The Surprising Link Between Auto Insurance and Inflation

After an up-and-down 2024 for the U.S. airlines industry, our Freight Transportation & Airlines Analyst Ravi Shanker explains why he is bullish about the sector’s trajectory over the next year.----- Transcript -----Welcome to Thoughts on the Market. I’m Ravi Shanker, Morgan Stanley’s Freight Transportation and Airlines analyst. Today I’ll discuss why we remain bullish on the US Airlines industry for 2025.It’s Friday, December 13, at 10am in New York.The Airline industry entered 2024 with good momentum, lost it during the middle of the year with some concerns around the economy and capacity, but then turned it around in the fall to finish the year with the strongest run that the Airlines have had since the pandemic. The coast looks clear for 2025, and we remain bullish on the US Airlines for next year.While many airline stocks enter 2025 close to post-pandemic if not all-time highs, valuations are still attractive enough across the space to see upside across the industry. The big question right now is: will the focus on premium services continue to pay off, or will there be a resurgence in domestic travel that alters the market dynamics? We think the answer is both.Premium beneficiaries will continue to shine in 2025. We believe the premiumization trend in the industry is structural and will continue next year. Legacy carriers have successfully capitalized on this trend, enhancing their revenue streams significantly through upgraded service offerings such as premium seating and lounge access. This move isn't just about luxury—it's a calculated play to boost ancillary revenues, which are becoming a more critical component of financial stability in the airline industry. The premium leaders are building annuity-like business models – think razorblades, printers or smartphones – where the sale of a popular gateway product is followed by the bulk of the profitability coming from ancillary revenues generated in the following years, as loyalty and adjacent revenues contribute a steady stream of earnings and free cash flow to the airlines.On the flip side, the conversation around better margins on domestic travel is gaining momentum as well. 2024 saw a big shift where several domestic carriers made significant changes and even in some cases fundamentally overhauled their business models to fly less, fly differently, bundle fares, and move upmarket. This change brought significant disruption in 2024 but could be set to pay dividends in 2025 and reignite investor interest in these domestic names. This shift toward domestic travel could potentially redistribute market share and redefine competitive dynamics within the entire Airlines industry.To sum up, the setup for 2025 looks very good. But volatility could remain high due to external factors. The biggest risk into 2025 -- especially the second half of [20]25 -- continues to be the macro backdrop. More specifically, our economists' view of a sharply slowing GDP growth and services spending environment in the second half of [20]25 and into [20]26. While we take comfort from the resilience of travel spending so far, we know that things could change quickly. We will continue to keep you updated throughout the next year.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.

13 Dec 20243min

Our U.S. Retail Analyst Simeon Gutman discusses shoppers’ embrace of a private labels super cycle and how changing consumer behavior could fundamentally change grocery and discount retailers.----- Transcript -----Welcome to Thoughts on the Market. I’m Simeon Gutman, Morgan Stanley’s US Hardlines, Broadlines and Food Retail Analyst. Today, we’ll talk about a fascinating shift in the retail landscape: the rise of private label products and what this could mean for the future of grocery and discount retailers.It’s Thursday, December 12, at 10am in New York.Think about your recent trip to your favorite grocery store. As you reached towards the shelves for your preferred brand of mayonnaise, frozen pizza, or bread, you may have noticed that more and more shelves are stocked with store-brand products. Products that not only match the quality of national brands but often exceed it. This isn't just a minor trend. We estimate private label sales growth will accelerate by 40 per cent to reach $462 billion by 2030. An expansion that will redefine market dynamics significantly.In essence, we think the private label grocery market is on the cusp of a super cycle. This super cycle is a by-product of COVID-era shifts in the way that customers shop and how retailers invest into this trend. At the same time, private label groceries reflect the rise of mega platforms, which are taking ever greater consumer wallet share and are innovating more than ever before.When you look at macro drivers, US consumers have been navigating a difficult post-COVID environment. While inflation is currently moderating, overall food prices remain 30-34 per cent above their 2018 levels. Most consumers are spending more on food at home vs. food away from home, which is a positive catalyst for private label acceleration. Further, consumers are willing to substitute lower priced goods, especially groceries, and these categories present a growth opportunity for private labels. This is the tipping point that we’re talking about. High costs, recent innovation, and innovation like we’ve never seen before – with the rise of these mega platforms, this industry looks like it’s ripe for disruption.The market views private label penetration as a slow, gradual, and ongoing event. But our work challenges this premise. We believe the rate of change in private label growth will accelerate substantially over the next few years. We think private label products will grow at double the rate of the overall grocery market bringing private label market penetration from about 19 per cent in 2023 to about 23 per cent by 2030.This growth is not just about stocking up the shelves. It's about changing consumer perceptions and behavior. Consumers increasingly see private labels as viable alternatives to national brands because they often offer better value and innovation. From healthier ingredients, like no more seed oils, to organic products that you had no idea they can produce, to premium products like frozen lobster ravioli to mushroom and truffle pizza. There are a couple of retailers in the US that are all private label and they are among the fastest growing ones, taking away the stigma of what private label products could mean.So what does this mean for the broader retail and consumer packaged good industries? For grocers and discounters with already strong private label offerings, this shift presents a significant opportunity for growth. It’s also accretive to margins. On the flip side, traditional food companies might face increased competition. These companies have historically relied on brand superiority. But as private label gains market share – particularly in food categories – these national brands could see a hit to their gross profit growth, which could fall from 3 per cent historically to about 2 per cent. And while household and personal care categories have seen some resilience against private label encroachment, the ongoing economic pressures and shifts in consumer spending habits could challenge the status quo.Looking ahead, the rise of private labels could lead to a reevaluation of what brands mean to consumers. As private label becomes synonymous with quality and value, we may see a new era in which traditional brand loyalty becomes less significant compared to product quality and cost-effectiveness.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

12 Dec 20244min

Our Head of Corporate Credit Research Andrew Sheets explains why corporate credit may struggle in 2025, including the risks of aggressive policy shifts in the U.S. along with political and structural challenges in Europe and Asia.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Today I’ll be discussing realistic scenarios where things are worse than we expect. Next week, I’ll cover what could be better.It's Wednesday, December 11th at 2pm in London.Morgan Stanley strategists and economists recently completed our forecasting process for the year ahead, and regular listeners will have now heard our expectations across a wide range of economies and markets. But I’d stress that these forecasts are a central case. The world is uncertain, with a probability distribution around all forecasts. So in the case of credit, what could go wrong?As a quick reminder, our baseline for credit is reasonably constructive. We think that low credit spreads can remain low, especially in the first half of next year – as policy change is slow to come through, economic data holds up, the Fed and European Central Bank ease rates more than expected, and still-high yields on corporate bonds attract buyers.So how does all of that go wrong? Well, there are a few specific, realistic factors that could lead us to something worse, i.e., our bear case.Let me start with US policy. Morgan Stanley’s Public Policy team’s view is that the incoming US administration will see fast announcement, but slow implementation on key issues like tariffs, fiscal policy, and immigration; and that that slower implementation of any of these policies will mean that change comes less quickly to the economy. But that change could happen faster, which would mean weaker growth and higher prices – if, for example, tariffs were to hit earlier and or in larger size. In the case of immigration, we are actually still forecasting positive net immigration over the next several years. But a larger change in policy would raise the odds of a more severe labor shortage.Even outside any specific change from the new US administration, there’s also a risk that the US economy simply runs out of gas. The recovery since COVID has been extraordinary – one of the fastest on record, especially in the labor market. The risk is that companies have now done all the hiring they need to do, meaning a slower job market going forward. Even in their base-case, Morgan Stanley’s economists see job market growth slowing, adding just 28,000 jobs/month in 2026. And to give you a sense of how low that number is, the average over the last 12 months was 190,000. And so, the bear case is that the labor market slows even more, more quickly, raising the risk of recession and dramatically lowering bond yields, both of which would reduce investor demand for corporate bonds.At the other extreme, credit could be challenged if conditions are too hot. Because current levels of corporate aggression are still quite low, we think they could rise in 2025 without creating a major problem. But if those corporate animal spirits arrive more rapidly, it could be a negative.Outside the US, we think the growth in Europe holds up as the European Central Bank cuts rates and Europeans end up saving at a slightly less elevated rate, and that that can keep growth near this year’s levels, around 1 per cent. But you don’t need me to tell you that Europe is riddled with challenges: from the political in France, to major structural questions around Germany’s economy. Meanwhile, China, the world’s second largest economy, continues to struggle with too little inflation. We think that growth in China muddles through, but a larger trade escalation could drive downside risk; one reason we prefer ex-China credit within Asia.Of course, maybe the most obvious risk to Credit is simply valuation. Credit spreads in the US are near 20-year lows, while the US Equity Price-to-Earnings Multiples for the equity market is near 20-year highs. In our view, valuation is a much better guide to returns over the next six years, rather than say the next six months. And that’s one reason we are currently looking through this. But those valuations do leave a lot less margin for error.Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

11 Dec 20244min

Our CIO and Chief U.S. Equity Strategist says that while equity market activity suggests a measured level of optimism about 2025, the questions around tariffs and inflation have tempered expectations.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Today on the podcast I will be discussing how equity markets have traded post the election and how this fits with our thinking.It's Tuesday, Dec 10 at 11:30am in New York. So let’s get after it. Post the election, our focus has been on the potential for a rebound in animal spirits like we observed following the 2016 election. During that historical period, we saw a broad-based surge in corporate, consumer and investor confidence as the sentiment analysis we’ve done shows. So far over the last month, sentiment data has reflected a more measured level of optimism led by small business confidence while services related business outlooks were actually tempered somewhat. Our assessment of the details of these surveys and commentary from corporates suggests that consumers and companies are feeling more optimistic heading into 2025. But the uncertainty around tariffs and the still elevated price levels are likely holding back the type of exuberance we saw post the 2016 election.In 2016, we were also coming out of an industrial/manufacturing downturn, which was then aided by aggressive China stimulus. Due to that downturn, interest rates were much lower globally and sovereign deficits and balance sheets were in much better shape to absorb reflationary type policies like tax cuts and deregulation. As a result, the equity market almost immediately embraced an expansionary fiscal agenda that was interpreted as being pro-growth. Today, that policy agenda appears to be less front-footed in this regard, perhaps due to some of these constraints.Nevertheless, these dynamics are still supportive of our preference for more cyclical sectors. However, given the stickiness of interest rates, it also makes sense to remain up the quality curve within cyclicals and constructively focused on sectors with clearer de-regulation tailwinds. As a result, Financials remain our preferred over-weight, followed by Software, Utilities and Industrials. On the topic of interest rates, we find it interesting that the correlation of S&P 500 returns versus the change in bond yields remains in positive territory. In other words, good macro data is good for equity returns. Furthermore, there is a clear bifurcation in terms of this correlation between cyclical and defensive sectors. Cyclical sectors are showing a positive correlation to rates, with one exception of Materials, while defensive cohorts are showing a negative correlation except for Utilities.In our view, this is a sign that cyclicals and the market overall still like stronger macro data even if it comes amid higher yields. Having said that, there is a point where this dynamic would likely reverse if interest rates rise due to less dovish monetary policy or an increase in the term premium. In April of this year, that level was 4.5 per cent on the 10-year Treasury yield when growth and inflation drove the term premium higher. For now, rates remain contained well below that threshold and the term premium is close to zero.On the flipside, a material decline in yields due to weakness in the macro growth data would also hurt cyclical stocks disproportionately leaving 4.00-4.50 per cent on the 10-year treasury yield as the sweet spot for equity valuations. Yields below that range can certainly be tolerated by equities assuming the driver is Fed rate cuts in the absence of a material slowdown in growth. Yields above that range can also be tolerated if the pace of the rate rise is measured, and the driver is stronger nominal growth versus a more hawkish Fed or a rising inflation. Finally, as we approach year-end, December seasonality is likely to be a focal point for investors. Over the past 45 years, the S&P 500's median return over the month of December is 1.5 per cent and the index has a positive return 73 per cent of the time. Notably, almost all of that performance comes in the second half of the month. These trends are directionally consistent for the Russell 2000 small cap index except that it’s even stronger at about 2.5 per cent. This performance could be further enhanced by the larger post-election spike in small business confidence mentioned earlier. Thanks for listening. If you enjoy the podcast, leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

10 Dec 20244min

Morgan Stanley Research and Investment Management analysts discuss how AI can keep costs down for the industry and give patients a more personalized experience.----- Transcript -----Craig Hettenbach: Welcome to Thoughts on the Market. I'm Craig Hettenbach, Morgan Stanley's U.S. Healthcare Technology and Providers analyst. Today I'm here with my colleague Steve Rodgers from Morgan Stanley Capital Partners to talk about a growing and underappreciated segment of healthcare – the behind-the-scenes technology that is transforming the sector to keep costs down and improve patient care. It's Monday, December 9th at 9am in New York. In 2022, the size of the U.S. healthcare sector was [$]4.5 trillion and is projected to grow to [$]6.8 trillion in 2030, accounting for 20 per cent of overall U.S. GDP. We know that the U.S. population is aging, and we expect to see 71 million U.S. citizens age 65 and over by 2030. That puts ever growing demand on health care systems. So, Steve, you and your colleagues in investment management have been looking lately at key macro trends driving change in the healthcare sector.What are these drivers and how do they work together?Steve Rodgers: When we look at the health care landscape, we really think about four major macro trends. The first is cost containment. And this is just this simple idea that costs are escalating at an unsustainable rate. The second is demographics; we also know that things like obesity is increasing the prevalence of chronic conditions and increasing the overall utilization of the healthcare system. And so, we're looking at ways to invest behind that macro trend. We've also identified something called consumerism. And consumerism stems from the reality that today, patients are taking more of a financial responsibility in their healthcare. And with that comes more decision making. So, the old days – where the patient received healthcare services, but the payer paid, and there was really no link between the two – have moved on.We call it the retailization of health care. Waiting in the office for your appointment for 30 minutes used to be a standard. Today, that's unacceptable because these patients will move to the next provider who's providing them a better retail experience. The final macro driver we call enabling technology. Health care has lagged many other industry segments in the use of technology as a source of efficiency. I like to give the example of chemotherapy treatments, right? Technology would produce a new chemotherapy treatment, and while that's great for patient care and outcomes. It actually could lead to increased costs to the system because it was an added route that people would go down.Now there's technology which allows a provider to say, “Start with this one because of your genetic makeup.” And not only will you have a better outcome more quickly, but it will be less cost to the system. We're also seeing that kind of efficiency happen on the administrative side of healthcare as well. The way we think about these macro trends and how they work together is really thinking about demand versus supply. So, we see demand drivers coming from demographics and consumerism. We see supply drivers coming from cost containment and really enabling technology has impacts on both demand and supply.Craig Hettenbach: Let's focus more specifically on just how digitization and cost containment dovetail. When people talk about the impact of AI and ML on healthcare, typically the focus is on things like big pharma, medical equipment, and hospitals. But there's actually a whole intricate infrastructure that helps healthcare run.Can you talk about these behind-the-scenes businesses and why investment managers are so interested in the opportunities they offer? Steve Rodgers: Yeah, it's really important. We focus on investments that are using technology to enable their businesses. And so that's automation. That's machine learning. It's AI. But all of these technologies are being used behind the scenes to make care more efficient and they're a better use of our dollars. For example the personalization of communications from health plans. So historically a health plan would send the same communication, you know, to – the same form to every patient.Well now, technology allows the health plan, at the point of generating that communication, to know that information about the person that's getting it. And having the ability to personalize it in ways that might help them be more likely to interact with it. Maybe they're trying to get them to do something about their health. Well, they can take an administrative communication, you know, called an explanation of benefit, which really just explains how much you owe versus how much the health plan owes. And you can also add important information to that that might help you utilize your benefits better.Another example that we see is on the hospital side. As people I think have heard, hospitals have been very inefficient, right? They pay bills the wrong bills, they're duplicative invoices, and there haven't been really good ways to figure that out. Well, we now have technology that can identify those duplicative invoices, that can actually identify that there are multiple contracts that they have with a vendor and direct them to use the cheapest one.Last one that I would highlight is around the procurement of pharmaceuticals. So, again, if you imagine a hospital system that has 50 different hospitals and one person at each hospital might be buying the pharmaceuticals that fit to the needs they have in that facility. Well, now there's technology that's really helping consolidate those purchases, get the benefits of scale. Also tracking what is a very dynamic pricing market and figuring out today this channels is less costly than that one, so buy it from here; tomorrow it might be different.We're seeing behind-the-scenes uses of technology in all of those types of areas, which are leading to efficiencies. Craig Hettenbach: That's really interesting and I agree. Sometimes investors can overlook healthcare infrastructure as an area offering a lot of hidden growth. Let's take a subsector like Revenue Cycle Management or RCM. What is it exactly and what opportunities does it offer when it comes to technology and cost containment?Steve Rodgers: What it is, it really is the whole process from start to finish of a healthcare episode. So, starting with something as simple as eligibility, or is this patient eligible for this procedure?Then once that procedure happens, it has to be documented and coded and billed. And then once that bill goes out that needs to be collected and paid on. So, this whole process is really how healthcare works and it's one of the most important business processes for healthcare companies .And what we've seen with revenue cycle is it's been a very, historically, a very manual process that involved a lot of human effort. So early on, some of the most basic functions of revenue cycle were automated. So, the example I can give there would be the front-end entry of a claim.So that used to be sent over by fax and a person would have to look at that and type it into a computer and start the processing that way. Well that, for a long time, that's now been automated with either what's called OCR, which is a scanning technology. But even, you know, now, a lot of that's coming in digitally. But a lot of the rest of the process is still manual. And the reason is because the tasks are so complex. So, to resolve a claim, you often need to pull data from multiple sources. There'd be some subjective determinations about what's allowed or not allowed.You would then need to apply [it] against a multiple complex rules and benefits. And sometimes the sheer dollars involved would make it too risky to just pay that claim without someone actually looking at it. Really we're entering an automation cycle where some of these new technologies are making it possible to reliably automate these more complex functions.And so it's a combination of machine learning and AI but it's really driving efficiencies that are really exciting from an investment perspective to us right now.Craig Hettenbach: Got it. In addition to revenue cycle management, are there any other subsectors that look interesting to you right now?Steve Rodgers: We also, we call it cost cycle management. This is the idea of applying the same principles that we're seeing in revenue cycle to the purchasing of providers. So that can be supply costs, inventory management. Another area that we think is interesting is self insured employer outsourcing. One of the main frustrations that we hear time and time again from self insured employers is that their employees are not utilizing the benefits that they have. With technology, companies that are finding ways to get broader and better adoption; then in turn allowing these employers to see better utilization, which is going to lead to a healthier workforce and hopefully do so also, with some cost containment.So Craig, it's clear that there's an overlap between what we look at from the investment management side and what you and your colleagues focus on in research. How do you think about analyzing how AI and machine learning are impacting healthcare?Craig Hettenbach: Yeah, so for research across the department, we came up with a framework to look at and that's the NEXT framework. So number one, new business opportunities to evaluate. Number two, efficiencies. Number three, external productivity. And number four, content creation. So those are four things to help kind of frame what the opportunity set looks like, when leveraging AI and technology.Steve Rodgers: And how does this framework apply to your space, healthcare services and technology specifically?Craig Hettenbach: The second point of that next framework, the E for efficiencies, is something that we're already starting to see the tangible benefits. And so, just to give you some context here, the CEO of a leading hospital, at a conference recently said that 25 to 30 per cent of overall healthcare costs are tied to administrative.So there is a lot of low hanging fruit there. There's other areas within whether you think about things like prior authorizations that are still done manually, either via fax, phone, email. Those are things that some health plans and technology partners are looking to automate. So, I think the efficiencies – we’re still early on, but you're starting to see at least the business case in terms of investments there.And then there's the longer term look on the clinical side. And I think the understanding there is that's going to take longer. An executive at a recent industry conference I was at, I thought he said it best when he said, ‘You know, AI is going to save time before it saves lives.’ Steve Rodgers: How is this technology changing how physicians or providers do their jobs?Craig Hettenbach: When we look at what's happened with physicians and nurses and still not too far removed from COVID and just burnout, it's palpable. And I think it's something that technology can certainly be used as an enhancer.So ambient listening is a new technology. When we think about electronic health records; yes, it's great to get that information into that record, but it's also timely and consuming. And so, I think things like that – that can listen to and populate notes – is going to be a real time saver for both doctors and patients.And on the patient side as well, when we think about just our experience, right? Healthcare just has a long ways to go in terms of response time. And that's something that I think more automation and technology, whether it's things like scheduling or check-ins and things like that, I think ultimately you'll see more technology deployed.Okay, Steve, are there any other potentially overlooked near term or longer-term pockets of opportunity within health care that you think investors should focus on?Steve Rodgers: Yeah, I think a general rule for investors or, you know, a heuristic that they should think about is, really trying to invest behind the things that are providing – really trying to stay on the right side of healthcare. And so, when we look at things like cost containment, you know, we see companies out there where they might be benefiting from inefficiency in the system. Those are things that I'd stay away from. I'd focus on companies that are providing better quality care at a lower cost and staying on the right side of healthcare. Because I do believe that a lot of these investments – the AI, the technology – are going to drive efficiency and really eradicate some of these business models that are really taking advantage of the inefficiencies in the healthcare system.Craig Hettenbach: Great, Steve, well that's very helpful and thanks for taking the time to talk today.Steve Rodgers: Great speaking with you, Craig.Craig Hettenbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleagues today.

9 Dec 202412min

Morgan Stanley Research analysts see a strong start following Black Friday but question whether the short shopping season will hurt retailers.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's U.S. Thematic and Equity Strategist.Simeon Gutman: I'm Simeon Gutman, U.S. Hardlines, Broadlines, and Food Retail analyst.Alex Straton: And I'm Alex Straton, North America Softlines, Retail, and Brands analyst.Michelle Weaver: Thanksgiving and Black Friday are behind us; and now that the holiday shopping season is in full swing, we have some interesting new data we wanted to dig into. We also recently concluded Morgan Stanley's Global Consumer and Retail Conference in New York, and we'll share some key takeaways from that.It's Friday, December 6th at 10am in New York.I was recently on the show to talk about our holiday shopping outlook and survey takeaways, and noted that overall, we're expecting stronger spending this holiday season relative to last year. Inflation's cooled, and U.S. consumers are more positive on spending this season versus the past two holiday seasons. Now that we've got Black Friday in the rearview mirror, Simeon, within your space, how's holiday season tracking so far?Simeon Gutman: Better. And the three key metrics – traffic, physical store sales, digital sales – all seem to be tracking better. The question is the magnitude and the length of ahead that the entire industry is – and what does that give us through the rest of the season? As we all know, the holiday season, shopping season is shorter; with the later fall of Thanksgiving, we're losing a weekend. The tone at our conference affirmed all of this, all the data points we heard were pretty upbeat. And it seems like the weather couldn't have broken at a better time, which is different from the October lead up to holiday.So, it seems like we're off to a pretty healthy start. I think there's some questions of what do we make up in the last three weeks in this final push. Some companies at our conference sounded good on that. Some were a little bit, call it cautiously optimistic about the rest of the season.Michelle Weaver: And what are you expecting for the rest of the holiday season?Simeon Gutman: In theory, and as we do our models what the good start typically portends a pretty good finish. There will be like a frenetic, frantic rush till the end. And because we lose that last weekend, you know, we might just lose some days. That's what history has told us. And those couple of days, it could end up being a couple of points or a couple hundred points of growth. That's understandable. I think the market knows that. And if that were to happen, as long as the underlying tone of business is healthy, I think it's pretty excusable because it's either made up in the subsequent months, and it'll especially be made up in the following year.Michelle Weaver: Great. And then Alex, in your space with Black Friday now behind us, were there any surprises?Alex Straton: The headline on Black Friday out of the apparel and footwear space was very positive. That's the message everyone should hear. I think I'll break down how we thought about – and what we observed – into two buckets. One being what we saw on demand, and the other being what we saw on promotional or discounting activity.Now, starting with demand, I think context is really important here, and we had a pretty lackluster September and October trend line in the space. To us, this was a function of adverse weather; it was much hotter than usual, really deterring apparel spending. We also had high hurricane activity, which deterred overall discretionary spending. And then also we had the election overhang upon consumers, which can, you know, deter spending as well.So as a result, we had fall apparel spending not necessarily as robust as many retailers would have liked. We've seen that in third quarter earnings reports. And we viewed Black Friday as, almost this very powerful potential catalyst for pent up demand. It was very weather dependent, though, and Simeon mentioned this briefly. We got a cold front across the country, and I think that created this important catalyst to kick off the holiday season. So, demand was strong. Just to put some numbers around it. Our line counts were up 30 per cent year-over-year. That's a data set that typically grows mid-single digits. So, speaks to, you know, outstanding demand. It doesn't capture conversion, so it's not perfect, but it gives you a sense for our confidence and how strong it was.The second piece that I wanted to cover is just promotions. And what we saw there was consistent activity year-over-year. That was a positive surprise for me. We were braced for discounting to be higher across the group because we exited both the second quarter and out of the early third quarter reporters with some excess inventory. So, we thought they might look to clear it.We had seen a recent uptick in promotional activity in October across the group. And then also, we're facing down a pretty competitive fourth quarter set up because of a number of the dynamics that Simeon mentioned. So, the fact that we didn't see retailers, kind of, push the panic button on discounting and promotions to drive that strong sales result, I think further underscores how strong it was; and also tells you retailers are willing to wait later for the consumer, similar to how they behaved last year.Michelle Weaver: In your outlook for holiday shopping this year, you cautioned about some potential headwinds. What were they and have they been playing out as you expected?Alex Straton: Yeah. So, since the start of the year, there's been a number of dynamics that we're going to weigh on the fourth quarter, no matter what. The first is that it's companies in my coverage most difficult year-over-year comparison quarter from both the sales and a profitability perspective. The second is that we have a compressed holiday shopping period, five fewer days, one less weekend; that’s very impactful for these retailers. And the last thing is that most retailers are lapping an extra week last year. They have a 53rd week calendar dynamic that reverses out this week. So, think about it as one last less week of sales opportunity.And so, I could have sat here in January and told you all of that. What we've learned since is that these retailers are now also facing incremental freight headwinds in the back half. Some of which are just repercussions from the Red Sea dynamic. And then second, this inventory build that I mentioned that started to show up in the second quarter and some of these earlier third quarter reporters. So, all of those headwinds, I'm putting them on the table.I think the good news is that the market seems to now mostly appreciate those. There's not really high bars as we think about fourth quarter results expectations or even sentiment more broadly. So, while it is a very challenging set up, I feel like it's mostly appreciated.Michelle Weaver: Great. And final question for both of you. What are some of your key takeaways from the fireside chats you hosted at the conference that just closed?Simeon Gutman: A few thoughts. First on the tone of holiday, I'll reiterate again: companies that are most exposed to holiday, in my coverage – ones that have weather exposure, ones that have seasonal exposure, ones that have large Black Friday promotions and into Cyber Monday – sounded good. There was a sense of relief that we're making up sales, especially on cold weather categories, and there's momentum that's being carried into the rest of the year.Second, in our chats with some of the largest companies, a discussion around how starting from a retail point of view and leveraging into Omnichannel has actually been beneficial, because now as these companies gain scale and leverage, the economies of scale in Omnichannel are actually more beneficial for profits than they thought; and in some cases that's just getting started. So, an interesting dichotomy, or almost an irony for the way that these businesses were positioned about 10 to 15 years ago.Third inventories – building; companies acknowledge that, but generally feel good. That reflected underlying optimism on sales trends and buying good inventory they think the customer will respond to. And then lastly, on housing; acknowledgment that the backdrop and the rebuild will be slow and steady, but at the same time that the industry is bottoming.Alex Straton: Yeah, on my end, I would underscore what Simeon said on demand in the holiday. Clearly a strong start in terms of the weather finally turning around this big initial event with Black Friday.Secondly, on inventory we're asking our companies the same question is – how do they feel about this build that we're seeing? And they attributed to a little bit of a pull forward of receipts in advance of holiday. Some also pulling forward even further than normal to offset some of the freight expense, or they were worried about some degree of freight disruption that could have impacted the receipts. So they have explanations for why that's the case, but we're monitoring it nonetheless.And then lastly, the one magic dynamic we didn't mention yet is tariff, of course, and what the outlooks are there. I would say most companies in my space feel that they have a number of levers that they can pull to offset any potential incremental tariff next year. But the reality there is that apparel is a deflationary category. There's no pricing power. So I'll be really interested to see how this plays out next year.Michelle Weaver: Simeon and Alex, thank you for taking the time to talk. And to our listeners, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.

6 Dec 20249min

Our Europe MedTech Analyst digs into the transformational impact of AI-driven diagnostic imaging on healthcare systems.----- Transcript -----Welcome to Thoughts on the Market, I’m Robert Davies, Morgan Stanley’s Head of the Europe MedTech research team. Today I want to take you behind the scenes to show you how AI is revolutionizing our approach to medical diagnostics via Smart Imaging.It’s Thursday, December 5, at 10 AM in Boston.When was the last time you needed to get an X-Ray, a CT scan, or an ultrasound? Depending on where you live, your wait time could be as long as a month. Medical diagnostics through imaging is facing enormous challenges right now. Population growth, rising longevity, and intensifying chronic disease burdens are driving ever increasing volumes of medical scans. In the U.S. alone, CT scan volumes have quadrupled since 1995. So, what is the impact of this? Imagine a radiologist interpreting a CT or MRI image every 3-4 seconds during an eight-hour workday. This is the current pace needed to meet the soaring demand.At the same time, the U.S. population is getting older and a growing number of people are signing up for Medicare. Healthcare costs are continually rising, total U.S. healthcare spend is now hitting $4.5 trillion. That's nearly 20% of U.S. GDP. On top of that, patients need fast, accurate diagnosis. But long wait times often mean that patients don’t get the diagnostic done in time or sometimes not at all. All of this indicates that more and more stress is being placed on hospital systems each year in terms of diagnostic imaging.Smart Imaging uses AI tools to improve imaging processing and workflows to enhance traditional image gathering, processing, and analysis. It sits at the intersection of Longevity and Tech Diffusion, two of Morgan Stanley Research’s big themes for 2024. And it can help solve these acute demand challenges. In fact, AI is already transforming the $45 billion Diagnostic Imaging market.AI-driven Smart Imaging integrates into the diagnostic imaging workflow at multiple stages—from preparation and planning, all the way to image processing and interpretation. The primary benefits of using AI are twofold. Firstly, it enhances image quality, which ensures more accurate diagnoses. And secondly it improves the speed, efficiency, and overall comfort of the patient journey. At the same time, AI effectively acts as a second set of eyes for the radiologist, often surpassing human accuracy in pattern recognition. That's crucial in reducing diagnostic errors—a problem costing the U.S. healthcare system around $100 billion annually at the moment.In addition to minimizing misdiagnosis, AI is not only capable of identifying the primary disease, but also registering any potential secondary diseases. Otherwise, this isn’t normally a priority for the radiologist who is only able to spend 3-4 seconds looking at any individual image. But it’s a potentially life-saving benefit for using Smart Imaging applications.So how does AI fit into the clinical setting? There are multiple stages to the Diagnostic Imaging workflow and AI can play a role across the entire value chain from preparing a patient’s scan, to processing the images, and finally, aiding in the diagnosis, reporting, and treatment planning.Radiology is currently dominating the FDA list of AI/Machine Learning-Enabled Medical Devices. And when we look at the broader economic implications, it's clear Smart Imaging represents a pivotal development in healthcare technology that has broad implications for healthcare costs, quality of care, and better healthcare outcomes.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

5 Dec 20243min

Our Global Head of Fixed Income and Thematic Research explains why President-elect Trump’s proposed tariff plans may look different than the policies that are ultimately put in place.----- Transcript -----Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income and Thematic Research. Today on the podcast I'll be talking about what investors need to know about tariffs.It’s Wednesday, Dec 4, at 2 pm in London.There’s still over a month before Trump takes office again. But in the meantime he’s started sending messages about his policy plans. Most notably, for investors, he’s started talking about his ideas for tariffs. He’s floated the idea of tariffs on all imports from China, Mexico, and Canada. He’s talked about tariffs on all the BRICs countries unless they publicly dismiss the idea of pursuing an alternative reserve currency to the US dollar. In short, he’s talking about tariffs a lot.While we certainly don’t dismiss Trump’s sincerity in suggesting these tariffs, nor the ability for a President to execute on tariffs like these – well, mostly anyway – it’s important for investors to know that the ultimate policies enacted to address the concerns driving the tariff threats could look quite different than what a literal interpretation of Trump’s words might suggest. After all, there are plenty of examples of policies enacted on Trump’s watch that address his concerns that were not implemented exactly as he initially suggested.The Tax Cuts and Jobs act is a good example, where Trump advocated for a 15 percent corporate tax rate but signed a bill with a 21 percent tax rate. Another is the exceptions process for the first round of China tariffs, where some companies got exceptions based on modest onshoring concessions. These examples speak to the idea that procedural, political, and economic considerations can shape policy in a way that’s different from what’s initially proposed.This is why our base case for the US policy path in 2025 includes higher tariffs announced shortly after Trump takes office; but with a focus on China and some exports from Europe; and implementation of those tariffs would ramp up over time, as has been suggested by key policy advisors. There's broad political consensus on a stronger tariff approach to China, and there’s already executive authority to take that approach. Something similar can be said about Europe, but with a focus more on certain products than across imports broadly. However, we see scope for Mexico to avoid incremental tariffs through negotiation. And a global tariff via executive order risks getting held up in court, and we’re skeptical even a Republican-controlled Congress would authorize this approach.Of course we could be wrong. For example it's possible the incoming administration might be less concerned about the economic challenges posed by a rapid escalation of tariffs. So if they start quicker and are more severe than we anticipate, then our 2025 economic projections are probably too rosy, as are our expectations for equities and credit to outperform over the next 12 months. The US dollar and US Treasuries might be the outperformer in that scenario.So stick with us, we’ll be paying attention and trying to tease out the policy path signal from the media noise from the new administration.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or colleague today.

4 Dec 20243min