US Elections: Weighing the Options

While investors may now better understand President Trump’s trade strategy, the economic consequences of tariffs remain unclear. Our Global Head of Fixed Income Research and Public Policy Michael Zezas and our Chief U.S. Economist Michael Gapen offer guidance on the data they are watching.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy. Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist. Michael Zezas: Today ongoing effects of tariffs on the U.S. economy. It is Friday, August 1st at 8am in New York. So, Michael, lots of news over the past couple of weeks about the U.S. making trade agreements with other countries. It's certainly dominated client conversations we've had, as I'm assuming it's probably dominated conversations for you as well. Michael Gapen: Yeah certainly a topic that never goes away. It keeps on giving at this point in time. And I guess, Michael, what I would ask you is, what do you make of the recent deals? Does it reduce uncertainty in your mind? Does it leave uncertainty elevated? What’s your short-term outlook for trade policy? Michael Zezas: Yeah, I think it's fair to say that we've reduced the range of potential outcomes in the near term around tariff rates. But we haven't done anything to reduce longer term uncertainties in U.S. trade policy. So, consider, for example, over the last couple of weeks, we have an agreement with Japan and an agreement with Europe – two pretty substantial trading partners – where it appears, the tariff rate that's going to be applied is something like 15 percent. And when you stack up these deals on one another, it looks like we're going to end up in an average effective tariff rate from the U.S. range of kind of 15 to 20 percent. And if you think back a couple of months, that range was much wider and we were potentially talking about levels in the 25 to 30 percent range. So, in that sense, investors might have a bit of a respite from the idea of kind of massive uncertainty around trade policy outcomes. However, longer term, these agreements really just are kind of principles that are set out for behavior, and there's lots of trip wires that could create future potential escalations. So, for example, with the Europe deal, part of the deal is that Europe will commit to purchase a substantial amount of U.S. energy. There's obvious questions as to whether or not the U.S. can actually supply that amidst its own energy needs that are rising substantially over the course of the next year. So, could we end up in a situation where six months to a year from now if those purchases haven't been made – the U.S. sort of presses forward and the administration threatens to re-escalate tariffs again. Really hard to know, but the point is these arrangements have lots of contingencies and other factors that could lead to re-escalation. But it's fair to say, at least in the near term, that we're in a landing place that appears to be somewhat smaller in terms of the range of potential outcomes. Now, I think a question for investors is going to be – how do we assess what the effects of that have been, right? Because is it fair to say that the economic data that we've received so far maybe isn't fully telling the story of the effects that are being felt quite yet. Michael Gapen: Yeah, I think that's completely right. We've always had the view that it would take several months or more just for tariffs to show up in inflation. And if tariffs primarily act as a tax on the consumer, you have to apply that tax first before economic activity would moderate. So, we've long been forecasting that inflation would begin to pick up in June. We saw a little of that. But it would accelerate through the third quarter, kind of peaking around the August-September period. So, I'd say we've seen the first signs of that, Michael, but we need obviously follow through evidence that it's happening. So, we do expect that in the July, August and September inflation reports, you'll see a lot more evidence of tariffs pushing goods prices higher. So, we'll be dissecting all the details of the CPI looking for evidence of direct effects of tariffs, primarily on goods prices, but also some services prices. So, I'd put that down as the first marker, and we've seen some, early evidence on that. The second then, obviously, is the economy's 70 percent consumption. Tariffs act as a regressive tax on low- and middle-income consumers because non-discretionary purchases are a larger portion of their consumption bundle and a lot of goods prices are as well. Upper income households tend to spend relatively more money on leisure and recreation services. So, we would then expect growth in private consumption, primarily led by lower and middle-income spending softening. We think the consumer would slow down. But into the end of the year. Those are the two main markers that I would point to. Michael Zezas: Got it. So, I think this is really important because there's certainly this narrative amongst clients that we talk to that markets may have already moved on from this. Or investors may have already priced in the effects – or lack thereof – of some of this tariff escalation. Now we're about to get some real evidence from economic data as to whether or not that view and those assumptions are credible. Michael Gapen: That's right. Where we were initially on April 2nd after Liberation Day was largely embargo level tariffs. And if those stayed in place, trade volumes and activity and financial market asset values would've collapsed precipitously. And they were for a few weeks, as you know, but then we dialed it back and got out of that. So, yeah, we would say it's wrong to conclude that the economy , has absorbed these tariffs already and that they won't have,, a negative effect on economic activity. We think they will just in the base case where tariffs are high, but not too high, it just takes a while for that to happen. Michael Zezas: And of course, all of that's kind of core to our multi-asset outlook right now where a slowing economy, even with higher recession probabilities can still support risk assets. But of course, that piece of it is going to be very complicated if the economic data ends up being worse than you suspect. Now, any evidence you've seen so far? For example, we had a GDP report earlier this week. Any evidence from that data as to where things might go over the next few months?Michael Gapen: Yeah, well, another data point on trade policy and trade policy uncertainty really causing a lot of volatility in trade flows. So, if you recall, there's big front running of tariffs in the first quarter. Imports were up about 37 percent on the quarter; that ended in the second quarter, imports were down 30 percent. So net trade was a big drag on growth in the first quarter. It was a big boost to growth in the second. But we think that's largely noise. So, what I would say is we've probably level set import and export volumes now. So, do trade volumes from here begin to slow? That's an unresolved question. But certainly, the large volatility in the trade and inventory data in Q1 and Q2 GDP numbers are reflective of everything that you're saying about the risks around trade policy and elevated trade policy uncertainty. Second, though, I would say, because we started out the quarter with Liberation Day tariffs, the business sector, clearly – in our mind anyway – clearly responded by delaying activity. Equipment spending was only up 4 to 5 percent on the quarter. IP was up about 6 percent. Structures was down 10 percent. So, for all the narrative around AI-related spending, there wasn't a whole lot of spending on data centers and power generation in the second quarter.So, what you speak to about the need to reduce some trade policy uncertainty, but also your long run trade policy uncertainty remains elevated? I would say we saw evidence in the second quarter that all of that slowed down capital spending activity. Let's see if the One Big Beautiful Bill act can be a catalyst on that front, whether animal spirits can come back. But that's the other thing I would point to is that, business spending was weak and even though the headline GDP number was 3 percent, that's mainly a trade volatility number. Final sales to domestic purchasers, which includes consumption and business spending, was only up 1.1 percent in the quarter. So, the economy's moderating; things are cooling. I think trade policy and trade policy uncertainty is a big part of that story.Michael Zezas: Got it. So maybe this is something of a handoff here where my team had been really, really focused and investors have been really, really focused on the decision-making process of the U.S. administration around tariffs. And now your team's going to lead us through understanding the actual impacts. And the headline numbers around economic data are important, but probably even more important is the underlying. Is that fair? Michael Gapen: I think that's fair. I think as we move into the third quarter, like between now and when the Fed meets in, September, again, they'll have a few more inflation reports, a few more employment reports. We're going to learn a lot more than about what the Fed might do. So, I think the activity data and the Fed will now become much more important over the next several months than where we've been the past several months, which is about, has been about announcements around trade. Michael Zezas: All right. Well then, we look forward to hearing more from you and your team in the coming months. Well Michael, thanks for taking the time to talk to me. Michael Gapen: Thanks for having me on. Michael Zezas: And to our audience, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen.

1 Aug 10min

Lisa Shalett, our Wealth Management CIO, and Andrew Sheets, our Head of Corporate Credit Research, conclude their discussion of American Exceptionalism, factoring in fixed income, in the second of a two-part episode.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Andrew Sheets: Today – a today a concluding look at the theme of American exceptionalism and how it factors into fixed income. It's Thursday, July 31st at 4pm in London. Lisa Shalett:  And it's 11am here in New York. So, Andrew, it's my turn to ask you some questions. And yesterday we talked a lot about equity markets, globalization, some of the broader macro shifts. But I wanted to zoom in on the credit markets today and one of our themes in the American Exceptionalism paper was the constraints of debts and deficits and how they play in. With U.S. debts level soaring and interest costs rising, how concerned should investors be? Andrew Sheets: So, you alluded to this a bit on our discussion yesterday that we are in a very interesting divide where you have inequality between very well-off companies and weaker companies that aren't doing as well. You have a lot of division within households between those who are, doing better and struggling more with the rate environment. But you know, I think we also see that the large deficits that the U.S. Federal government are running are in some ways largely mirrored by very, very good private sector financial positions. In aggregate U.S. households have record levels of assets relative to debt at the end of 2024; in aggregate the financial position of the U.S. equity market has never been better. And so, this is a dynamic where lending to the private sector, whether that is to parts of the residential mortgage market or to the corporate credit market, does have some advantages; where not just are you dealing with arguably a better trend of financial position, but you're just getting less issuance. I think there are a number of factors that could cause the market to cause the difference of yield between the government debt and that private sector debt – that so-called spread – to be narrower than it otherwise would be.Lisa Shalett: Well, that's a pretty interesting and provocative idea because, one of the hypotheses that we laid out in our paper is that perhaps one of the consequences of this extraordinary period of monetary stimulus of financial repression and ultra low rates, of massive regulation of the systemically important banking system, has been the explosion of shadow banks, and the private credit markets. Our thesis is they're a misallocation of capital. Has there been excess risk taking – in that area? And how should we think about that asset class, number one? And, number two, are they increasingly, a source of liquidity and issuance, or are they a drain on the system? Andrew Sheets: This is, kind of, where your discussion of normalization is is so interesting because in aggregate household balance sheets are in very good shape; in aggregate corporate balance sheets are in very good shape. But I do think there's a distinct tail of the market. Lets call it 5 percent of the high yield market, where you really are looking at a corporate capital structure that was designed for for a much lower level of rates. It was designed for maybe a immediately post COVID environment where rates were on the floor and expected to stay there for a long period of time. And so, if we are moving to an environment where Fed funds is at 3 or 4. Or as you mentioned – hey, maybe you could justify a rate even a little bit higher and not be wildly off. Well then, you just have the wrong capital structure. You have the wrong level of leverage; and it's actually hard to do much about that other than to restructure that debt, or look to change it in a larger way. So, I think we'll see a dynamic similar to the equity market – where there is less dispersion between the haves and have nots. Lisa Shalett: As we kind of think about where there could be pockets of opportunity in credit and in private credit, both public and private credit, and where there could be risks. Can you just help me with that and explore that a little bit more? Andrew Sheets: I think where credit looks most interesting is in some ways where it looks most boring. I think where the case for credit is strongest is – the investment grade market in the U.S. pays 5.25 percent. A 6 percent long run return might be competitive with certain investors’ long-term equity market forecasts, or at least not a million miles off. I think though the other area where this is going to be interesting is – do we see significantly more capital intensity out of the tech sector? And a real divide between fixed income and equities is that tech has so far really been an equity story.Lisa Shalett: Correct. Andrew Sheets: But this data center build out is just enormous. I mean, through 2028, our analysts at Morgan Stanley think it's close to $3 trillion with a 't'. And so there's a lot of interest in how can credit markets, how can private credit markets fund some of this build out; and there are opportunities and risks around that. And you know, something that I think credit's going to play an interesting part of. Lisa Shalett: And in that vision do you see the blurring of lines or a more competitive market between public and private? Andrew Sheets: I do think there's always a little bit of a funny nature about credit where it's not always clear why a particular corporate loan would need to be traded every day, would need to be marked every day. I think it is a little bit different from the equity market in that way. And I think you're also seeing a level of sophistication from investors who now have the ability to traffic across these markets and move capital between these markets, depending on where they think they're being better compensated or where there's better opportunities. So, I think we're kind of absolutely seeing the blur of these lines. And again, I think private credit has until recently been somewhat synonymous with high-yield lending, riskier lending, lower rated lending. Lisa Shalett: Correct. Yeah. Andrew Sheets: And, yet, the lending that we're seeing to some of this tech infrastructure is, you could argue, maybe more similar to Investment Grade lending – both in terms of risk, but also it pays a lot less. And so again, this is kind of an interesting transition where you're seeing a broader scope and absolutely, I think, more blurring of the line between these markets. Lisa Shalett: So, let's just switch gears a little bit and pull out from credit to the broader diversified cross-asset portfolio. And some of those cross-asset correlations are starting to break down; and we go through these periods where stocks and bonds are more often than not positively correlated in moving together. How are you beginning to think about duration risk in this environment? And have you made any adjustments to how you think about portfolio construction in light of these potentially shifting changes in correlations across assets?Andrew Sheets:  I think there are kind of maybe two large takeaways I would take from this. First is I do think the big asset where we've seen the biggest change is in the U.S. dollar. The U.S. dollar, I think, for a lot of the period we've been discussing on these two episodes, was kind of the best of both worlds. And recently that's just really broken down. And so, I think, when we think about the reallocation to the rest of the world, the focus on diversification, I think this is absolutely something that is top of mind among non-U.S. investors that we're talking to, which is almost the U.S. equity piece is kind of a separate conversation.The other piece though, is some of this debate around yields and equities – and do equities fear higher rates or lower rates? Which one of those is the biggest problem? And there's a question of magnitude that's a little interesting here. Rates going higher might be a little bit more of a problem for the S&P 500 than rates going lower. That rates going higher might be more consistent with the scenario of temporary higher inflation. Maybe rates go lower [be]cause the market gets more excited about Federal Reserve cuts.But I think in terms of scenarios where – like where is the equity market really going to have a problem? Well, it's really going to have a problem if there's a recession. So, even though I think bonds have been less effective diversifiers, I really do think they're still going to serve a very healthy, helpful purpose around some of those potentially kind of bigger dynamics. Lisa Shalett: Yeah that very much jives with the way we've been thinking about it, particularly within the context of managing private wealth, where very often we're confronted with the, the question: What about 60-40? Is 60-40 dead? Is 60-40 back? Like, you talk about not wanting to hedge, I don't want to hedge either. But the answer to the question we agree is somewhat nuanced. Right?We do agree that this perfect world of negative correlations between stocks and bonds that we enjoyed for a good portion of the last 15 years probably is over. But that doesn't mean that bonds, and most specifically that 5 - 10 year part of the curve, doesn't have a really important role to play in portfolios. And the reason I say that is that one of the other elements of this conversation that we haven't really touched on is valuation and expected returns.I know that when I speak of the valuation-oriented topics and the CAPE ratio when expected 10-year returns, everyone's eyes glaze over and roll to the back of their head and they say, ‘Oh, here she goes again.’ But look, I am in the camp that says an awful lot of growth has already been discounted and already been priced. And that it is much more likely that U.S. equities will return something closer to long run averages. So that's not awful. The lower volatility of a fixed income asset that's returning 6s and 7s has a definite role to play in portfolios for wealth clients who are by and large long term oriented investors who are not necessarily attempting to exploit 90-day volatility every quarter. Andrew Sheets:   Without putting too fine of a point on it, I think when that question of is 60-40 over is phrased, I kind of think the subtext is often that it's the bond side, the 40 side that has a problem. And not to be the Fixed Income Defender on this podcast, but you could probably more easily argue that if we're talking about, well, which valuation is more stretched, the equity side or the bond side? I think it's the equity side that has a more stretched valuation.Lisa Shalett: Without a doubt, without a doubt. Andrew Sheets:  Well, Lisa, thanks again for taking the time to talk. Lisa Shalett: Absolutely great to speak with you, Andrew, as always. Andrew Sheets: And thanks again for listening to this two-part conversation on American exceptionalism, the changes coming to that and how investors should position. And to our listeners, a reminder to take a moment to please review us wherever you listen. It helps more people find the show. And if you found this conversation insightful, tell a friend or colleague about Thoughts on the Market today.*****Lisa Shalett is a member of Morgan Stanley’s Wealth Management Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

31 Juli 12min

In the first of a two-part episode, Lisa Shalett, our Wealth Management CIO, and Andrew Sheets, our Head of Corporate Credit Research, discuss whether the era of “American Exceptionalism” is ending and how investors should prepare for a global market rebalancing. Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Andrew Sheets: Today, the first of two episodes tackling a fascinating and complex question. Is American market dominance ending? And what would that mean for investors?It's Wednesday, July 30th at 4pm in London. Lisa Shalett: And it's 11am here in New York. Andrew Sheets: Lisa, it's so great to talk to you again, and especially what we're going to talk about over these two episodes. , a theme that's been coming up regularly on this podcast is this idea of American exceptionalism. This multi-year, almost multi-decade outperformance of the U.S. economy, of the U.S. currency, of the U.S. stock market. And so, it's great to have you on the show, given that you've recently published on this topic in a special report, very topically titled American Exceptionalism: Navigating the Great Rebalancing.So, what are the key pillars behind this idea and why do you think it's so important? Lisa Shalett: Yeah. So, I think that that when you think about the thesis of American exceptionalism and the duration of time that the thesis has endured. I think a lot of investors have come to the conclusion that many of the underpinnings of America's performance are just absolutely inherent and foundational, right? They'll point to America as a, economy of innovation. A market with regulation and capital markets breadth and depth and liquidity a market guided by, , laws and regulation, and a market where, heretofore, we've had relatively decent population growth. All things that tend to lead to growth. But our analysis of the past 15 years, while acknowledging all of those foundational pillars say, ‘Wait a minute, let's separate the wheat from the chaff.’ Because this past 15 years has been, extraordinary and different. And it's been extraordinary and different on at least three dimensions. One, the degree to which we've had monetary accommodation and an extraordinary responsiveness of the Fed to any crisis. Secondly, extraordinary fiscal policy and fiscal stimulus. And third, the peak of globalization a trend that in our humble opinion, American companies were among the biggest beneficiaries of exploiting, despite all of the political rhetoric that considers the costs of that globalization. Andrew Sheets: So, Lisa, let me go back then to the title of your report, which is the Great Rebalancing or navigating the Great Rebalancing. So, what is that rebalancing? What do you think kind of might be in store going forward? Lisa Shalett: The profound out performance, as you noted, Andrew, of both the U.S. dollar and American stock markets have left the world, , at an extraordinarily overweight position to the dollar and to American assets.And that's against a backdrop where we're a fraction of the population. We're 25 percent of global GDP, and even with all of our great companies, we're still only 33 percent of the profit pool. So, we were at a place where not only was everyone overweight, but the relative valuation premia of American equity assets versus equities outside or rest of world was literally a 50 percent premium. And that really had us asking the question, is that really sustainable? Those kind of valuation premiums – at a point when all of these pillars, fiscal stimulus, monetary stimulus, globalization, are at these profound inflection points. Andrew Sheets: You mentioned monetary and fiscal policy a bit as being key to supercharging U.S. markets. Where do you think these factors are going to move in the future, and how do you think that affects this rebalancing idea? Lisa Shalett: Look, I mean, I think we went through a period of time where on a relative basis, relative growth, relative rate spreads, right? The, the dispersion between what you could earn in U.S. assets and what you could earn in other places, and the hedging ratio in those currency markets made owning U.S. assets, just incredibly attractive on a relative basis. As the U.S. now kind of hits this point of inflection when the rest of the world is starting to say, okay, in an America first and an America only policy world, what am I going to do? And I think the responses are that for many other countries, they are going to invest aggressively in defense, in infrastructure, in technology, to respond to de-globalization, if you will. And I think for many of those economies, it's going to help equalize not only growth rates between the U.S. and the rest of the world, but it's going to help equalize rate differentials. Particularly on the longer end of the curves, where everyone is going to spending money. Andrew Sheets: That's actually a great segue into this idea of globalization, which again was a major tailwind for U.S. corporations and a pillar of this American outperformance over a number of years.It does seem like that landscape has really changed over the last couple of decades, and yet going forward, it looks like it's going to change again. So, with rising deglobalization with higher tariffs, what do you think that's going to mean to U.S. corporate margins and global supply chains? Lisa Shalett: Maybe I am a product of my training and economics, but I have always been a believer in comparative advantage and what globalization allowed. True free trade and globalization of supply chains allowed was for countries to exploit what they were best at – whether it was the lowest cost labor, the lowest cost of natural resources, the lowest cost inputs. And America was aggressive at pursuing those things, at outsourcing what they could to grow profit margins. And that had lots of implications. And we weren't holding manufacturing assets or logistical assets or transportation assets necessarily on our balance sheets. And that dimension of this asset light and optimized supply chains is something in a world of tariffs, in a world of deglobalization, in a world of create manufacturing jobs onshore, where that gets reversed a bit. And there's going to be a financial cost to that. Andrew Sheets: It's probably fair to say that the way that a lot of people experience American exceptionalism is in their retirement account. In your view, is this outperformance sustainable or do you think, as you mentioned, changing fiscal dynamics, changing trade dynamics, that we're also going to see a leadership rotation here? Lisa Shalett: Our thesis has been, this isn't the end of American exceptionalism, point blank, black and white. What we've said, however, is that we think that the order of magnitude of that outperformance is what's going to close, , when you start burdening, , your growth rate with headwinds, right? And so, again, not to say that that American assets can't continue to, to be major contributors in portfolios and may even, , outperform by a bit. But I don't think that they're going to be outperforming by the magnitude, kind of the 450 - 550 basis points per year compound for 15 years that we've seen. Andrew Sheets: The American exceptionalism that we've seen really since 2009, it's also been accompanied by really unprecedented market imbalances. But another dimension of these imbalances is social and economic inequality, which is creating structural, and policy, and political challenges. Do these imbalances matter for markets? And do you think these imbalances affect economic stability and overall market performance? Lisa Shalett: People need to understand what has happened over this period. When we applied this degree of monetary and fiscal, stimulus, what we essentially did was massively deleverage the private sector of America, right? And as a result, when you do that, you enable and create the backdrop for the portions of your economy who are less interest rate sensitive to continue to, kind of, invest free money. And so what we have seen is that this gap between the haves and the have nots, those who are most interest rate sensitive and those who are least interest rate sensitive – that chasm is really blown out.But also I would suggest an economic policy conundrum. We can all have points of view about the central bank, and we can all have points of view about the current chair. But the reality is if you look at these dispersions in the United States, you have to ask yourself the question, is there one central bank policy that's right for the U.S. economy? I could make the argument that the U.S. GDP, right, is growing at 5.5 percent nominal right now. And the policy rate's 4.3 percent. Is that tight?Andrew Sheets: Hmm. Lisa Shalett: I don't know, right? The economists will tell me it's really tight, Lisa – [be]cause neutral is 3. But I don't know. I don't see the constraints. If I drill down and do I say, can I see constraints among small businesses? Yeah. I think they're suffering. Do I see constraints in some of the portfolio companies of private equity? Are they suffering? Yeah. Do they need lower rates? Yeah. Do the lower two-thirds of American consumers need lower rates to access the housing market. Yeah. But is it hurting the aggregate U.S. economy? Mm, I don't know; hard to convince me. Andrew Sheets: Well, Lisa, that seems like a great place to actually end it for now and Thanks as always, for taking the time to talk. Lisa Shalett: My pleasure, Andrew. Andrew Sheets: And that brings us to the end of part one of this two-part look at American exceptionalism and the impact on equity and fixed income markets. Tomorrow we'll dig into the fixed income side of that debate.Thank you as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen, and also tell a friend or colleague about us today.*****Lisa Shalett is a member of Morgan Stanley’s Wealth Management Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

30 Juli 11min

AI adoption, dollar weakness and tax savings from the Big Beautiful Bill are some of the factors boosting our CIO and Chief U.S. Equity Strategist Mike Wilson’s confidence in U.S. stocks.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I will discuss what's driving my optimism on stocks. It's Tuesday, July 29th at 11:30am in New York. So, let’s get after it. Over the past few weeks, I have been leaning more toward our bull case of 7200 for the S&P 500 by the middle of next year. This view is largely based on a more resilient earnings and cash flow backdrop than anticipated. The drivers are numerous and include positive operating leverage, AI adoption, dollar weakness, cash tax savings from the Big Beautiful Bill, and easy growth comparisons and pent-up demand for many sectors in the market. While many are still focused on tariffs as a headwind to growth, our analysis shows that tariff cost exposures for S&P 500 industry groups is fairly contained given the countries in scope and the exemptions that are still in place from the USMCA. Meanwhile, deals are being signed with our largest trading partners like Japan and Europe that appear favorable to the U.S. Due to the lack of pricing power, the main area of risk in the stock market from tariffs is consumer goods; and that’s why we remain underweight that sector. However, the main tariff takeaway for investors is that the rate of change on policy uncertainty peaked in early April. This is the primary reason why earnings guidance bottomed in April as evidenced by the significant inflection higher in earnings revisions breadth—the key fundamental factor that we have been focused on. Of course, the near-term set up is not without risks. These include still high long-term interest rates, tariff-related inflation and potential margin pressure. As a result, a correction is possible during the seasonally weak third quarter, but pull-backs should be shallow and bought. In addition to the growth tailwinds already cited, it’s worth pointing out that many companies also face very easy growth comparisons. I’ve had a long standing out of consensus view that the U.S. has been experiencing a rolling recession for the last three years. This fits with the fact that much of the soft economic data that has been hovering in recession territory for much of that period as well—things like purchasing manager indices, consumer confidence, and the private labor market. It also aligns with my long-standing view that government spending has helped to keep the headline economic growth statistics strong, while much of the private sector and many consumers have been crowded out by that heavy spending which has also kept the Fed too tight. Meanwhile, private sector wage growth has been in a steady decline over the last several years, and payroll growth across Tech, Financials and Business Services has been negative – until recently. Conversely, Government and Education/Health Services payroll growth has been much stronger over this time horizon. This type of wage growth and sluggish payroll growth in the private sector is typical of an early cycle backdrop. It's a key reason why operating leverage inflects in early cycle environments, and margins expand. Our earnings model is picking up on this underappreciated dynamic, and AI adoption is likely to accelerate this phenomenon. In short, this is looking more and more like an early cycle set up where leaner cost structures drive positive operating leverage after an extended period of wage growth consolidation. Bottom line, the capitulatory price action and earnings estimate cuts we saw in April of this year around Liberation Day represented the end of a rolling recession that began in 2022. Markets bottom on bad news and we are transitioning from that rolling earnings recession backdrop to a rolling recovery environment. The combination of positive earnings and cash flow drivers with the easy growth comparisons fostered by the rolling EPS recession and the high probability of the Fed re-starting the cutting cycle by the first quarter of next year should facilitate this transition. The upward inflection we're seeing in earnings revisions breadth confirms this process is well underway and suggests returns for the average stock are likely to be strong over the next 12-months. In short, buy any dips that may occur in the seasonally weak quarter of the year. Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

29 Juli 4min

Our Head of ASEAN Research Nick Lord discusses how Singapore’s technological innovation and market influence are putting it on track to continue rising among the world’s richest countries.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Nick Lord, Morgan Stanley’s Head of ASEAN Research.Today – Singapore is about to celebrate its 60th year of independence. And it’s about to enter its most transformative decade yet.It’s Monday, the 28th of July, at 2 PM in Singapore.Singapore isn’t just marking a significant birthday on August 9th. It’s entering a new era of wealth creation that could nearly double household assets in just five years. That’s right—we’re projecting household net assets in the city state will grow from $2.3 trillion today to $4 trillion by 2030.So, what’s driving this next chapter?Well, Singapore is evolving from a safe harbor for global capital into a strategic engine of innovation and influence driven by three major forces. First, the country’s growing role as a global hub. Second, its early and aggressive adoption of new technologies. And last but not least, a bold set of reforms aimed at revitalizing its equity markets.Together, these pillars are setting the stage for broad-based wealth creation—and investors are taking notice.Singapore is home to just 6 million people, but it’s already the fourth-richest country in the world on a per capita basis. And it's not stopping there.By 2030, we expect the average household net worth to rise from $1.6 million to an impressive $2.5 million. Assets under management should jump from $4 trillion to $7 trillion. And the MSCI Singapore Index could gain 10 percent annually, potentially doubling in value over the next five years. Return on equity for Singaporean companies is also set to rise—from 12 percent to 14 percent—thanks to productivity gains, market reforms, and stronger shareholder returns.But let me come back to this first pillar of Singapore’s growth story. Its ambition to become a hub of hubs. It’s already a major player in finance, trade, and transportation, Singapore is now doubling down on its strengths.In commodities, it handles 20 percent of the world’s energy and metals trading—and it could become a future hub for LNG and carbon trading. Elsewhere, in financial services, Singapore’s also the third largest cross-border wealth booking centre, and the third-largest FX trading hub globally. Tourism is also a key piece of the puzzle, contributing about 4 percent to GDP. The country continues to invest in world-class infrastructure, events, and attractions keeping the visitors—and their dollars—coming.As for technology – the second key pillar of growth – Singapore is going all in. It’s becoming a regional hub for data and AI, with Malaysia and Japan also in the mix. Together, these countries are expected to attract the lion’s share of the $100 billion in Asia’s data center and GenAI investments this decade.Worth noting – Singapore is already a top-10 AI market globally, with over 1,000 startups, 80 research facilities, and 150 R&D teams. It’s also a regional leader in autonomous vehicles, with 13 AVs currently approved for public road trials. And robots are already working at Singapore’s Changi Airport.Finally, despite its economic strength, Singapore’s stock market had long been seen as sleepy — dominated by a few big banks and real estate firms. But that’s changing fast and becoming the third pillar of Singapore’s remarkable growth story.This year, the government rolled out a sweeping set of reforms to breathe new life into the market. That includes tax incentives, regulatory streamlining, and a $4 billion capital injection from the Monetary Authority of Singapore to boost liquidity—especially for small- and mid-cap stocks.We also expect that there will be a push to get listed companies more engaged with shareholders, encouraging them to communicate their business plans and value propositions more clearly. The goal here is to raise Singapore’s price-to-book ratio from 1.7x to 2.3x—putting it on a par with higher-rated markets like Taiwan and Australia.So, what does all this mean for investors?Well, Singapore is not just celebrating its past—it’s building its future. With smart policy, bold innovation, and a clear vision, it’s positioning itself as one of the most dynamic and investable markets in the world.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.

28 Juli 4min

Joining the AI race also requires building out massive physical infrastructure. Our Head of Corporate Credit Research Andrew Sheets explains why credit markets may play a critical role in the endeavor.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.Today – how the world may fund $3 trillion of expected spending on AI. It's Friday July 25th at 2pm in London.Whether you factor it in or not, AI is rapidly becoming a regular part of our daily lives. Checking the weather before you step out of the house. Using your smartphone to navigate to your next destination, with real time traffic updates. Writing that last minute wedding speech. An app that reminds you to take your medication or maybe reminds you to power off your device.All of these capabilities require enormous physical infrastructure, from chips to data centers, to the electricity to power it all. And however large AI is seen so far, we really haven't seen anything yet. Over the next five years, we think that global data center capacity increases by a factor of six times. The cost of this spending is set to be extraordinary. $3 trillion by the end of 2028 on just the data centers and their hardware alone. Where will all this money come from? In a recent deep dive report published last week, a number of teams within Morgan Stanley Research attempted to answer just that. First, large cap technology companies, which are also commonly called the hyperscalers. Well, they are large and profitable. We think they may fund half of the spending out of their own cash flows. But that leaves the other half to come from outside sources. And we think that credit markets – corporate bonds, securitized credit, asset-backed finance markets – they're gonna have a large role to play, given the enormous sums involved.For corporate bonds, the asset class closest to my heart, we estimate an additional $200 billion of issuance to fund these endeavors. Technology companies do currently borrow less than other sectors relative to their cash flow, and so we're starting from a relatively good place if you want to be borrowing more – given that they're a small part of the current bond market. While technology is over 30 percent of the S&P 500 Equity Index, it's just 10 percent of the Investment Grade Bond Index.Indeed, a relevant question might be why these companies don't end up borrowing more through corporate bonds, given this relatively good starting position. Well, some of this we think is capacity. The largest non-financial issuers of bonds today have at most $80 to $90 billion of bonds outstanding. And so as good as these big tech businesses are, asking investors to make them the largest part of the bond market effectively overnight is going to be difficult. Some of our thinking is also driven by corporate finance. We are still in the early stages of this AI build out where the risks are the highest. And so, rather than take these risks on their own balance sheet, we think many tech companies may prefer partnerships that cost a bit more but provide a lot more flexibility. One such partnership that you'll likely to hear a lot more about is Asset Backed Finance or ABF. We see major growth in this area, and we think it may ultimately provide roughly $800 billion of the required funding.The stakes of this AI build out are high. It's not hyperbole to say that many large tech companies see this race to develop AI technology as non-negotiable. The cost of simply competing in this race, let alone winning it – could be enormous. The positive side of this whole story is that we're in the early innings of one of the next great runs of productive capital investment, something that credit markets have helped fund for hundreds of years. The risks, as can often be the case with large spending, is that more is built than needed; that technology does change, or that more mundane issues like there not being enough electricity change the economics of the endeavor.AI will be a theme set to dominate the investment debate for years to come. Credit may not be the main vector of the story. But it's certainly a critical part of it. Thank you as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

25 Juli 4min

The Trump administration unveiled a 28-page AI Action Plan, outlining more than 90 policy actions, with an ambition for the U.S. to win the AI race. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas, and U.S. Public Policy Strategist Ariana Salvatore, explain why investors need to keep an eye on AI policy.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Ariana Salvatore: And I'm Ariana Salvatore, U.S. Public Policy Strategist.Michael Zezas: Today we're diving into the administration's newly released AI action plan. What's in It, what it means for markets, and where the challenges to implementation might lie.It's Thursday, July 24th at 10am in New York.Things are not all quiet on the policy front, but with the fiscal bill having passed Congress and trade tensions simmering ahead of the new August 1st deadline, clients are asking what the administration might focus on that investors might need to know more about.Well, this week it seems to be AI.The White House just unveiled its sweeping AI Action Plan, the first big policy-signaling document since the administration canceled the implementation of former President Biden's AI Diffusion Rule. So, Ariana, what do we need to focus on here?Ariana Salvatore: This document is basically the administration signaling how it intends to cement America's role in the global development of AI – through a mix of both domestic and global policy initiatives. There are over 90 policy actions outlined in the document across three main pillars: innovation, infrastructure, and global leadership.Michael Zezas: That's right. And even though there's still some important details to flesh out here in terms of what these initiatives might practically mean, it's worth delving into what the different areas are outlining and what it might mean for investors here.Ariana Salvatore: So first on the innovation front. The plan calls for removing regulatory barriers to AI development, encouraging open-source models, and investing in interpretability and robustness. There's also a push throughout the document to build world class data sets and accelerate AI adoption across the federal agencies.Michael Zezas: Infrastructure is another main pillar here, and keeping with the theme of loosening regulation, the plan includes fast tracking permits for data centers, expanding access to federal land, and improving grid interconnection for power generation. There's also a call to stabilize the existing grid and prioritize dispatchable energy sources like nuclear and geothermal.But that's where we may see some of these frictions emerge. As our colleague Stephen Byrd has talked about quite a bit, the grid remains a major constraint for power generation; and even with some of these executive orders, the President's ability to control scaling power capacity is somewhat limited.Many of these policy tools to increase energy production to facilitate more data centers will likely have to be addressed by Congress, especially if any of these policy changes are to be more durable.Ariana Salvatore: One area where the executive actually does have pretty broad discretion to control is trade policy, and this document focused a lot on the U.S.’ role in the world as we see increasing AI competition on a global scale.So, to that point, the third pillar is around global leadership. Specifically, the plan calls for the U.S. to export its full AI stack – hardware, models, standards – to allies, while simultaneously tightening export controls on rivals. China's clearly a focal point here, and that's one that is explicitly called out in the document.Michael Zezas: Right. And so, it all seems part of a proposal to form in International AI Alliance built on shared values and open trade; and the plan explicitly frames AI leadership as a strategic priority in the multipolar world.It calls for embedding U.S. AI standards and global governance bodies while using export controls and diplomatic tools to limit adversarial influence. But you know, importantly, something we'll have to track here is what exactly are these standards going to be and how that will shape how industry in the U.S. around AI has to behave. Those details are not yet forthcoming.So, there's a couple of threads here across all of this; deregulation, pushing for more energy generation, trade policy aspects. Ariana, what do you think it all means for investors? Are there key sectors here that face more constraints or face more tailwinds that investors need to know about?Ariana Salvatore: Yeah, so really two key takeaways from this document. First of all, AI policy is a priority for the administration, and we're seeing them pursue efforts to reduce regulatory barriers to data center construction. Although those could run into some legal and administrative hurdles. All else equal reduction in data center, build time and cost benefits owners of natural gas fired and nuclear power plants. So, you should see a tailwind to the power and utility sector.Secondly, this document and the messaging from the President makes AI a national security issue. That's why we see differentiated treatment for China versus the rest of the world, which is also reflected in the administration's approach to the broader trade relationship and dovetails well with our expectation for higher tariffs on China at the end of this year versus the global baseline.Michael Zezas: Right. So, if AI becomes a national and economic security issue, which is what this document is signaling, it's one of the reasons you should expect that these tariff increases globally – but with a skew towards China – are probably durable. And it's something that we think is reflected in the sector preferences or equity strategy team, for example, with some caution around the consumer sector.Ariana Salvatore: That's right. So, plan to watch as this unfolds.Michael Zezas: That's it for today's episode of Thoughts on the Market. If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.

24 Juli 5min

Our U.S. Media & Entertainment Analyst Benjamin Swinburne discusses how GenAI is transforming content creation, distribution and also raising some serious ethical questions. Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Ben Swinburne, Morgan Stanley’s U.S. Media and Entertainment Analyst. Today – GenAI is poised to shake up the entertainment business. It’s Wednesday, July 23, at 10am in New York.It's never been easier to create art for anyone – with a little help from GenerativeAI. You can transform photos of yourself or loved ones in the style of a popular Japanese movie studio or any era of visual art to your liking. You can create a short movie by simply typing in a few prompts. Even I can speak to youin several different languages. I can ask about the weather:Hvordan er været i dag?Wie ist das wetter heute?आज मौसम कैसा है? In the media and entertainment industry, GenAI is expected to bring about a seismic shift in how content is made and consumed. A recent production used AI to de-age actors and recreate the likeness of a deceased performer—cutting what used to take hundreds of VFX artists a year to just a few months with a small team. There are many other examples of how GenAI is revolutionizing how stories are told, from scriptwriting and editing to visual effects and dubbing. In music, GenAI is helping music labels identify emerging talent and generate new compositions. GenAI can even create songs using the voices of long-gone artists – potentially extending revenue far beyond an artist’s lifetime. GenAI-driven tools have the potential to reduce TV and film production costs by 10–30 percent, with animation and post-production among the biggest savings opportunities. GenAI could also transform how content reaches audiences. Recommendation engines can become even more predictive, using behavioral data to serve up exactly what listeners want—sometimes before we know what we want. And there’s more studios can achieve in post production. GenAI can already dub content in multiple languages, even syncing mouth movements to match the new dialogue. This makes global distribution faster, cheaper, and more culturally relevant. With better engagement comes better monetization. Platforms will use GenAI to introduce new pricing tiers, targeted advertising, and personalized superfan content that taps into niche audiences willing to pay more. But all this innovation brings up profound ethical concerns. First, there’s the issue of consent and copyright. Can GenAI tools legally use an actor’s name, likeness or voice? Then there’s the question of authorship. If an AI writes a script or composes a song, who owns the rights? The creator or the GenAI model? Labor unions are understandably worried. In 2023, AI was a major sticking point in negotiations between Hollywood studios and writers’ and actors’ guilds. The fear? That AI could replace human jobs or devalue creative work. There are also legal battles. Multiple lawsuits are underway over whether AI models trained on copyrighted material without permission violate intellectual property laws. The outcomes of these cases could reshape the entire industry. But here’s a big question no one can ignore: Will audiences care if content is AI-generated? Some consumers are fascinated by AI-created music or visuals, while others crave the emotional depth and authenticity that comes from human storytelling. Made-by-humans could become a premium label in itself. Now, despite GenAI’s rapid rise, not every corner of entertainment is vulnerable. Live sports, concerts, and theater remain largely insulated from AI disruption. These experiences thrive on real-time emotion, unpredictability, and human connection—things AI can’t replicate. In an AI-saturated world, the value of live events and sports rights will rise, favoring owners of sports rights and live platforms. So where do we go from here? By and large, we’re entering an era where storytelling is no longer limited by budget or geography. GenAI is lowering the barriers to entry, expanding the creative class, and reshaping the economics of media. The winners in this new landscape will likely be companies that can scale—platforms with massive user bases, deep data pools, and the engineering talent to integrate GenAI seamlessly. But there’s also room for agile newcomers who can innovate faster than the incumbents and disrupt the disrupters. No doubt, as the tools get better, the questions get harder. And that’s where the real story begins. 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.

23 Juli 5min