Big Debates: The State of the Energy Transition

As Generative AI continues to accelerate, some agencies will be better positioned than others to reap the benefits. Our Europe Media & Entertainment analyst, Laura Metayer, explains.----- Transcript -----Welcome to Thoughts on the Market. I’m Laura Metayer, from the Morgan Stanley Europe Media & Entertainment team. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss what the future may hold for advertising agencies amid fast-paced Generative AI developments.It’s Wednesday, July 31, at 2 PM in London. Right now we’re still in the early stages of GenAI’s impact on ad agency offerings; although the debate around technology removing the need for ad agencies is not new. Soon after the release of ChatGPT in early 2023, my colleagues in North America started mapping out the potential impact of GenAI on the ad agencies. They concluded that GenAI should represent an opportunity for the ad agencies, at least near-term. First, Gen AI would lead to productivity improvements from automatable tasks in creative, media, digital transformation consulting and central functions like HR and Finance. Second, GenAI would boost client demand for advice from agencies to help navigate the coming evolution in digital advertising. Fast-forward to now and the impact of GenAI on the ad agencies has become an active investor debate, with concerns centering around the Creative business. Many eyes are on the Gen AI-powered text to image/video tools, which could disrupt the ad agencies' Creative & Production business. We this has weighed on agency stock prices recently. Essentially, the bear case has been – and is – that technology would devalue agencies’ offerings and agency clients may rely more on tech platforms and in-house services. That bear case – twenty years into online advertising – has not played out. We think that in these early days of AI’s impact on marketing, there may be more upside to agency equities than risk over the next 12 to 18 months. On the one hand, the introduction of Gen AI tools may mean reduced pricing power and challenged top-line growth. At the same time, replacing creative personnel with software may increase earnings power, even with less revenue. We think it's likely that a key value-add of the ad agencies' Creative business would be campaign personalization at scale, powered by data and technology. Looking back, technology has been commoditizing certain areas of creative and production for years, well ahead of AI; and yet creativity and creative services remain core value propositions by agencies to brands. Overall, there is as much – if not more – opportunity than risk for ad agencies over time. So let me leave you with two key takeaways: First, we see the larger ad agencies as better positioned to remain relevant to customers in the GenAI era. However, we would caution that their large scale may also lower their ability to adapt quickly to evolving customer requirements when it comes to GenAI. Second, we expect GenAI to drive more consolidation in the industry. We think it’s likely that some of the large ad agencies take market share from other large ad agencies. As these trends play out over time, we’ll continue to keep you updated. 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.

31 Juli 20243min

A later cycle economy and continued uncertainty means that investors should be remain wary of cyclicals such as small caps, explains Mike Wilson, our CIO and Chief US Equity Strategist.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about slowing growth in the context of high valuations.It's Tuesday, July 30th at 3pm in New York.So, let’s get after it.Over the past few weeks, the equity markets have taken on a different complexion with the mega cap stocks lagging and lower quality small caps doing better. What does this mean for investor portfolios? And is the market telling us something about future fundamentals? In our view, we think most of this rotation is due to the de-grossing that is occurring within portfolios that are overweight large cap quality growth and underweight lower quality and smaller cap names.We have long been in the camp that large cap quality has been the place to be – for equity investors – as opposed to diving down the quality and cap curves. That continues to be the case; though we are watching the fundamental and technical backdrop for small caps closely, and we’re respectful of the pace of the recent move in the space.For now, however, we continue to think the better risk/reward is to stay up the quality curve and avoid the more cyclical parts in the market like small caps. Our rationale for such positioning is simple — in a later cycle economy where growth is softening or not translating into earnings growth for most companies, large cap quality outperforms. Exacerbating the many imbalances across the economy is a bloated fiscal budget deficit. In our view, there are diminishing returns to fiscal spending when it starts to crowd out private companies and consumers. As I have been discussing for the past year, this crowding out has contributed to the bifurcation of performance in both the economy and equity markets, while potentially keeping the Fed's Interest rate policy tighter than it would have been otherwise.While the macro data has been mixed, there is a growing debate around the actual strength of the labor market with the household survey painting a weaker picture than the non-farm payroll data which is based on employer surveys. The bottom line is that we are in a stable, but decelerating late cycle economy from a macro data standpoint. However, on the micro front, the data has not been as stable and is showing a more meaningful deterioration in growth; particularly as it relates to the consumer.More specifically, earnings revision breadth has broken down recently for many of the cyclical parts of the market. Financials has been a bright spot here but that may be short-lived if the consumer continues to weaken. We continue to favor quality but with a greater focus on defensive sectors like utilities, staples and REITs as opposed to growthier ones like technology. The issue with the growth stocks is valuations and the quality of the earnings for some of the mega cap tech stocks.The other variable weighing on stocks at the moment is valuations which remain in the top decile of the past 20 years. It’s worth noting that valuations are very sensitive to earnings revisions breadth. The last time revision breadth rolled over into negative territory was last fall. Between July and October 2023, the market multiple declined from 20x to 17x. Two weeks ago, this multiple was 22x and is now 21x. If earnings revisions continue to fade as we expect, it’s likely these valuations have further to fall. With our 12-month base case target multiple at 19x, the risk reward for equities broadly remains quite unfavorable at the moment.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.

30 Juli 20243min

Our sustainability strategists Stephen Byrd and Tim Chan discuss what’s driving new opportunities across the global nuclear power sector and some risks investors should keep in mind.----- Transcript -----Stephen Byrd: Welcome to Thoughts on the Market. I'm Steven Byrd, Morgan Stanley's Global Head of Sustainability Research.Tim Chan: And I'm Tim Chan, Asia Pacific Head of Sustainability Research.Stephen Byrd: And on this episode of the podcast, we'll discuss some significant developments in the nuclear power generation space with long term implications for global markets.It’s Monday, July 29th at 8am in New York.Tim Chan: And 8 pm in Hong Kong.Stephen Byrd: Nuclear power remains divisive, but it is making a comeback.So, Tim, let's set the scene here. What's really driving this resurgence of interest in nuclear power generation?Tim Chan: One key moment was the COP28 conference last year. Over 20 countries, including the US, Canada, and France, signed a joint declaration to triple nuclear capacity by 2050. Right now, the world has about 390 gigawatts of nuclear capacity providing 10 per cent of global electricity. It took 70 years to bring global nuclear capacity to 390 gigawatts. And now the COP28 target promises to build another 740 gigawatts in less than 30 years.And if this remarkable nuclear journey is going to be achieved, that will require financing and also shorter construction time.Stephen Byrd: So, Tim, how do you size the market opportunity on a global scale over the next five to ten years?Tim Chan: We estimate that nuclear renaissance will be worth $ 1.5 trillion (USD) through 2050, in the form of capital investment in new global nuclear capacity. And the growth globally will be led by China and the US. China will also lead in the investment in nuclear, followed by the US and the EU. In addition, this new capacity will need $128 billion (USD) annually to maintain.Stephen Byrd: Well, Tim, those are some gigantic numbers, $1.5 trillion (USD) and essentially a doubling of nuclear capacity by 2050. I want to dig into China a bit and if you could just speak to how big of a role China is going to play in this.Tim Chan: In China, by 2060, nuclear is likely to account for roughly 80 per cent of the total power generation, according to the China Nuclear Association. This figure represents half of the global nuclear capacity in similar stages, which amounts to 520 gigawatts.And Stephen, can you tell us more about the US?Stephen Byrd: Sure, during COP 28, the US joined a multinational declaration to triple nuclear power capacity by 2050. In this past year, the US has seen the completion of a new nuclear power plant in Georgia, which is the first new reactor built in the United States in over 30 years.Now, beyond this, we have not seen a strong pipeline in the US on large scale nuclear plants, according to the World Nuclear Association. And for the US to triple its nuclear capacity from about 100 gigawatts currently, the nation would need to build about 200 gigawatts more capacity to meet the target.In our nuclear renaissance scenario, we assume only 50 gigawatts will be built, considering a couple of factors. So, first, clean energy options, such as wind and solar are becoming more viable; they're dropping in cost. And also, for new nuclear in the United States, we've seen significant construction delays and cost overruns for the large-scale nuclear plants. Now that said, there is still upside if we're able to meet the target in the US.And I think that's going to depend heavily on the development of small modular reactors or SMRs. I am optimistic about SMRs in the longer term. They're modular, as the name says. They're easier to design, easier to construct, and easier to install. So, I do think we could see some upside surprises later this decade and into the next decade.Tim Chan: And nuclear offers a unique opportunity to power Generative AI, which is accounting for a growing share of energy needs.Stephen Byrd: So, Tim, I was wondering how long it was going to take before we began to talk about AI.Nuclear power generators do have a unique opportunity to provide power to data centers that are located on site, and those plants can provide consistent, uninterrupted power, potentially without external connections to the grid. In the US, we believe supercomputers, which are essentially extremely large data centers used primarily for GenAI training, will be built behind the fence at one or more nuclear power plants in the US. Now these supercomputers are absolutely massive. They could use the power, potentially, of multiple nuclear power plants.Now just let that sink in. These supercomputers could cost tens of billions of dollars, possibly even $100 billion plus. And they will bring to bear unprecedented compute power in developing future Large Language Models.So, Tim, where does regulation factor into the resurgence of nuclear power or the lack of resurgence?Tim Chan: So, for the regulation, we focus a lot on the framework to provide financing: subsidies, sustainable finance taxonomies and also from the bond investor; although we note that taxonomies are still developing to offer dedicated support to nuclear. We expect nuclear financing under green bonds will become increasingly common and accepted. However, exclusion on nuclear still exists.Stephen Byrd: So finally, Tim, what are some of the key risks and constraints for nuclear development?Tim Chan: I would highlight three risks. Construction time, shortage of labor, and uranium constraint. These remain the key risks for nuclear projects to bring value creation.US and Europe had high profile delay in the past, which led to massive cost overrun. We are also watching the impacts of shortage of skilled labor, which is more likely in the developed markets versus emerging markets. And the supply of enriched uranium, which is mainly dominated by Russia.Stephen Byrd: Well, that's interesting, Tim. There are clearly some risks that could derail or slow down this nuclear renaissance. Tim, thanks for taking the time to talk.Tim Chan: Great speaking with you, Stephen.Stephen Byrd: 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.

29 Juli 20246min

Our head of Corporate Credit Research, Andrew Sheets, notes areas of uncertainty in the credit, equity and macro landscapes that are worth tracking as we move into the fall.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about three risks we’re focused on for the third quarter.It's Friday, July 26th at 2pm in London.We like credit. But there are certainly risks we’re watching. I’d like to discuss three that are top of mind. The first is probably the mildest. Looking back over the last 35 years, August and September have historically been tougher months for riskier assets like stocks and corporate bonds. US High Yield bonds, for example, lose about 1 per cent relative to safer government bonds over August-September. That’s hardly a cataclysm, but it still represents the worst two-month stretch of any point of the year. And so all-else-equal, treading a little more cautiously in credit over the next two months has, from a seasonal perspective, made sense. The second risk is probably the most topical. Equity markets, especially US equity markets, are seeing major shifts in which stocks are doing well. Since July 8th, the Nasdaq 100, an index dominated by larger high-quality, often Technology companies, is down over 7 per cent. The Russell 2000, a different index representing smaller, often lower quality companies, is up over 11 per cent. So ask somebody – ‘How is the market?’ – and their answer is probably going to differ based on which market they’re currently in. This so-called rotation in what’s outperforming in the equity market is a risk, as Technology and large-cap equities have outperformed for more than a decade, meaning that they tend to be more widely held. But for credit, we think this risk is pretty modest. The weakness in these Large, Technology companies is having such a large impact because they make up so much of the market – roughly 40 per cent of the S&P 500 index. But those same sectors are only 6 per cent of the Investment grade credit market, which is weighted differently by the amount of debt somebody is issued. Meanwhile, Banks have been one of the best performing sectors of the stock market. And would you believe it? They are one of the largest sectors of credit, representing over 20 per cent of the US Investment Grade index. Put a slightly different way, when thinking about the Credit market, the average stock is going to map much more closely to what’s in our indices than, say, a market-weighted index. The third risk on our minds is the most serious: that economic data ends up being much weaker than we at Morgan Stanley expect. Yes, weaker data could lead the Fed and the ECB to make more interest rate cuts. But history suggests this is usually a bad bargain. When the Fed needs to cut a lot as growth weakens, it is often acting too late. And Credit consistently underperforms.We do worry that the Fed is a bit too confident that it will be able to see softness coming, given the lag that exists between when it cuts rates and the impact on the economy. We also think interest rates are probably higher than they need to be, given that inflation is rapidly falling toward the Fed’s target. But for now, the US Economy is holding up, growing at an impressive 2.8 per cent rate in the second quarter in data announced this week. Good data is good news for credit, in our view. Weaker data would make us worried. 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.

26 Juli 20243min

Markets are contending with greater uncertainty around the US presidential election following President Biden’s withdrawal. Our Global Head of Fixed Income and Thematic Research breaks down what we know as the campaign enters a new phase.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Thematic Research. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about the latest development in the US presidential race.It's Thursday, July 25th at 2:30 pm in New York. Last weekend, when President Biden decided not to seek re-election, it begged some questions from investors. First, with a new candidate at the top of the ticket, are there new policy impacts, and potential market effects, resulting from Democrats winning that we haven’t previously considered? For the moment, we think the answer is no. Consider Vice President Harris. Her policy positions are similar to Biden’s on key issues of importance to markets. And even if they weren’t, the details of key legislative policies in a Democratic win scenario will likely be shaped by the party’s elected officials overall. So, our guidance for market impacts that investors should watch for in the event that Democrats win the White House is unchanged. Second, what does it mean for the state of the race? After all, markets in the past couple of weeks began anticipating a stronger possibility of Republican victory. It was visible in stronger performance in small cap stocks, which our equity strategy team credited to investors seeing greater benefits in that sector from more aggressive tax cuts under possible Republican governance. It was also visible in steeper yield curves, which could reflect both weaker growth prospects due to tariff risks, pushing shorter maturity yields lower, and greater long-term uncertainty on economic growth, inflation, and bond supply from higher US deficits – something that could push longer-maturity Treasury yields relatively higher. So, it's understandable that investors could question the durability of these market moves if the race appeared more competitive. But the honest answer here is that it's too early to know how the race has changed. As imperfect as they are, polls are still our best tool to gauge public sentiment. And there’s scant polling on Democratic candidates not named Biden. So, on the question of which candidate more likely enjoys sufficient voter support to win the election, it could be days or weeks before we have reliable information. That said, prediction markets are communicating that they expect the race to tighten – pricing President Trump’s probability of regaining the White House at about 60-65 per cent, down from a recent high of 75-80 per cent. So bottom line, a change in the Democratic ticket hasn’t changed the very real policy stakes in this election. We’ll keep you informed here of how it's impacting our outlook for markets. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

25 Juli 20242min

Our Chief Asia Economist explains how the region’s economies and markets would be affected by higher tariffs, and other possible scenarios in the US elections.----- Transcript -----Welcome to Thoughts on the Market. I’m Chetan Ahya, Morgan Stanley’s Chief Asia Economist. Along with my colleagues bringing you a variety of perspectives, today I’ll discuss a question that’s drawing increasing attention – just how the U.S. presidential election would affect Asian economies and markets. It’s Wednesday, July 24th, at 8 PM in Hong Kong. As the US presidential race progresses, global markets are beginning to evaluate the possibility of a Trump win and maybe even a Republican sweep. Investors are wondering what this would mean for Asia in particular. We believe there are three channels through which the US election outcome will matter for Asia. First, financial conditions – how the US dollar and rates will move ahead of and after the US elections. Second, tariffs. And third, US growth outcomes, which will affect global growth and end demand for Asian exports. Well, out of the three our top concern is the growth downside from higher tariffs. The 2018 experience suggests that the direct effect of tariffs is not what plays the most dominant role in affecting the macro outcomes; but rather the transmission through corporate confidence, capital expenditure, global demand and financial conditions. Let’s consider two scenarios. First, in a potential Trump win with divided government, China would likely be more affected from tariffs than Asia ex China. We see potentially two outcomes in this scenario – one where the US imposes tariffs only on China, and another where it also imposes 10 percent tariffs on the rest of the world. In the case of 60 percent tariffs on imports from China, there would be meaningful adverse effect on Asia's growth and it will be deflationary. China would remain most exposed compared to the rest of the region, which has reduced its export exposure to China over time and could see a positive offset from diversification of the supply chain away from China. In the case where the US also imposes 10 percent tariffs on imports from the rest of the world, we expect a bigger downside for China and the region. We believe that in this instance – in addition to the direct effect of tariffs on exports – the growth downside will be amplified by significant negative impact on corporate confidence, capex and trade. Corporate confidence will see bigger damage in this instance as compared to the one where tariffs are imposed only on China as corporate sector will have to think about on-shoring rather than continuing with friend-shoring. In the second scenario, in a potential Trump win with Republican sweep, in addition to the implications from tariffs, we would also be watching the possible fiscal policy outcomes and how they would shift the US yields and the dollar. This means that the tightening of financial conditions would pose further growth downside to Asia, over and above the effects of tariffs. How would Asia’s policymakers respond to these scenarios? As tariffs are imposed, we would expect Asian currencies to most likely come under depreciation pressure in the near term. While this helps to partly offset the negative implications of tariffs, it will constraint the ability of the central banks to cut rates. In this context, we expect fiscal easing to lead the first part of the policy response before rate cuts follow once currencies stabilize. It’s worth noting that in this cycle, the monetary policy space in Asia is much more limited than in the previous cycles because nominal rates in Asia for the most part are lower than in the US at the starting point. Of course, this is an evolving situation in the remaining months before the US elections, and we’ll continue to keep you updated on any significant developments. 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.

24 Juli 20244min

Our Head of Global Autos & Shared Mobility discusses what makes humanoid robots a pivotal trend with implications for the global economy.----- Transcript -----Welcome to Thoughts on the Market. I’m Adam Jonas, Morgan Stanley’s Head of Global Autos & Shared Mobility. Today I’ll be talking about an unusual but hotly debated topic: humanoid robots.It’s Tuesday, July 23rd, at 10am in New York. We've seen robots on factory floors, in displays at airports and at trade shows – doing work, performing tasks, even smiling. But over the last eighteen months, we seem to have hit a major inflection point.What's changed? Large Language Models and Generative AI. The current AI movement is drawing comparisons to the dawn of the Internet. It’s begging big, existential questions about the future of the human species and consciousness itself. But let’s look at this in more practical terms and consider why robots are taking on a human shape. The simplest answer is that we live in a world built for humans. And we’re getting to the point where – thanks to GenAI – robots are learning through observation. Not just through rudimentary instruction and rules based heuristic models. GenAI means robots can observe humans in action doing boring, dangerous and repetitive tasks in warehouses, in restaurants or in factories. And in order for these robots to learn and function most effectively, their design needs to be anthropomorphic. Another reason we're bullish on humanoid robots is because developers can have these robots experiment and learn from both simulation and physically in areas where they’re not a serious threat to other humans. You see, many of the enabling technologies driving humanoid robots have come from developments in autonomous cars. The problem with autonomous cars is that you can't train them on public roads without directly involving innocent civilians – pedestrians, children and cyclists -- into that experiment. Add to all of this the issue of critical labor shortages and challenging demographic trends. The global labor total addressable market is around $30 trillion (USD) or about one-third of global GDP. We’ve built a proprietary US total addressable market model examining labor dynamics and humanoid optionality across 831 job classifications, working with our economic team; and built a comprehensive survey across 40 sectors to understand labor intensity and humanoid ability of the workforce over time. In the United States, we forecast 40,000 humanoid units by 2030, 8 million by 2040 and 63 million by 2050 – equivalent to around $3 trillion (USD) of salary equivalent. But as early as 2028 we think you're going to see significant adoption beginning in industries like manufacturing, production, warehousing, and logistics, installation, healthcare and food prep. Then in the 2030s, you’re going to start adding more in healthcare, recreational and transportation. And then after 2040, you may see the adoption of humanoid robots go vertical. Now you might say – that’s 15 years from now. But just like autonomous cars, the end state might be 20 years away, but the capital formation is happening right now. And investors should pay close attention because we think the technological advances will only accelerate from here. Thanks for listening. And 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 20243min

Our CIO and Chief US Equity Strategist explains that in the event of a Republican sweep in this fall’s U.S. elections, investors should not expect a repeat of 2016 given the different business environment.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist. Along with my colleagues bringing you a variety of perspectives, today I'll be talking about why investors should fade the recent rally in small caps and other pro cyclical trades. It's Monday, July 22nd at 11:30am in New York. So let’s get after it.With Donald Trump’s odds of winning a second Presidency rising substantially over the past few weeks, we’ve fielded many questions on how to position for this outcome. In general, there is an increasing view that growth and interest rates could be higher given Trump's focus on business-friendly policies, de-regulation, higher tariffs, less immigration and additional tax cuts. While the S&P 500 has risen alongside Trump's presidential odds this year, several of the perceived industry outperformers under this political scenario have only just recently started to show relative outperformance. One could argue a Trump win in conjunction with a Republican sweep could be particularly beneficial for Banks, Small Caps, Energy Infrastructure and perhaps Industrials. Although, the Democrats' heavy fiscal spending and subsidies for the Inflation Reduction Act, Chips Act and other infrastructure projects suggest Industrial stocks may not see as much of an incremental benefit relative to the past four years. The perceived industry underperformers are alternative energy stocks and companies likely to be affected the most by increased tariffs. Consumer stocks stand out in terms of this latter point, and they have underperformed recently. However, macro factors are likely affecting this dynamic as well. For example, concerns around slowing services demand and an increasingly value-focused consumer have risen, too. It's interesting to note that while these cyclical areas that are perceived to outperform under a Trump Presidency did work in 2016 and through part of 2017, they did even better during Biden's first year. Our rationale on this front is that the cycle plays a larger role in how stocks trade broadly and at the sector level than who is in the White House. As a comparison, we laid out a bullish case at the end of 2016 and in early 2017 when many were less constructive on pro cyclical risk assets than we were post the 2016 election. It’s worth pointing out that the global economy was coming out of a commodity and manufacturing recession at that time, and growth was just starting to reaccelerate, led by another China boom. Today, we face a much different macro landscape. More specifically, several of the cyclical trades mentioned above typically show their best performance in the early cycle phase of an economic expansion like 2020-2021. They show strong, but often not quite as strong performance in mid cycle periods like 2016-17. They tend to show less strong returns later in the cycle like today. Our late cycle view is further supported by the persistent fall in long term interest rates and inverted yield curve. We believe the recent outperformance of lower quality, small cap stocks has been driven mainly by a combination of softer inflation data and hopes for an earlier Fed cut combined with dealer demand and short covering from investors on the back of Trump’s improved odds. For those looking to the 2016 playbook, we would point out that relative earnings revisions for small cap cyclicals are much weaker today than they were during that period. Back in December when small caps saw a similar squeeze higher, we explored the combination of factors that would likely need to be in place for small cap equities to see a durable, multi-month period of outperformance. Our view was that the introduction of rate cuts in and of itself was not enough of a factor to drive small cap outperformance versus large caps. In fact, history suggests large cap growth tends to be the best performing style once the Fed begins cutting as nominal growth is often slowing at this point in the cycle, which enables the Fed to begin cutting. We concluded that to see durable small cap outperformance, we would need to see a much more aggressive Fed cutting cycle that revived animal spirits in a significant enough way for growth and pricing power to inflect higher, not lower like recent trends. We are monitoring small cap earnings expectations and small business sentiment for signs that animal spirits are building in this way. Rates and pricing power are still headwinds; while small businesses are not all that sanguine about expanding operations, they are increasingly viewing the economy more positively — an incremental positive and something worth watching. We will continue to monitor the data in assessing the feasibility of this small cap rally continuing. Based on the evidence to date, we would resist the urge to chase this cohort and lean back into large cap quality and defensives. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or colleague today.

22 Juli 20245min