Big Debates: The State of the Energy Transition

Our analysts Michael Zezas and Rajeev Sibal unpack the significance of a little-discussed clause in the Trump administration’s tariff policy, which suggests investors should think less about countries and more about products.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income Research and Public Policy Strategy.Rajeev Sibal: And I am Rajeev Sibal, Senior Global Economist.Michael Zezas: Today we look through the potential escalation and de-escalation of tariff rates and discuss what the lasting impact of higher tariffs will be for companies and the economy.It's Wednesday, April 30th at 11am in New York.Rajeev Sibal: And 4pm in London.Michael Zezas: Last week during a White House News conference, President Trump announced that tariffs on goods from China will come down substantially, but it won't be zero. And this was after U.S. Treasury Secretary Scott Bessent made comments about high tariffs against China being unsustainable, according to some news reports.Now, some of this has been walked back, and there's further discussion of challenging negotiations with China and potential escalations if those negotiations don't go well. Meanwhile, Canadian voters elected a Liberal government, led by Mark Carney yesterday. That federal election played out against the backdrop of the U.S. proposing higher tariffs on its northern neighbors. So, Rajeev, amidst all this noise, what seems clear is that tariff levels will end up higher than where we started before President Trump took office. Though we don't exactly know how high they will be. What is it that investors need to understand about the economic impacts of higher tariffs just generically?Rajeev Sibal: So yeah, we do view that tariffs are going to structurally be higher than they were before the Trump administration. This has been a baseline of our outlook since last year. Now I think the challenge is figuring out where they're going to settle as you've highlighted. We do think that peak tariff was probably a couple weeks ago, when we were at the max pain threshold, vis-a-vis China and the rest of the world. We've since seen the reciprocal tariffs move to 10 per cent for everyone but China.China's clearly higher than 60 per cent today, but we do think that over time the implied rate to China will start to graduate and come down. If you look at the electronics exemption for example, that's a big step in getting the average tariff rate out of China lower. So, we think we're on a journey. We think we were past peak tariff pain in terms of level. But over the next few months, it's going to take some time and negotiation to figure out where we settle. And we are still looking to kind of our baseline outlook, that had been defined some time ago of a 10 per cent baseline with an elevated level on China, if you will.Michael Zezas: So, I think this is an important point, that there's a lot of back and forth about tariff levels, which countries are going to be levied on, to what degree, and to what products. But at the end of the day, we think there'll be more tariffs than where we started.Rajeev, you have a view on where investors should focus, in terms of what tariffs are durable. And maybe at the end of the day it'll be less about countries and more about products. Can you talk us through that?Rajeev Sibal: You know, on April 2nd when the Trump administration released the fact sheet about tariffs and reciprocal tariffs, there was a small clause in there that I think the market did not pay enough attention to, and which is becoming front and center now.And in that clause, they identified that a number of tariffs related to Section 232 would be exempted from reciprocal tariffs. And the notion is that country tariffs would evolve or shift into sector tariffs over time. And in the note that we recently published, we highlighted some of the legal mechanisms that may be at play here. There's still a lot of uncertainty as to how things will settle down, but what we do know is that legally speaking, country tariffs are coming through IEEPA, which is the International Emergency Economic Powers Act; whereas section and sector tariffs are coming through Section 232; and some of the other section structures that exist in U.S. trade law.And so, the experience of 2018 leaned a lot more to these sections than it did to IEEPA. And that was a guiding, I guess, mechanism for us, as we thought about what was happening in the current tariff structure. And the fact that the White House included this carve out, if you will, for Section 232 tariffs in their April 2nd fact sheet was a big lead indicator for us that, over time, there would be an increased shift towards sectors.And, so for us, we think the market should be focusing more in that direction. As we think about how this evolves over time, now that we've not completely de-escalated, but brought a materially lower tariff level and everywhere in the world except for China. The big variability is probably going to be in the sector tariffs now going forward.Michael Zezas: So, what sectors do you think are particularly in focus here?Rajeev Sibal: So, on the April 2nd fact sheet that the White House provided to countries and to the market, they specifically identified steel, aluminum, autos and auto parts as already having Section 232 tariffs. And we know that's true because those investigations had started in a prior Trump administration. And so, kind of the framework was already in place for them to execute those tariffs.The guidance then suggested that copper, pharmaceuticals, semiconductors, and lumber would also potentially fall under Section 232 tariffs in the future. And then there's been a range of indications as to what might be in play, so to speak, for Section 232.I know pharmaceuticals is at the top of the list of many investors, as are semiconductors. So, this is our kind of sample list, but we're pretty certain that this will evolve over time. But that's where we're starting.Michael Zezas: Okay, so pharmaceutical, semiconductors, automobile, steel, aluminum. It's a pretty substantial list. So, if that's the sort of end game landscape here – relatively elevated China tariffs, and then all of these products specific tariffs – what does an investor need to know about a company's options in this world? Can companies just rewire their supply chains around all of this? And you know, ultimately there's some temporary price pain. But once things are rewired around this, that should dissipate. Or are the decisions more difficult than that and that there has to be some cost passed through to the consumer or to the companies themselves – because this is just too many tariffs in too many places?Rajeev Sibal: Yeah, so I think the latter of your question – the difficulty – is really where we need to be thinking about what's happening here. If you think about the bigger picture, and you go back to the note that we collaborated on earlier in the year called Supply Chain Strain, we highlighted the complexity of moving factors of production and the extreme levels of investment that have required to shift factors of production.So, companies, if they're going to move a factory from country A to country B, have to make sure that country B has the institutional framework, that it has the capital, it has the labor input, and this is a big, big decision. So, as a company you're not going to make that decision to shift your investment or reconstruct productive facilities in a new country – until you understand the cost benefit analysis. And in order to understand the cost benefit analysis, you really need to know what the sector-based Section 232 tariff looks like in the end.If we remember back in 2018, the government tried to implement a wide range of tariffs. On average, it took about 250 days for each investigation to be completed. And that's a long timeframe. And so, I think what we're going through now, apart from automobiles and steel and aluminum where that process has kind of already been done, and we kind of have the framework of the tariffs and the new sectors, companies are going to have to wait for this investigation to take place so that they understand what the tariff level is. Because the tariff level is going determine the risk of actually shifting productive facilities. Or if you just kind of absorb the cost because the tariff isn't at a high enough level that it incentivizes the shift.And so, these are the changes that I think remain an open question and will be the focus of companies over the next few months as their sectors are exposed to tariffs.Michael Zezas: Right. So, what I think I'm hearing then, and correct me if I'm wrong, is that some of the focus on the China tariffs or the country level specific tariffs in the headlines – about they're moving up, they're moving down – might mask that at the end of the day, we're still dealing with considerably higher tariffs on a broad enough array of products; that it will mean difficult choices for companies and/or higher costs. And so therefore markets are still going to have to price some of the economic challenges around that.Rajeev Sibal: Yeah, I think that's absolutely right. And we've seen the market try to price some of this stuff at a country level context. But it's been hard. And, you know, even the headline tariff rate in the U.S. is really hard to pin down for the simple reason that we don't know if the Mexican and Canadian trade into the U.S. is compliant or non-compliant, and how that gets counted in the current structure of the tariff regime. And so, as these questions remain outstanding, markets are going to be volatile, trying to figure out where the tariff level is. I think that uncertainty at a country level then shifts to the sector level as we go through these investigations that we've been highlighting.Autos is a great example. We finished the investigation. We've implemented a Section 232 tariff, and we still don't know what the implied auto tariff rate is because we don't know how many parts in a car are compliant within existing free trade agreements of the United States; and if they're compliant or not really determines what the implied tariff level is for the U.S. And until companies can decide and give forward guidance and understand what their margins look like, I think markets are going to be in this guessing game.Michael Zezas: Yeah, and that certainly syncs up with our fixed income strategy views. The idea that yield curves will continue to steepen to deal with the uncertainty about U.S. trade policy and demand for dollars, as a consequence. That equity markets might be moving sideways as perhaps we priced in some of the first order effects of tariffs, but not necessarily the second order, potentially non-linear effects on the broader global economy. And unfortunately, the lingering uncertainties that you talk about implementation, they're going to be with us for awhile.Rajeev Sibal: Yeah, I think that's really fair. And our economics outlook mirrors that as well.Michael Zezas: Well, Rajeev, thanks for joining us today to help us sort through all of thisRajeev Sibal: Mike, thanks for having me on the podcast.Michael Zezas: And to all of you, thanks for listening. If you found this podcast helpful, let us know and share Thoughts on the Market with a friend or colleague today.

30 Apr 202510min

Our Global Commodities Strategist Martijn Rats discusses the ongoing volatility in the oil market and potential macroeconomic scenarios for the rest of this year.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Today on the podcast – the uncertainty in the oil market and how it can play out for the rest of the year.It’s Tuesday, April 29th, at 3pm in London.Now, notwithstanding the energy transition, the cornerstone of the world’s energy system is still the oil market; and in that market, the most important price is the one for Brent crude oil. Therefore, fluctuations in oil prices can have powerful ripple effects on various industries and sectors, as well as on the average consumer who, of course, pays attention to gasoline prices at the pump. Now with that in mind, we are asking the question: what's been happening in the global oil market recently?Earlier this month, Brent crude oil prices dropped sharply, falling 12.5 per cent over just two trading sessions, from around 75 dollars a barrel to close to 65 dollar a barrel. That was primarily driven by two factors: first, worries about the impact of trade wars on the global economy and therefore on oil demand, after the Trump administration’s announcement of reciprocal tariffs.Secondly, was OPEC’s announcement that, notwithstanding all the demand uncertainty that this created, it would still accelerate supply growth, progressing not only with the planned production increases for May; but bring forward the planned production increases for June and July as well. Now you can imagine, when OPEC releases extra production whilst the GDP outlook is weakening, understandably, this weighs on the price of oil.Now to put things into context, two-day declines of 12.5 per cent are rare. The Brent futures market was created in 1988, and since then this has only happened 24 times, and 22 of those instances coincided with recessions. So therefore, some commentators have taken the recent drop as a potential sign of an impending recession.Now while Brent prices have recovered slightly from the recent lows, they’re still very volatile as they continue to reflect the ongoing trade concerns, the economic outlook, and also a strong outlook for supply growth from OPEC and non-OPEC countries alike. The last few weeks have already seen unusually large speculator selling. So with that in mind, we suspect that oil prices will hold up in the near-term. However, we still see potential for further headwinds later in the year.In our base case scenario, we expect that demand growth will slow down to approximately 0.5 million barrels a day year-on-year by the second half of 2025, and that is down from an an initial estimate earlier in the year when were still forecasting about a million barrel a day growth over the same period. Now this slowdown – coupled with an increase in non-OPEC and OPEC supply – could result in an oversupply of the market of about a million barrels a day over the remainder of 2025. Now with that outlook, we believe that Brent prices could eventually drop further down into the low-$60s.That said, let's also consider a more bearish scenario. Oil demand has never grown continuously during recessions. So if tariffs and counter-tariffs tip the economy into recession, oil demand growth could also fall to zero. In such a situation, the surplus we're currently modeling could be substantially larger, possibly north of 1.5 million barrels a day. Now that would require non-OPEC production to slow down more severely to balance the market. In that scenario, we estimate that Brent prices may need to fall into the mid-$50s to create the necessary supply slowdown.On the flip side, there's also a bullish scenario where we and the market are all overestimating the demand impact. If oil demand doesn't slow down as much as we currently expect and OPEC were to revert quite quickly back to managing the supply side again, then inventories would still build but only slowly. Now in that case, Brent could actually return into the low-$70s as well.All in all, we would suspect that the twin headwinds of higher-than-expected trade tariffs and faster-than-expected OPEC+ quota increases will continue to weigh on oil prices in the months ahead. And so we have lowered our demand forecast for the second half of the year to just 0.5 million barrels a day, year-on-year. And we’ve also lowered our prices forecasts for 2026; we’re now calling for $65 a barrel – that’s $5 a barrel lower than we were forecasting before.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.

29 Apr 20254min

Our CIO and Chief U.S. Equity Strategist Mike Wilson discusses how market volatility over the last month will affect equity markets as earnings season begins.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, I will discuss what to expect from Equity markets as we enter the heart of earnings season. It's Monday, April 28th at 11:30am in New York. So, let’s get after it. The S&P 500 tested both the lower and upper ends of our 5000-5500 range last week, reinforcing the notion that we remain in a volatile trading environment. Incrementally positive news on a potential tariff deal with China and hope for a more dovish Fed lifted stocks into the end of the week, and the S&P 500 closed slightly above the upper end of our range. While a modest overshoot of 5500 can persist very short-term, a sustainable break above this level is dependent on developments that have yet to come to fruition. Those include a tariff deal with China that brings down the effective rate materially; a more dovish Fed; 10-year Treasury yields falling below 4 percent without recessionary risks increasing; and a clear rebound in earnings revisions. Bottom line, until we see clear positive shift in one or more of these factors, range trading is likely to continue with risks to the downside given that we are now at the top end of the range. A frequent question we're getting from clients is does the soft data matter for equities or is the market waiting for the hard data to make up its mind in terms of an upside or downside breakout above or below this range? Our view has been consistent that the most important macro data at this stage is from the labor market while the most important micro data are earnings revisions. Equities have already priced a meaningful slowdown in growth relative to expectations. What's not priced is a labor cycle or recession. While this risk has been reduced to some extent given the recent, more dovish tone shift on tariffs from the administration, it's far from extinguished. Until we see clear evidence over multiple months that the labor market remains solid, a recession will likely remain a coin toss. One soft data point to pay attention to this week that could move the market is the April ISM Manufacturing data on May 1st. Recall this series accelerated the August 2024 selloff ahead of a soft July payroll report. The most important takeaway from an equity strategy perspective is to stay up the quality curve. No matter what the hard data says, we remain in a late cycle backdrop where both quality and large cap relative outperformance should continue. While uncertainty remains higher than usual, defensives should continue to do well. However, given their relative outperformance over the past year, it also makes sense to pick spots in high quality cyclicals that have already discounted a material slowdown in both macro conditions and earnings. To be clear, this is not a blanket call on cyclicals; it's a selective, stock-specific one. More specifically, look for quality, cyclical stocks that are more de-risked based on what the stocks are pricing from a forward earnings growth standpoint. See our written research for stock screens. And from a global standpoint, we recommend favoring U.S. over international equities at this point as a weaker dollar should benefit U.S. relative earnings revisions, particularly versus Europe and Japan. Furthermore, less volatile earnings growth and a higher quality bias should benefit the U.S. on a relative basis in today's late cycle backdrop. 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.

28 Apr 20253min

Our U.S. and Asia economists Michael Gapen and Chetan Ahya discuss how tariff uncertainty is shaping their expectations for these economies over the second half of 2025.Read more insights from Morgan Stanley. ----- Transcript -----Michael Gapen: Welcome to Thoughts on the Market. I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.Chetan Ahya: And I'm Chetan Ahya, Chief Asia Economist.Michael Gapen: Today we'll discuss some significant changes to our Asia growth forecast on the heels of tariffs. As well as how the U.S. economy is reacting to the changes in the global trading environment.It's Friday, April 25th at 8am in New York.Chetan Ahya: And 8pm in Hong Kong.Michael Gapen: So, Chetan, since the last time we were both on the show, it appears that we are headed towards at least some de-escalation of trade tensions. Just last week, you wrote in your report that the tariffs on China are too prohibitive for any trade to take place – and that you expected some dialing down of the escalatory action. And this week the administration started to talk about easing tariffs on China significantly.Considering all the events since April 2nd – and it's felt like a lot of events since April 2nd –where does it leave you in terms of how you are thinking about the outlook?Chetan Ahya: So, Mike, that's right. You know what we thought was that the current level of tariffs that the U.S. has on China and what China has on the U.S. means that effectively there are no transactions possibleBut look, even after those tariff rates are going down, we are still expecting it to be in the range of around 60 per cent. And that would still be relatively high level of tariffs. If I were just to translate this into what it means for the whole region? So, for the whole region, the weighted average tariff will still be around 32 per cent. And remember this number was close to 5 per cent in early January.So, we are talking about a huge amount of uncertainty related to this tariff path and the tariff level itself is going to remain somewhat high.And so, with that concern on uncertainty, we are expecting a region's investment growth to be affected significantly, taking down region's growth lower.Michael Gapen: So, Chetan, I was looking over your growth forecast and noticed that you have a sharp step down in growth from the second quarter of 2025 on. Can you walk us through these revisions in particular?Chetan Ahya: So yes, we have changed our forecast and what we are now seeing is in terms of growth path is that Asia's overall GDP growth will slow from 4.8 per cent that we saw in fourth quarter of last year, to around 3.6 per cent by fourth quarter of this year.And for comparable time period, China's growth will slow from 5.4 to 3.7 [per cent]. So that's another meaningful step down for ChinaMichael Gapen: What do you think Asian economies can do to counteract the impact from tariffs at this point?Chetan Ahya: So, we expect the policy makers in the region to take up both monetary and fiscal policy easing. But, you know, despite that policy easing effort, you will still see that meaningful growth drag. So, for China, we think it'll be the fiscal policy that will do the heavy lifting. Whereas for Asia ex-China is going to be more monetary policy that will do the heavy lifting.And in terms of the exact magnitude, we're expecting 50 to 150 basis points depending upon the economy in the region in form of rate cuts. And specifically on China; on the fiscal policy, we expect them to take up about 2.5 per cent of GDP increase in fiscal deficit in form of investment in infrastructure, as well as some programs for supporting consumption spending.Michael Gapen: So Chetan, it sounds like a lot of monetary and fiscal policy easing and support is coming from the Asian economies. But I guess the bottom line is that you don't think it would be sufficient to fully counteract the impact from tariffs. Is that right?Chetan Ahya: That's right Mike. And let me come to you now and get your thoughts on how you see the development of the tariffs, et cetera, affecting the U.S. economy. You've already recently characterized your view on the U.S. economy as still living on the edge. What's driving this view?Michael Gapen: It's a way that we were trying to communicate that, you know, we don't see the economy at the moment, falling into a recession, but we think it's close. If we thought that the effective tariff rate was going to stay where it was -- or where it is -- roughly around 18 per cent, then we would have a much more negative view on the outlook. And we do expect the effective tariff rate to come down for all the reasons that you suggested there. And there's openings for that, to happen. And that's where the conversation has been going in recent days.And so, I think there's a tension between how much uncertainty can be reduced on one hand. And then on the other hand, how quickly volumes in the economy, activity in the economy may slow. So, I think we're in a window here where – where we are in a race against time to bring the effective tariff rate lower, in order to keep the economy in recovery. So that was really my narrative here where living on the edge, where we're not projecting a recession, but we're close enough to one. That, it’s almost a coin toss. And I think we need to backpedal here relatively quickly, or we could have much more negative effects on the economy.Chetan Ahya: And Mike, I remember that, in 2018, we did not see this kind of a reaction in the consumer confidence data, but we are seeing that in this cycle. And on top of it, we have this expectation that corporate confidence will also be weighed down by policy uncertainty. So how does this double whammy of weak confidence feature in your forecast?Michael Gapen: I think the key component or in, in this case two key components for the outlook for the economy – because it's relatively straightforward to try and project or pass through the direct effect of tariffs on consumer spending, real incomes and trade volumes. But what's really hard to understand here is what does a highly uncertain environment do to asset markets and business sentiment?So, the, the two channels here that you mentioned, consumer confidence and business confidence. These are kind of what might get you spill over effects, and a recession.So, for the consumer, what we're really focused on here is, yes. Stated confidence by households is weak, but they're still generally spending. And tariffs affect lower- and middle-income houses more than they do upper income households. So, we're really keyed in on: Do equity markets fall enough? Do we get a negative wealth shock on upper income consumers, where they decide, ‘Hey, I feel less wealthy, therefore I'm going to spend less than save more.’So, then the business sector delays spending and may even, you know, generate some layoffs; and recessions, as you know, happen when there's a lot of negative feedback loops in the economy. And so, this is what we're worried about.Chetan Ahya: Another interesting debate, that we as a team are having with the investors is about the Fed policy response. And so, Fed Chair Powell has said that tariffs would generate at least a temporary rise in inflation. How do you think the Fed will handle a tariff induced spike in inflation?Michael Gapen: So, there has been an evolution in the Fed's thought and thinking around how to handle tariffs. Given the dramatic increase in tariffs,, I think the Fed has to wait and they have to see the actual data come in.So, in our view, with inflation rising first and activity weakening later, you probably don't get any Fed cuts this year. And the Fed moves to rate cuts in 2026. If we're wrong in the economy, and, and it decelerates, and moves into a recession more quickly than we would anticipate, and the labor market deteriorates rapidly, then the Fed will ease.But what they're doing here is they're responding to a world where both sides of their mandate are getting worse. And they're going to respond to the one that's more offsides than the other. And in the short run, we think that'll be inflation. So, it means the Fed moves much later than markets currently expect.Chetan Ahya: In terms of the next set of data points or events that you're watching, uh, which can change your view on the growth outlook – what are you really, looking out for?Michael Gapen: Well, I think in the very short run, it's looking at all the inflation data and seeing whether or not the higher tariff rates are getting passed through to the final consumer. We think a little of that will show up in the April inflation data that's due out in the middle of May. That'll be mainly around autos. But then we think the May, June, and July data will begin to show much more increase in goods prices from the tariff pass through. So, we'll be kind of watching that to see whether the inflation impulse is as strong as we think it will be.Second, I think in the very short run, we'll be watching trade volumes. We'll be watching even, shipping container volumes.We'll be watching for blank sales where ships skip ports because there's just not any activity or demand. And then finally, I'd say employment, right? Obviously, expansion versus contraction and whether the economy will stay in expansion phase will be dependent on whether employment continues to grow. We'll get an early look on that. For the April employment data in early May. We don't think there'll be much negative imprint on April employment, but as we move into May, June, and July, we could see hiring slow down more rapidly.So, Chetan, that's what I would point to – just ascertaining the near-term inflation impulse, looking out for any sharp slowdown in trade volumes and whether or not the labor market holds up.Michael Gapen: Before we close, based on what I just described about the U.S. and also how you're thinking about the tariff situation, how would you differentiate the economies in your part of the world? I only have to deal with one. You have to deal with many. How would you differentiate between economies in your region right now?Chetan Ahya: So Mike, what we've tried to do is to think about this more from which economies are more trade oriented and which economies are less trade oriented. Because we are aware about the fact that there is going to be an overall trade slowdown for the region. And so, in that context, India and Australia are the ones we think will be, relatively less affected from this trade slowdown and global growth slowdown. Whereas more trade-oriented economies, which is, you know, the likes of Korea, Taiwan, Thailand, Malaysia would be getting more affected.; The reality is that China is facing the maximum amount of tariffs within the region. And therefore we are building in a bit more growth slowdown in case of China, even while its trade orientation is a bit lower than Korea and Taiwan.Michael Gapen: Chetan, thanks for taking time to talk today.Chetan Ahya: Great speaking with you, Mike,Michael Gapen: 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 colleague today.

25 Apr 202511min

Our Co-Heads of Securitized Products Research Jay Bacow and James Egan explain how mortgage rates, tariffs and stock market volatility are affecting the U.S. housing market.Read more insights from Morgan Stanley. ----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley.James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley. And today we're here to talk about all of the headlines that we've been seeing and how they impact the U.S. housing market.It's Thursday, April 24th at 9am in New York.Jay Bacow: Jim, there are a lot of headlines right now. Mortgage rates have decreased about 60 basis points from the highs that we saw in January through the beginning of April. But since the tariff announcements, they've retraced about half of that move. Now, speaking of the tariffs, I would imagine that's going to increase the cost of building homes.So, what does all of this mean for the U.S. housing market?James Egan: On top of everything you just mentioned, the stock market is down over 15 per cent from recent peaks, so there is a lot going on these days. We think it all has implications for the U.S. housing market. Where do you want me to start?Jay Bacow: I think it's hard to have a conversation these days without talking about tariffs, so let's start there.James Egan: So, we worked on the impacts of tariffs on the U.S. housing market with our colleagues in economics research, and we did share some of the preliminary findings on another episode of this podcast a couple weeks ago. Since then, we have new estimates on tariffs, and that does raise our baseline expectation from about a 4 to 5 per cent increase in the cost of materials used to build a home to closer to 8 per cent right now.Jay Bacow: Now I assume at least some of that 8 per cent is going to get pushed through into home prices, which presumably is then going to put more pressure on affordability. And given the – I don't know – couple hundred conversations that you and I have had over the past few years, I am pretty sure affordability's already under a lot of pressure.James Egan: It is indeed. And this is also coming at a time when new home sales are playing their largest role in the U.S. housing market in decades. New home sales, as a percent of total, make up their largest share since 2006. New homes for sale – so now talking about the inventory piece of this – they’re making up their largest share of the homes that are listed for sale every month in the history of our data. And that's going back to the early 1980s.Jay Bacow: And since presumably the cost of construction is much higher on a new home sale than an existing home sale, that's going to have an even bigger impact now than it has when we look to the history where new home sales were making up a much smaller portion of housing activity.James Egan: Right, and we're already seeing this impact come through on the home builder side of this, specifically weighing on home builder sentiment and single unit building volumes. Through the first quarter of this year, single unit housing starts are down 6 per cent versus the first quarter of 2024.Jay Bacow: All right. And we're experiencing a housing shortage already; but if building volumes are going to come down, then presumably that puts upward pressure on home prices. Now, Jim, you mentioned home builder sentiment. But there's got to be home buyer sentiment right now. And that can't feel very good given the sell off in equity markets and what that does with home buyer's ability to afford to put down money for down payment. So how does that all affect the housing market?James Egan: Now that's a question that we've been getting a lot over the past couple weeks. And to answer it, we took a look at all of the times that the stock market has fallen by at least 20 per cent over the past few decades.Jay Bacow: I assume when you looked at that, the answers weren't very good.James Egan: You know, it depends on the question. We identified 10 instances of at least a 20 per cent drawdown in equity markets over the past few decades. For eight of them, we have sufficient home price data. Outside of the Global Financial Crisis (GFC), which you could argue was a housing led global recession, every other instance saw home prices actually climb during the equity market correction.Jay Bacow: So, people were buying homes during a drawdown in the equity market?James Egan: No home prices were climbing. But in every instance, and here we can go back a little bit further, sales declined during the drawdown. Now, once stock markets officially bottomed, sales climbed sharply in the following 12 months. But while stock prices were falling, so were sales.And Jay, at the top of this podcast, you mentioned mortgage rate volatility. That matters a lot here…Jay Bacow: Can you elaborate on why I said something so thoughtful?James Egan: Well, it's because you're a very thoughtful person. But why mortgage rate volatility matters here? While sales volumes fall in all instances, the magnitude of that decrease falls into two distinct camps. There are four of these roughly 10 instances, where the decrease in sales volumes is large; it exceeds 10 per cent. And again, one of those was that GFC – housing led global recession. But the other three all had mortgage rates increased by at least 200 basis points alongside the equity market selloff.Jay Bacow: So not only were people feeling less wealthy, but homes were getting more expensive. That just seems like a double whammy.James Egan: Bingo. And there were more instances where rates did actually decrease amid the equity market selloff. And while that didn't stop sales from falling, it did contain the decrease. In each of these instances, sales were virtually flat to down low single digits. So, call it a 3 or 4 per cent drop.Jay Bacow: All right, so that's a really good history lesson. What's going to happen now? We've been talking about the housing market being at almost trough turnover rates already for some time.James Egan: Right, so when we think about the view forward, and you talk about trough turnover rates, I've said some version of this statement on this podcast a few times…Jay Bacow [crosstalk]: You’re saying it again…James Egan: … but there’s some level of housing activity that has to occur regardless of where rates and affordability are. And coming into this year, we really thought we were at those levels. I'm not saying we don't still think that we're there, but if mortgage rates were to stay elevated like they are today as we're recording this podcast, amid this broader equity market volatility, we do think that could introduce a little bit more downside to sales volumes.Jay Bacow: All right, but if we've got this equity drawdown, then I feel like we've been getting other questions from homeowners’ ability to pay for these mortgages – and delinquencies in the pipeline. Do you have anything to highlight there?James Egan: Yes, so I think one of the things we've also highlighted with respect to the unique situation that we're in in the US housing market is – just how low effective mortgage rates are on the outstanding universe versus the prevailing rate today.We've talked about the implications of the lock-in effect. But if we take a closer look on just how much bifurcation that's led to in terms of household mortgage payments as a share of income, depending on when you bought your house. If you bought your house back in 2016, your income, if we at least look at median income growth, is up in the interim.You probably refinanced in 2020 when mortgage rates came down. That monthly payment as a share of today's income, today's median household income, roughly 8.5 per cent. If you bought up the median priced home at prevailing rates in 2024, you're talking about a payment to income north of 26 per cent. When we look at performance from a mortgage perspective, we are seeing real delineations by vintage of mortgage origination – with mortgages before 2021, behaving a lot better than mortgages after 2021. So the 2022 to [20]24 vintages.I would highlight that losses and foreclosures, those remain incredibly contained. We expect them to stay that way. But when we think about all of this on a go forward basis, we do think that mortgage rate volatility is going to be important for sales volumes next year. But everything we talked about should lead to continued support for home prices. They're growing at 4 per cent year-over-year now. By the end of the year, maybe 2 to 3 per cent growth. So, a little bit of deceleration, but still climbing home prices.Jay Bacow: Interesting. So normally we talk about the housing market. It's location, location, location. But it sounds like the timing of when you bought is also going to impact things as well. Jim, always a pleasure talking to you.James Egan: Pleasure talking to you too, Jay. And to our listeners, thanks for listening. If you enjoy this podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

24 Apr 20258min

Morgan Stanley’s Head of European Consumer Staples, Sarah Simon, discusses why aging populations, wellness trends and Gen Z’s moderation are putting pressure on the long-term outlook for alcoholic beverages.Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market. I’m Sarah Simon, Head of the European Consumer Staples team. Today’s topic: Is America sobering up? Recent trends point to a national decline in alcohol use.It's Wednesday, April 23rd, at 2pm in London.Picture this: It's Friday night, and you're at a bar with friends. The drinks menu offers many options. A cold beer or glass of wine, sure. But how about a Phony Negroni. And your friends nod approvingly.This isn't just a passing trend – we believe it's a structural shift that's set to reshape the beverage industry. Overall alcohol consumption in volume terms has been relatively flat over the last decade in the U.S. - with spirits growing mid single digits in value terms and beer growing low single digits. But both categories are currently declining. The big debate is whether it’s cyclical or structural. We acknowledge that the consumer is under pressure right now, but we equally see long term structural pressures that are starting to play out. There are three key factors behind this trend: increased moderation by younger drinkers, an ageing population, and then broader health and wellness trends. So let’s talk first about Gen Z – those born between 1997 and 2012. They're drinking notably less than previous generations of the same age. In fact, today’s 18-34 year-olds drink 30 per cent less than the same age group 20 years ago. And we think it’s pretty unlikely they will catch up as they get older. This isn't a temporary blip caused by the after-effects of COVID-19 lockdowns or economic pressures. It's a long-term trend that predates both of these factors. And importantly this isn’t the case of abstinence – as in the case of tobacco – but moderation. Younger generations are simply drinking less alcohol and allocating more of their beverage spending towards soft drinks. Secondly, developed market populations are ageing. If we look at population data, we see it’s today’s 45-55 year old age group that drinks the most alcohol; and has exhibited the highest growth in consumption and spending over the last 20 years. However, over the next 20 years, this cohort is likely to cut back on drinking due to physiological reasons as they age. The body simply becomes less able to metabolize alcohol, and there’s much higher usage of prescription medication in the over 65 age group. And in just the same way that this cohort was growing faster than the population overall over the last 20 years – because of the higher birth rate in the late 60s and 70s – in future, the aging of these GenX-ers will drive outsized growth in the number of people aged over 75, who consume much less alcohol. And so, the result is a disproportionate impact on overall alcohol consumption. And on top of this, there’s increased adoption of GLP-1 weight loss drugs that we’ve talked about previously. And increasingly negative perceptions of the health implications of alcohol – as the broader health and wellness trend takes hold. On the flip side, there's also a growing acceptance of non-alcoholic beverages, driven by better products and broader distribution. We expect low- and zero-alcohol alternatives to gain a larger share of the market as a result. And we think beer looks particularly well-positioned; it already accounts for about 85 per cent of the non-alcoholic market overall. And this year in the U.S., non-alcoholic beer has nearly doubled its share of U.S. beer retail sales, compared to where it was in 2021. Now it’s still small, but the growth rate in the well over 20 per cent range, suggests that share gain will continue. Meanwhile, we’re seeing more mocktails on menus and zero-alcohol beer on draft in pubs. All of this is further contributing to less stigma associated with not drinking alcohol. And all these trends add up to one conclusion, we think: earnings pressures on alcohol makers are not simply cyclical but structural. They have been underway even prior to COVID. And looking to the future, we think they’re here to stay. So now, many more people can say cheers to that. Thanks for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen to podcasts. And tell your friends about us too.

23 Apr 20255min

Our Chief Cross-Asset Strategist Serena Tang discusses the market’s shifting perception of risk and what’s behind some unusual patterns in fund flows among asset classes.Read more insights from Morgan Stanley. No investment recommendation is made with respect to any of the ETFs or mutual funds referenced herein. Investors should not rely on the information included in making investment decisions with respect to those funds. ----- Transcript -----Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Today I want to look at how investors are playing defense amid elevated macro uncertainty.It’s Tuesday, April 22, at 10am in New York.So, the last three weeks have brought intense volatility to global markets, and investors have had to reexamine their relationship with risk. Typically, in times like these, mutual fund and ETF flows from stocks into bonds serve as a clear gauge of investor defensiveness. But this pattern hasn’t really been informative this time around.Instead, flows to gold – rather than bonds – have been the clearest evidence of flight-to-quality most recently. Between April 3rd and 11th almost US$5 billion went into gold ETFs globally, one of the strongest seven-day net flow stretches ever. There's been US$22 billion of net inflows to gold ETFs with assets under management totaling about US$250 billion year-to-date. Of the 10 days of the highest net inflows to gold ETFs over the last 20 years, three occurred in the last month.Cash also benefited from the dash to defensives, with over US$100bn flowing into money market funds year-to-date. And we expect that reallocating to cash will be a theme for the rest of the year for many reasons. For one, our U.S. economists expect no Fed cuts in 2025 and back-loaded cuts in 2026 following a projected surge in core PCE inflation from tariffs. This means that money market fund yields should stay higher for longer. And with investors seeing the wild gyrations in safe government bonds in recent weeks, money market funds’ low volatility offer a strong risk/reward argument over holding Treasuries. For another, let's say our economists' base case is incorrect, and we do get steep cuts from the Fed sooner rather than later. That probably means we're on the brink of a recession; and in that situation, cash is king.You know what's been particularly surprising in the middle of this recent flight to quality? Outflows from high-grade US fixed income. These outflows are notable because U.S. Treasuries, Agency mortgages, and investment grade credit are usually seen as low-beta and defensives. But U.S. high-grade bonds saw net outflows of approximately US$1.4bn during the week of April 7th. These are the largest outflows since the pandemic; and we think that this trend can continue.So we need to ask ourselves if this is the end of American exceptionalism. And are we seeing a rotation from U.S. assets into rest-of-the-world?The answer may surprise you, but despite the outflows in U.S. bonds, there hasn’t really been a persistent rotation out of U.S. risk assets and into rest-of-world markets. At least not a lot of evidence in the data yet. U.S. equity investors still have a strong home bias, and we've seen continued net buying from Japanese and euro area investors of foreign equities – at least some of which are U.S. equities. We think investors should stay defensive amid the current uncertainty. But figuring out what's actually defensive has been challenging. This recent turmoil in the global markets suggests that the investors’ shifting idea of what's risky is a risk in itself. 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.

22 Apr 20254min

Can the U.S. equity market break out of its expected range? Our CIO and Chief U.S. Equity Strategist Mike Wilson looks at whether the Trump administration’s shifting tariff policy and Fed uncertainty will continue weighing down 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, I will discuss what it will take for the US equity market to break out of the 5000-5500 range. It's Monday, April 21st at 11:30am in New York.So, let’s get after it.Last week, we focused on our view that the S&P 500 was likely to remain in a 5000-5500 range in the near term given the constraints on both the upside and the downside. First, on the upside, we think it will be challenging for the index to break through prior support of 5500 given the recent acceleration lower in earnings revisions, uncertainty on how tariff negotiations will progress and the notion that the Fed appears to be on hold until it has more clarity on the inflationary and growth impacts of tariffs and other factors. At the same time, we also believe the equity market has been contemplating all of these challenges for much longer than the consensus acknowledges. Nowhere is this evidence clearer than in the ratio of Cyclical versus Defensive stocks as discussed on this podcast many times. In fact, the ratio peaked a year ago and is now down more than 40 per cent.Coming into the year, we had a more skeptical view on growth than the consensus for the first half due to expectations that appeared too rosy in the context of policy sequencing that was likely to be mostly growth negative to start. Things like immigration enforcement, DOGE, and tariffs. Based on our industry analysts' forecasts, we were also expecting AI Capex growth to decelerate, particularly in the first half of the year when growth rate comparisons are most challenging. Recall the Deep Seek announcement in January that further heightened investor concerns on this factor. And given the importance of AI Capex to the overall growth expectations of the economy, this dynamic remains a major consideration for investors. A key point of today’s episode is that just as many were overly optimistic on growth coming into the year, they may be getting too pessimistic now, especially at the stock level. As the breakdown in cyclical stocks indicate, this correction is well advanced both in price and time, having started nearly a year ago. Now, with the S&P 500 closing last week very close to the middle of our range, the index appears to be struggling with the uncertainty of how this will all play out.Equities trade in the future as they try to discount what will be happening in six months, not today. Predicting the future path is very difficult in any environment and that is arguably more difficult today than usual, which explains the high volatility in equity prices. The good news is that stocks have discounted quite a bit of slowing at this point. It’s worth remembering the factors that many were optimistic about four-to-give months ago—things like de-regulation, lower interest rates, AI productivity and a more efficient government—are still on the table as potential future positive catalysts. And markets have a way of discounting them before it's obvious.However, there is also a greater risk of a recession now, which is a different kind of slowdown that has not been fully priced at the index level, in our view. So as long as that risk remains elevated, we need to remain balanced with our short-term views even if we believe the odds of a positive outcome for growth and equities are more likely than consensus does over the intermediate term. Hence, we will continue to range trade.Further clouding the picture is the fact that companies face more uncertainty than they have since the early days of the pandemic. As a result, earnings revisions breadth is now at levels rarely witnessed and approaching downside extremes assuming we avoid a recession. Keep in mind that these revisions peaked almost a year ago, well before the S&P 500 topped, further supporting our view that this correction is much more advanced than acknowledged by the consensus. This is why we are now more interested in looking at stocks and sectors that may have already discounted a mild recession even if the broader index has not. Bottom line, if a recession is averted, markets likely made their lows two weeks ago. If not, the S&P 500 will likely take those lows out. There are other factors that could take us below 4800 in a bear case outcome, too. For example, the Fed decides to raise rates due to tariff-driven inflation; or the term premium blows out, taking 10-year Treasury yields above 5 per cent without any growth improvement.Nevertheless, we think recession probability is the wildcard now that markets are wrestling with. In S&P terms, we think 5000-5500 is the appropriate range until this risk is either confirmed or refuted by the hard data – with labor being the most important. In the meantime, stay up the quality curve with your equity portfolio.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.

21 Apr 20255min