Market Outcomes of Fed’s New Course

Our Co-Heads of Securitized Product Research Jay Bacow and James Egan discuss the outlook for mortgage rates and the U.S. housing market in 2026.Read more insights from Morgan Stanley.----- Transcript -----Jay Bacow: Jim, why did the cranberry turn red? James Egan: Please enlighten me. Jay Bacow: Because it saw the turkey dressing. Jay Bacow: I hope everybody had a good Thanksgiving. 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. Today we're here to talk about our views from mortgage rates in 2026 and how that flows through to our U.S. housing outlook.It's Monday, December 1st at 11:30am in New York.Now, Jay, as we all get over our turkey induced naps over the weekend, how are we thinking about mortgage rates evolving in 2026?Jay Bacow: Well, as you and I discussed previously on this podcast, the Fed cutting rates in and of itself doesn't actually cause the 30-year fixed rate mortgage to come down. However, our rate strategists’ forecast for lower rates in the front end should be helpful to where the primary rate ends up this year. And we would also expect some compression between primary mortgage rates and Treasury rates given our bullish outlook for the mortgage asset class. So, our expectation is that the 30-year fixed rate ends 2026 around 5.75 percent.James Egan: Alright, if we get to 5.75, maybe a little bit lower than that in the middle of next year, that's enough to send affordability into a healthier place. But that's a relative term. Affordability is still going to be under pressure, but it will have improved. And it will have improved at a pretty healthy amount from where we were in the fourth quarter of 2023, which was multi-decade levels of challenged.Jay Bacow: All right, Jim, so clearly the mortgage rate coming down does make homes more affordable, but is it enough to cause more homes to actually transact?James Egan: So, the answer is yes, but it's going to be a ‘Yes, but’ answer from that perspective. We do think that transaction volumes are going to increase. But to put into context where we sit from a housing market perspective – we already saw a healthy increase in affordability from the fourth quarter of [20]23 through the end of 2024, right? But if we put that affordability improvement in context, we've seen that about 10 times over the past 40 years. The only times where sales responded more tepidly than they just did in 2025 – were in 2009, the teeth of the Great Financial Crisis; and in 2020, when the market really slowed down in the immediate aftermath of COVID. The lock-in effect is still playing a very big role. We do think that this sustained marginal improvement and affordability will help purchase volumes. But this is not what's going to get us to kind of escape velocity. We're calling for about a 3 percent growth in purchase volumes next year. Jay Bacow: Alright. Now, you mentioned this a little bit already, but if there's less lock-in because the mortgage rate has come down, will more people be willing to list their homes for sale? Are we going to get more inventory on the market? James Egan: I think that's the other piece of how we're thinking about housing moving forward. Any improvement we get in affordability from lower mortgage rates is going to be paired with increasing inventory volumes. We've already seen that. Listed inventories are up roughly 30 percent from historic lows in 2023. They're still 20 percent worth below where they were in 2019. So, we're not talking about oversupply at this point. But that increase in listed inventories without a contemporaneous increase in demand is weighed on the pace of home price growth. We started this year at +4 percent nationally. We're below +1.5 percent. We think that any growth and demand will come coincident with the growth in listing volumes. That's going to keep home price appreciation under control. We're only calling for 2 percent growth in HPA next year, 3 percent out in 2027. But the high level thought here is that the housing market is well supported at these levels. Difficult to see big decreases in sales volumes or prices next year. But also going to be difficult to really achieve any more material growth in this low single digits we're calling for. But Jay, as you and I are talking about this outlook with market participants, one question that gets brought up frequently is what else can the administration do, especially on the affordability side, to help with instigating more housing activity. Jay Bacow: In order to really help affordability, given the challenges that you've discussed around the supply and demand issues; then the other aspect of that is just what is the mortgage rate? And if they were to do things that would cause the mortgage rate to come down, that would be helpful. Now, the Fed already has made an announcement that they're going to continue mortgage runoff from their balance sheet. If they ended mortgage runoff, that would've helped. But that window seems to have passed. There's been some discussion from the administration around new types of programs. In particular, there was a lot of headlines around a 50-year program. A 50-year amortization schedule would likely result in a material drop in the monthly payment that the homeowner would make – which would help. However, the total interest payments for that homeowner, depending on exactly where this hypothetical 50-year mortgage rate would price, are probably about double over the life of the loan relative to a 30-year fixed rate mortgage. So, we're not really sure that this product would see a huge amount of upkeep. There's also some technical challenges around whether it meets the definition of a qualified mortgage and some other in the weeds discussions. James Egan: What about all the discussion we're hearing around assumability of mortgages, portability of mortgages? Is there anything there? Jay Bacow: Based on our understanding of contract law, which I have to confess is limited as I am not a lawyer, we don't think you can retroactively make mortgages portable or assumable that were not already portable or assumable. So, you can make new mortgages portable and assumable. Portable as a reminder means that if you have a mortgage, you take it with you to your new house, and assumable means that the mortgage stays with the house. If you sell it to somebody else, they get that mortgage. But realistically, we think this would have to be a new product. And because it would be a new product with new benefits to the homeowner, it would actually probably cause their mortgage rate to be higher, not lower. James Egan: I guess one last question. We're talking about affordability and we're addressing it through interest rates being lower, we’re addressing it through the potential for new products to be put out there, even if there are some challenges around that piece of it. But what about just demand for mortgages themselves? You said the Fed might not be a buyer going forward, but are there other pockets of demand for mortgages that could help bring down mortgage rates? Jay Bacow: Sure. So, we expect the GSEs to grow their portfolio next year, that would certainly be helpful. On the margin, we expect them to buy about a little less than a third of the net issuance that comes to the market. We also think that domestic banks could come back to the market and they could help bring the mortgage rates lower. But these changes are going to help mortgage rates by, in the context of maybe an eighth of a point to a quarter of a point at most. It's not a panacea, unfortunately. James Egan: Alright. So, we expect a little bit of an improvement in mortgage rates, a little bit of affordability improvement next year. That should lead to growth in purchase volumes, and I think it will lead to a little bit of growth in home prices. But the housing market is well supported range bound here. Jay Bacow: Jim, pleasure talking to you. And to all our regular listeners, thank you for adding Thoughts on the Market to your playlist. James Egan: Let us know what you think wherever you get this podcast and share Thoughts on the Market with a friend or colleague today.Jay Bacow: And as my kids would say, go smash that subscribe button.

1 Dec 20258min

Original Release Date: October 31, 2025Our Japan Financials Analyst Mia Nagasaka discusses how the country’s new stablecoin regulations and digital payments are set to transform the flow of money not only locally, but globally.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I’m Mia Nagasaka, Head of Japan Financials Research at Morgan Stanley MUFG Securities. Today – Japan’s stablecoin revolution and why it matters to global investors. It’s Friday, October 31st, at 4pm in Tokyo. Japan may be late to the crypto market. But its first yen-denominated stablecoin is just around the corner. And it has the potential to quietly reshape how digital money moves across the country and globally. You may have heard of digital money like Bitcoin. It’s significantly more volatile than traditional financial assets like stocks and bonds. Stablecoins are different. They are digital currencies designed to maintain a stable value by being pegged to assets such as the yen or U.S. dollar. And in June 2023, Japan amended its Payment Services Acts to create a legal framework for stablecoins. Market participants in Japan and abroad are watching closely whether the JPY stablecoin can establish itself as a major global digital currency, such as Tether. Stablecoins promise to make payments faster, cheaper, and available 24/7. Japan’s cashless payment ratio jumped from about 30 percent in 2020 to 43 percent in 2024, and there’s still room to grow compared to other countries. The government’s push for fintech and digital payments is accelerating, and stablecoins could be the missing link to a truly digital economy. Unlike Bitcoin or other cryptocurrencies, stablecoins are designed to suppress price volatility. They’re managed by private companies and backed by assets—think cash, government bonds, or even commodities like gold. Industry watchers think stablecoins can make digital payments as reliable as cash, but with the speed and flexibility of the internet. Japan’s regulatory approach is strict: stablecoins must be 100 percent backed by high-quality, liquid assets, and algorithmic stablecoins are prohibited. Issuers must meet transparency and reserve requirements, and monthly audits are standard. This is similar to new rules in the U.S., EU, and Hong Kong. What does this mean in practice? Financial institutions are exploring stablecoins for instant payments, asset management, and lending. For example, real-time settlement of stock and bond trades normally take days. These transactions could happen in seconds with stablecoins. They also enable new business models like Banking-as-a-Service and Web3 integration, although regulatory costs and low interest rates remain hurdles for profitability.Or think about SWIFT transactions, the backbone of international payments. Stablecoins will not replace SWIFT, but they can supplement it. Payments that used to take days can now be completed in seconds, with up to 80 percent lower fees. But trust in issuers and compliance with anti-money laundering rules are critical. There’s another topic on top of investors’ minds. CBDCs – Central Bank Digital Currencies. Both stablecoins and CBDCs are digital. But digital currencies are issued by central banks and considered legal tender, whereas stablecoins are private-sector innovations. Japan is the world’s fourth-largest economy and considered a leader in technology. But it takes a cautious approach to financial transformation. It is preparing for a CBDC but hasn’t committed to launching one yet. If and when that happens, stablecoins and CBDCs can coexist, with the digital currency serving as public infrastructure and stablecoins driving innovation. So, what’s the bottom line? Japan’s stablecoin journey is just beginning, but its impact could ripple across payments, asset management, and even global finance. 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 Nov 20255min

Original Release Date: October 10, 2025Our U.S. Thematic and Equity Strategist Michelle Weaver discusses how the largest intergenerational wealth transfer in history could reshape saving, spending and investment behavior across America.Read more insights from Morgan Stanley.----- Transcript ----- Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's U.S. Thematic and Equity Strategist.Today, a powerful force reshaping the financial lives of millions of Americans: inheritance.It's Friday, October 10th at 10am in New York.Americans are living longer and they're passing on their wealth later. Longevity is one of Morgan Stanley Research's four key themes, and this is an interesting element of longevity. As baby boomers age, they're expected to transfer their wealth to Gen X, millennials and Gen Z to the tune of tens or even hundreds of trillions of U.S. dollars.Estimates vary widely, but the amounts are unprecedented. And so, inheritance isn't just a family milestone; it's becoming an important cornerstone of financial planning and longevity. And understanding who's receiving, expecting, and using their inheritances is key to forecasting how Americans save, spend, and invest.According to our latest AlphaWise survey, 17 percent of U.S. consumers have received an inheritance, and another 14 percent expect to receive one in the future. Younger Americans are especially optimistic. Their expectations split evenly between those anticipating an inheritance within the next 10 years and those expecting it further out.But here's the kicker; income plays a huge role. Only 17 percent of lower income consumers report receiving or expecting an inheritance, but that number jumps to 43 percent among higher income households highlighting a clear wealth divide.What about the size of the inheritance? In our survey, those who received or expect to receive an inheritance fall broadly into three categories. About half reported amounts under $100,000 dollars. For about a third, that amount rose to under $500,000. And then meanwhile, 10 per cent reported an inheritance of half a million dollars or more.Younger consumers tend to report smaller amounts, while inheritance size rises with income. One important thing to remember about our survey though, is it looks more at the average person. We are missing some of those very high net worth demographics in there where I would expect inheritance to rise much higher than half a million.And so, when we think about this, how will recipients use this wealth? That's a really important question. The majority, about 60 percent, say they have or will put their inheritance towards savings, retirement, or investments. About a third say they'll use it for housing or paying down debt. Day-to-day consumption, travel, education and even starting a business or giving to charity also featured in the survey responses – but to a lesser extent.The financial impact of inheritance is significant: 46 percent of recipients say it makes them feel more financially secure; 40 percent cite improvements in savings; and 22 percent associate it with increased spending. Some even report retiring earlier or lightening their workloads.Inheritance trends are shaping consumer behavior and have the power to influence spending patterns across industries. To sum it up, inheritance isn't just a family matter, it's a market mover.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 Nov 20253min

Our Chief U.S. Economist Michael Gapen breaks down how growth, inflation and the AI revolution could play out in 2026.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.Today I'll review our 2026 U.S. Economic Outlook and what it means for growth, inflation, jobs and the Fed.It’s Tuesday, November 25th, at 10am in New York.If 2025 was the year of fast and furious policy changes, then 2026 is when the dust settles.Last year, we predicted slow growth and sticky inflation, mainly because of strict trade and immigration policies – and this proved accurate. But this year, the story is changing. We see the U.S. economy finally moving past the high-uncertainty phase. Looking ahead, we see a return to modest growth of 1.8 percent in 2026 and 2 percent in 2027. Inflation should cool but it likely won’t hit the Fed’s 2 percent target. By the end of 2026, we see headline PCE inflation at 2.5 percent, core inflation at 2.6 percent, and both stay above the 2 percent target through 2027. In other words, the inflation fight isn’t over, but the worst is behind us.So, if 2025 was slow growth and sticky inflation, then 2026 and [20]27 could be described as moderate growth and disinflation. The impact of trade and immigration policies should fade, and the economic climate should improve. Now, there are still some risks. Tariffs could push prices higher for consumers in the near term; or if firms cannot pass through tariffs, we worry about additional layoffs. But looking ahead to the second half of 2026 and beyond, we think those risks shift to the upside, with a better chance of positive surprises for growth.After all, AI-related business spending remains robust and upper income consumers are faring well. There is reason for optimism. That said, we think the most likely path for the economy is the return to modest growth. U.S. consumers start to rebound, but slowly. Tariffs will keep prices firm in the first half of 2026, squeezing purchasing power for low- and middle-income households. These households consume mainly through labor market income, and until inflation starts to retreat, purchasing power should be constrained.Real consumption should rise 1.6 percent in 2026 and 1.8 [percent] in 2027 – better, but not booming. The main culprit is a labor market that’s still in ‘low-hire, low-fire’ mode driven by immigration controls and tariff effects that keep hiring soft. We see unemployment peaking at 4.7 percent in the second quarter of 2026, then easing to 4.5 percent by year-end. Jobs are out there, but the labor market isn’t roaring. It'll be hard for hiring to pick up until after tariffs have been absorbed.And when jobs cool, the Fed steps in. The Fed is cutting rates – but at a cost. After two 25 basis point rate cuts in September and October, we expect 75 basis points more by mid 2026, bringing the target range to 3.0-3.25 percent. Why? To insure against labor market weakness. But that insurance comes with a price: inflation staying above target longer. Think of it as the Fed walking a tightrope—lean too far toward jobs, and inflation lingers; lean too far toward inflation, and growth stumbles. For now the Fed has chosen the former.And how does AI fit into the macro picture? It’s definitely a major growth driver. Spending on AI-related hardware, software, and data centers adds about 0.4 percent to growth in both 2026 and 2027. That’s roughly 20 percent of total growth. But here’s the twist: imports dilute the impact. After accounting for imported tech, AI’s net contribution falls sharply. Still, we expect AI to boost productivity by 25-35 basis points by 2027, over our forecast horizon, marking the start of a new innovation cycle. In short: AI is planting the seeds now for bigger gains later.Of course, there are risks to our outlook. And let me flag three important ones. First, demand upside – meaning fiscal stimulus and business optimism push growth higher; under this scenario inflation stays hot, and the Fed pauses cuts. If the economy really picks up, then the Fed may need to take back the risk management cuts it's putting in now. That would be a shock to markets. Second, there’s a productivity upside – in which case AI delivers bigger productivity gains, disinflation resumes, and rates drift lower. And lastly, a potential mild recession where tariffs and tight policy bite harder, GDP turns negative in early 2026, and the Fed slashes rates to near 1 percent. So in summary: 2026 looks to be a transition year with less drama but more nuance, as growth returns and inflation cools, while AI keeps rewriting the playbook.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.

25 Nov 20256min

Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why investors might want to reassess their portfolios, keeping in mind the gap between market moves and monetary policy.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, why the Fed may hold the key for both near term and medium-term stock market performance. It's Monday, November 24th at 1pm in New York. So, let’s get after it. At the end of September, we discussed the building tension between the Fed and markets in terms of both the fed funds rate and liquidity, suggesting this had the potential to lead to a correction in the short-term. This scenario is playing out with high momentum and low-quality stocks responding more to tightening liquidity back in September, while the high-quality S&P 500 and Nasdaq 100 responded more to the incremental hawkishness on rate cuts relayed at the October 29th Fed meeting.While downside for the S&P 500 has been limited to just 5 percent, the damage under the surface has been more significant with two-thirds of the largest 1000 stocks seeing more than a 10 percent drawdown and one quarter down more than 20 percent. Similarly, Bitcoin is down close to 30 percent and topped even earlier than high momentum stocks. Gold also felt the impact of tighter liquidity earlier than the S&P 500, as one would expect.We’re staying vigilant around this dynamic related to monetary policy and can't rule out more index-level downside in the short-term, especially if breadth remains weak. Having said that, we think the weakness under the hood is a sign that we're closer to the end of this correction than the beginning for the weaker areas of the market. Historically, the Generals tend to fall the most at the end of corrections. As I said on this podcast back in September, we would view this type of correction and reset on expectations as an opportunity to double down on our rolling recovery thesis which remains out of consensus.From our perspective, private labor data are showing signs of weakness that suggest the Fed should be cutting rates more aggressively. This is very much in line with my core view that the rate of change trough in the labor data occurred back in April with the lows in the equity market. The official government labor data that the Fed is waiting for is lagging and will simply confirm what we, and the markets, already know. With the official October jobs data cancelled due to the shutdown and the November series not available until December 16th, the equity market may continue to wrestle with the Fed that dragging its feet and delaying rate cuts.The good news is that we expect a meaningful decline in the Treasury’s General Account in the coming weeks as the government re-opens. This should help to provide a much-needed boost to liquidity at the same time the Fed ends quantitative tightening. The question is whether these changes will be enough to improve liquidity conditions in a durable way. In my view, the clearest indication will be if we see relief in areas of the equity market and asset classes most sensitive to these dynamics over the next two weeks. That means low quality profitless growth stocks in the equity world should rally the most.Bottom line, I remain convinced in our bullish 12-month outlook for the S&P 500 and stocks more broadly. Initial feedback from investors to our recently published 2026 outlook indicates that several of our core views for 2026 remain out of consensus. More specifically, our early cycle narrative versus consensus thinking that we’re late cycle; 17 percent earnings growth next year versus the consensus at 14 percent. And finally, our upgrades of small/mid cap stocks and consumer discretionary goods to overweight. Use near term weakness related to a Fed that is moving too slow for the markets’ liking to reposition portfolio to sectors and stocks that have lagged behind for most of the past several years – but will benefit the most from the more aggressive Fed action that we expect to come.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!

24 Nov 20254min

As market murmurs about an AI bubble, our Head of Corporate Credit Research Andrew Sheets offers some perspective on the impacts of the increasing demand for debt.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, a look at a very different type of challenge for credit markets. It's Friday, November 21st at 6pm in Singapore. It has now been well over 15 years since the Global Financial Crisis shook the credit markets to its very core. It's hard to state just how extreme that period was. How many usual relationships and valuation approaches broke. It saw the worst credit losses in 80 years; I think, and hope, that this record will hold for the next 80. This shock, however, did have a silver lining for the credit market. After a crisis that was driven by bank balance sheets being too large and complex, they shrank and simplified. After companies saw capital markets suddenly shut, they increased their cash levels and often managed themselves more conservatively. The housing market long, the engine of debt growth in the U.S. saw much tighter lending standards and less overall borrowing. And so, all these trends had a common theme. Less bond supply. The credit market has seen numerous bouts of volatility in the years since. But these have generally been driven by concerns around the macro economy, like the eurozone crisis or COVID. Or they've been driven by companies’ specific issues such as weakness around the oil sector in the mid 2010s or the collapse of Silicon Valley Bank in 2023. The idea that there would be too much borrowing for the level of demand and that this causes market weakness, well, it just hasn't been an issue. Until – that is – now. As we've discussed on this program, there is an enormous increase underway in the amount of capital expenditure by technology companies as they look to build out the infrastructure that supports their cloud and AI ambitions. Morgan Stanley Equity Research estimates that the largest spenders will commit about $470 billion of spending this year and [$]620 billion of spending next year. That's over $1 trillion of spending in just a two-year period. And it's still growing. We see a lot of momentum behind this spending, as the companies doing it have both enormous financial resources and see it as central to their future ambitions. But all this spending, however, will need to come from somewhere. These are often very profitable companies and so we think about half will be funded from their cash flows. The other half, well, debt markets will play a big role, especially as these companies are often highly rated and so have significant capacity to borrow more. And over the last few weeks, those spigots have now turned on. Several large technology hyperscalers have been borrowing tens of billions at a clip, and they've been doing this in short succession. There is some good news here. This new borrowing has been coming at a discount, with the issuers willing to pay investors a bit more than their existing debt to take it on. Demand in turn has been very high for this debt. And in most cases, this borrowing is still well below anything that could feasibly trigger rating agency action. But it is raising a very different type of issue after a long period where, generally speaking, investors have rarely worried about excessive supply – these are very large deals coming at very large discounts, and they are moving the market. If a AA rated company is in the market willing to pay the same as a current single A, well, that existing single A credit just simply looks less attractive. As far as problems go, we think this is a generally less scary one for the market to face but is a new challenge – something we haven't encountered for some time. And based on the aforementioned spending plans, it may be with us for some time to come. 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.

21 Nov 20254min

Live from Morgan Stanley’s Asian Pacific Summit, our Chief Fixed Income Strategist Vishy Tirupattur explains why micro trends are likely to be more on focus than macro shocks next year.Read more insights from Morgan Stanley.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist, coming to you from the Morgan Stanley Asia Pacific Summit underway in Singapore. Much of the client conversation at the summit was about the market outlook for 2026. In the last few days, you've heard from my colleagues about our outlook for the global economy, equities and cross asset markets. On today's podcast, I will focus on the outlook and key themes ahead for the global fixed income market. It's Thursday, November 20th at 10am in Singapore. Last year, the difficulty of predicting policy really complicated our task. This year brings its own challenges. But what we see is micro trends driving the markets in ways that adapt to a generally positive stance on risk. Our economists’ base case sees continued disinflation and growth converging towards potential by 2027, with the possibility that the potential itself improves. Notably, they present upside scenarios exploring stronger demand and rising productivity, while the downside case remains relatively benign. The U.S. remains pivotal, and the U.S. led shocks – positive and negative – should drive outcomes for the global economy and markets in 2026, In 2025, the combination of a resilient U.S. consumer supported by healthy balance sheets and rising wealth alongside robust AI driven CapEx has underpinned growth and helped avoid recession despite the headwinds of trade policy. These same dynamics should continue to support the baseline outlook in 2026, even though the path will be likely uneven. The Fed faces a familiar conundrum softening labor markets versus solid spending. The baseline assumes cuts to neutral as unemployment rises, followed by a recovery in the second half. Outside the U.S., most economies trend towards potential growth and neutral policy rates by end of 2026, but the timing and the trajectory vary. And as in recent years, global outcomes will likely hinge on U.S.-led effects and their spillovers. Our macro strategists expect government bond yields to stay range bound, and it is really a story of two halves. A front-loaded rally as the Fed cuts 50 basis points, pushing 10-year yields lower by mid-year before drifting higher into the fourth quarter. Curve steepening remains our high conviction call, especially two tens curve. The dollar follows a similar arc, softening mid-year, and then rebounding into the year end. AI financing moves to the forefront putting credit markets in focus, a topic that has come up repeatedly in every single meeting I've had in Singapore so far. So, from unsecured to structured and securitized credit in both public markets and private markets, credit will likely play a central role in enabling the next wave of AI related investments. Our credit and securitized credit strategists see data center financing in 2026 dominated by investment grade issuance. While fundamentals in corporate and securitized credit remain solid, the very scale of issuance ahead points to spread widening investment grade and in data center related ABS. Carry remains a key driver for credit returns, but dispersion should rise. Segments relatively insulated from the AI related supply such as U.S. high yield, agency brokerage backed securities, non-agency CMBS and RMBS are poised to outperform. We favor agency MBS and senior securitized tranches over U.S. investment grade, especially as domestic bank demand for agency MBS returns post finalization of the Basel III. 2025 was a tough year to navigate, and while we are constructive on 2026, it won't be a walk in the park. The challenges ahead look different. Less about macro shocks, more about micro shifts and market nuance. More details in our outlooks published just a few days ago. Thanks for listening If you like the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

20 Nov 20254min

Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why he continues to hold on to an out-of-consensus view of a growth positive 2026, despite near-term risks.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’ll discuss our outlook for 2026 that we published earlier this week. It’s Wednesday, Nov 19th at 6:30 am in New York. So, let’s get after it. 2026 is a continuation of the story we have been telling for the past year. Looking back to a year ago, our U.S. equity outlook was for a challenging first half, followed by a strong second half. At the time of publication, this was an out of consensus stance. Many expected a strong first half, as President Trump took office for his second term. And then a more challenging second half due to the return of inflation. We based our differentiated view on the notion that policy sequencing in the new Trump administration would intentionally be growth negative to start. We likened the strategy to a new CEO choosing to ‘kitchen sink’ the results in an effort to clear the decks for a new growth positive strategy. We thought that transition would come around mid-year. The U.S. economy had much less slack when President Trump took office the second time, compared to the first time he came into office. And this was the main reason we thought it was likely to be sequenced differently. Earnings revisions breadth and other cyclical indicators were also in a phase of deceleration at the end of 2024. In contrast, at the beginning of 2017—when we were out of consensus bullish—earnings revisions breadth and many cyclical gauges were starting to reaccelerate after the manufacturing and commodity downturn of 2015/2016. Looking back on this year, this cadence of policy sequencing did broadly play out—it just happened faster and more dramatically than we expected. Our views on the policy front still appear to be out of consensus. Many industry watchers are questioning whether policies enacted this year will ultimately lead to better growth going forward, especially for the average stock. From our perspective, the policy choices being made are growth positive for 2026 and are largely in line with our ‘run it hot’ thesis. There’s another factor embedded in our more constructive take. April marked the end of a rolling recession that began three years prior. The final stages were a recession in government thanks to DOGE, a rate of change trough in expectations around AI CapEx growth and trade policy, and a recession in consumer services that is still ongoing. In short, we believe a new bull market and rolling recovery began in April which means it’s still early days, and not obvious—especially for many lagging parts of the economy and market. That is the opportunity. The missing ingredient for the typical broadening in stock performance that happens in a new business cycle is rate cuts. Normally, the Fed would have cut rates more in this type of weakening labor market. But due to the imbalances and distortions of the COVID cycle, we think the Fed is later than normal in easing policy, and that has held back the full rotation toward early cycle winners. Ironically, the government shutdown has weakened the economy further, but has also delayed Fed action due to the lack of labor data releases. This is a near-term risk to our bullish 12-month forecasts should delays in the data continue, or lagging labor releases do not corroborate the recent weakness in non-govt-related jobs data. In our view, this type of labor market weakness coupled with the administration's desire to ‘run it hot’ means that, ultimately, the Fed is likely to deliver more dovish policy than the market currently expects. It's really just a question of timing. But that is a near-term risk for equity markets and why many stocks have been weaker recently. In short, we believe a new bull market began in April with the end of a rolling recession and bear market. Remember the S&P [500] was down 20 percent and the average S&P stock was down more than 30 percent into April. This narrative remains underappreciated, and we think there is significant upside in earnings over the next year as the recovery broadens and operating leverage returns with better volumes and pricing in many parts of the economy. Our forecasts reflect this upside to earnings which is another reason why many stocks are not as expensive as they appear despite our acknowledgement that some areas of the market may appear somewhat frothy. For the S&P 500, our 12-month target is now 7800 which assumes 17 percent earnings growth next year and a very modest contraction in valuation from today’s levels. Our favorite sectors include Financials, Industrials, and Healthcare. We are also upgrading Consumer Discretionary to overweight and prefer Goods over Services for the first time since 2021. Another relative trade we like is Software over Semiconductors given the extreme relative underperformance of that pair and positioning at this point. Finally, we like small caps over large for the first time since March 2021, as the early cycle broadening in earnings combined with a more accommodative Fed provides the backdrop we have been patiently waiting for. We hope you enjoy our detailed report published earlier this week and find it helpful as you navigate a changing marketplace on many levels. Thanks for tuning in. 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!

19 Nov 20255min