings estimates look increasingly unrealistic and the bear market may finally be ready to appropriately factor-in elevated earning risks.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief U.S. Equity Strategist for Morgan Stanley. Along with my colleagues, bringing you a variety of perspectives, I'll be talking about the latest trends in the financial marketplace. It's Monday, March 27th at 11 a.m. in New York. So let's get after it. Back in October, when we turned tactically bullish, we wrote that markets often need the engraved invitation from a higher power to tell them what's really going on. For bond markets, that higher power is the Fed, and for stocks it's company earnings guidance. Our assumption at the time was that we were unlikely to get the negative messaging on earnings from companies necessary for the final bear market low. Instead, our view is that it would likely take another quarter for business conditions to deteriorate enough for companies to finally change their minds on the recovery that is still baked into consensus forecasts. Fast forward to today and we are seeing yet another quarter where estimates are being lowered to the same degree we have witnessed over the past two. In other words, it doesn't appear that the earnings picture is bottoming as many investors were starting to think last month. In fact, these downward revisions are progressing right in line with our earnings model, that suggests bottoms up estimates remain 15 to 20% too high. More specifically, consensus estimates still assume a strong recovery in profitability. This flies directly in the face of our negative operating leverage thesis that is playing out. Our contention that inflation increases operating leverage and operating leverage cuts both ways, is a concept that is still under appreciated. We think that helps to explain why we are so far below the consensus now on earnings. More importantly, it doesn't necessarily require an economic recession to play out, although that risk is more elevated too. This leads us to the main point of this week's podcast. With the events of the past few weeks, we think it's becoming more obvious that earnings estimates are unrealistic. As we have said, most bear markets end with some kind of an event that is just too significant to ignore any longer. We think recent banking stress and the effects they are likely to have on credit availability is a risk that the market must consider and price more appropriately. Three weeks ago, the bond market did a striking reversal that caught many market participants flat footed. In short, the bond market appeared to have decided that the recent bank failures were the beginning of the end for this cycle. More specifically, the yield curve bull steepened by 60 basis points in a matter of days. Importantly, it was the first time we can remember the bond market trading this far away from the Fed's dot-plot. It was dismissing the higher powers guidance. We think this is important because now in our view it's likely to be the stock market's turn to think for itself, too. To date, the bear market has been driven almost entirely by higher interest rates and the impact that it has had on valuations. More specifically, when the bear market started, the price earnings multiple was 21.5x versus today's 17.5x. Importantly, this multiple troughed at 15.5x in mid-October, the lows of this bear market to date. Well, that's a relatively attractive multiple and one of the reasons we turned tactically bullish at the time, we think it never reflected the growth concerns that should now dominate the market and investor sentiment. Our evidence for that claim is based on the fact that the equity risk premium is actually lower by 110 basis points than it was at the start of this bear market. In other words, the portion of the price earnings multiple related to growth expectations is far from flashing concern. Based on our analysis, the equity risk premium is approximately 150 to 200 basis points too low, which translates into stock prices that are 15 to 20% lower at the index level. The good news is that the average stock is getting cheaper as small cap stocks have underperformed, along with banks and other areas most affected by recent events. Areas that appear most vulnerable to the further correction we expect include technology, consumer goods and services and industrials. Remain patient until the market has appropriately discounted the earnings risk that we think has moved center stage. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us on the Apple Podcasts app. It helps more people to find the show.

27 Mar 20233min