Thoughts on the Market

Our Head of Corporate Research Andrew Sheets and Chief Investment Officer for Morgan Stanley Wealth Management Lisa Shalett unpack what's fueling persistent U.S. inflation and how investors could adjust their portfolios to this new landscape.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management. Andrew Sheets: Today, is inflation really transitory or are we entering a new era where higher prices are the norm? Andrew Sheets: It's Thursday, December 18th at 4pm in London. Lisa Shalett: And it's 11am in New York. Andrew Sheets: Lisa, it's great to talk to you again. And, you know, we're having this conversation in the aftermath of, kind of, an unusual dynamic in markets when it comes to inflation. Because inflation is still hovering around 3 percent. That's well above the Federal Reserve's 2 percent target. And yet the Federal Reserve recently lowered interest rates again. Fiscal policy remains very stimulative, and I think there's this real question around whether inflation will moderate? Or whether we're going to see inflation be higher for longer. And you know, you are out with a new report touching on some of the issues behind this and why this might be a structural shift higher in inflation. So, we'd love to get your thoughts on that, and we'll drill down into the various drivers as this conversation goes on. Lisa Shalett: Thanks Andrew. And look, I think as we take a step back, and the reason we're calling this a regime change is because we see factors for inflation coming from both the demand side and the supply side. For example, on the demand side, the role of the infrastructure boom, the GenAI infrastructure boom, has become global. It has caused material appreciation of many commodities in 2025. We're seeing it obviously in some of the dynamics around precious metals. But we're also seeing it in industrial metals. Things like copper, things like nickel. We're also seeing demand factors that may stem from the K-shaped economy. And the K-shaped economy, as we know, is really about this idea that the wealthiest folks are increasingly dominating consumption. And they are getting wealthy through financial asset inflation. On the supply side, there are dynamics like immigration, dynamics around the housing market that we can talk about. But perhaps the wrapper around all of it is how policy is shifting – because increasingly policymakers are being constrained by very high levels of debt and deficits. And determining how to fund those debts and deficits actually removes some of the degrees of freedom that central bankers may have when it comes to actually using interest rates to constrain demand. Andrew Sheets: Well, Lisa, this is such a great point because we're financial analysts. We're not political analysts. But it seems safe to say that voters really don't like inflation. But they also don't like some of the policies that would traditionally be assigned to fight inflation – be they higher interest rates or tighter fiscal policy. And even some of the more recent political shifts that we've seen – I'm talking about the U.S. around, say, immigration policy could arguably be further tightening of that supply side of the economy – measures designed to raise wages, almost explicitly in their policy goals. So how do you see that dynamic? And, again, kind of where does that leave, you think, policy going forward? Lisa Shalett: Yeah. I think the very short answer – our best guess is that policy becomes constrained. So, on the monetary side, we're already seeing the Fed beginning to signal that perhaps they're going to rely on other tools in the toolkit. And what are those tools in the toolkit? Well, they're managing the size of their balance sheet, managing the duration or the mix of things that they hold in the balance sheet. And it's actual, you know, returns to how they think about reserve management in the banking system. All of those things, all of those constraints may enable the U.S. government to fund debts, right? By buying the Treasury bill issuance, which is, you know, swollen to almost [$]2 trillion a year in terms of U.S. deficits. But on the fiscal side, right, the interest payments on debt, begins to crowd out other government spending. So, policy itself in this era of fiscal dominance becomes constrained – both in, you know, Washington, D.C. and from Congress – what they can do, their degrees of freedom – and what the central bank can do to actually control inflation. Andrew Sheets: Another area that you touch on in your report is energy and technology, which are obviously related with this large boom that we're seeing – and continue to expect in AI data center construction. This is a lot of spending on the technology. This is a lot of power needed to power that technology and U.S. data center electricity demand is growing at a rapid rate. And transmission constraints are causing prices to go up. A price that is a pretty visible price for a lot of people when they get their utility bill. So, how do these factors you think shape the story? And where do you think they're going to go as we look into the future? Lisa Shalett: Yeah, 100 percent. I mean, I think, you know, when we talk about, you know, who's going to dominate in Generative AI globally, one of the factors that we have to take into consideration is what is the cost of power? What is the cost of electricity? What is the age of the infrastructure to both generate that electricity and transport it? And transmit it? This is one of the areas where the U.S., at the minute, is facing genuine constraints. When you think about some of the forecasts that have been put out there in terms of $10 trillion of spending related to Generative AI, the number of data centers that are going to be built, and the power shortfall that has been forecast. We're talking about someone having to pay the price, if you will, to ration power until you can upgrade the grid. And in the U.S., that grid upgrade, to be blunt, has lagged some of the rest of the world. Not only because the rest of the world was slower to modernize and leapfrogged in many ways. But we know in China, for example, they have one of the lowest electricity generation costs on the planet. That is an advantage for them. So, we have to consider that power generation writ large is potentially a force for upward inflation, at least in the short term. Andrew Sheets: So we have the fiscal policy backdrop. We have an AI spending backdrop both contributing to the demand side of inflation. We have these supply constraints, whether it's housing or labor also, you know, potentially being more structural drivers of higher inflation. The question I'm sure that investors are asking you is, what should they do about it? So, can you walk us through the key strategies that investors might want to consider as they navigate a new inflationary regime? Lisa Shalett: Sure. So, the first thing that we think it's really important for folks to appreciate is that typically when we've been in these higher inflation regimes in the past, stocks and bonds become positively correlated. And what that means is that the power of a very simple 60-40 or stock-bond-cash portfolio to provide complete or optimal diversification fades. And it requires investors to potentially consider investing, especially beyond fixed income. Stocks very often are pro-inflationary assets; meaning many, many companies have the power to pass through price increases. If you are consuming income from a fixed income or a bond instrument, inflation is your enemy, right? Because it's eating into your real returns. And so, one of the things that we're talking with our clients a lot about in terms of portfolio construction are things like adding real assets, adding infrastructure assets, adding energy, transportation assets, adding commodities. Adding gold even, to a certain extent. You know, there may be cryptocurrencies that have lower correlations to their portfolios. Andrew Sheets: Just to play devil's advocate, you can imagine that some investors might say, ‘Well, I can look in the market at long-term inflation expectations.' And those long-term inflation expectations have been kind of stable and a bit above the Fed's target. But not dramatically. So, what do you say to that? And what do you think those markets either might be missing? Or how could investors leverage that more benign view that's out there in the market? Lisa Shalett: Yeah, so look, I think here's where the debate, right? Our perception has been that inflation expectations have remained extraordinarily anchored – because investors have actually reasonably short memories on the one hand, and we have, by and large, been in disinflationary times. Second, there's extraordinary faith in policy makers – that policy makers will fight inflation. And I think the third thing is that there's extraordinary faith in the deflationary forces of technology. Now, all three of those things may absolutely, positively be true. The problem that we have is that the alternate case, right? The case that we're making – that maybe we're in a new inflationary regime is not priced, and the risk is non-zero. And so, what we see, and what we're watching is – how steep does the yield curve get, right? As we look at yields in the 10-30-year tenure – what is driving those rates higher? Is it a generic term premium? Or are we starting to see an unanchoring, if you will, of inflation expectations. And it takes a while for people to appreciate regime change. And so, look, as is always the case, there's no absolutes in the market. There's no one theory that is priced and the other theory is not. But sometimes you want to hedge, and we think that we're going through a period where diversified portfolios and hedging for these alternative outcomes -- because there are such powerful structural crosscurrents – is the preferred path. Andrew Sheets: Lisa, thanks for sharing your insights Lisa Shalett: Of course, Andrew. That's my pleasure. Andrew Sheets: As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us, wherever you listen. It helps more people find the show.

Our Public Policy Strategists Michael Zezas and Ariana Salvatore break down key moves from the White House, U.S. Congress and Supreme Court that could influence markets 2026.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Ariana Salvatore: And I'm Ariana Salvatore, U.S. Public Policy Strategist.Michael Zezas: Today we'll be talking about the outlook for U.S. public policy and its interaction with markets into 2026.It's Wednesday, December 17th at 10:30am in New York.So, Ariana, we published our year ahead outlook last month. And since then, you've been out there talking to clients about U.S. public policy, its interaction with markets, and how that plays into 2026. What sorts of topics are on investors' minds around this theme?Ariana Salvatore: So, the first thing I'd say is clients are definitely interested in our more bullish outlook, in particular for the U.S. equity market. And normally we would start these conversations by talking through the policy variables, right? Immigration, deregulation, fiscal, and trade policy. But I think now we're actually post peak uncertainty for those variables, and we're talking through how the policy choices that have been made interact with the outlook.So, in particular for the equity market, we do think that some of the upside actually is pretty isolated from the fact that we're post peak uncertainty on tariffs, for example. Consumer discretionary – the double upgrade that our strategists made in the outlook has very little to do with the policy backdrop, and more to do with fundamentals, and things like AI and the dollar tailwind and all of all those factors.So, I think that that's a key difference. I would say it's more about the implementation of these policy decisions rather than which direction is the policy going to go in.Michael Zezas: Picking up on that point about policy uncertainty, when we were having this conversation a year ago, right after the election, looking into 2025, the key policy variables that we were going to care about – trade, fiscal policy regulation – there was a really wide range of plausible outcomes there.With tariffs, for example, you could make a credible argument that they weren't going to increase at all. But you could also make a credible argument that the average effective tariff rate was going to go up to 50 or 60 percent. While the tariff story certainly isn't over going into 2026, it certainly feels like we've landed in a place that's more range bound. It's an average effective tariff rate that's four to five times higher than where we started the year, but not nearly as high as some of the projections would have. There's still some negotiation that's going on between the U.S. and China and ways in which that could temporarily escalate; and with some other geographies as well. But we think the equilibrium rate is roughly around where we're at right now.Fiscal policy is another area where the projections were that we were going to have anything from a very substantial deficit expansion. Tax cuts that wouldn't be offset in any meaningful way by spending cuts; to a fiscal contraction, which was going to be more focused on heavier spending cuts that would've more than offset any tax cuts. We landed somewhere in between. It seems like there's some modest stimulus in the pipe for next year. But again, that is baked. We don't expect Congress to do much more there.And in terms of regulation, listen, this is a little bit more difficult, but regulatory policy tends to move slowly. It's a bureaucratic process. We thought that some of it would start last year, but it would be in process and potentially hit next year and the year after. And that's kind of where we are.So, we more or less know how these variables have become something closer to constants, and to your point, Ariana now it's about observing how economic actors, companies, consumers react to those policy choices. And what that means for the economy next year.All that said, there's always the possibility that we could be wrong. So, going back to tariffs for a minute, what are you looking at that could change or influence trade policy in a way that investors either might not expect or just have to account for in a new way?Ariana Salvatore: So, I would say the clearest catalyst is the impending decision from the Supreme Court on the legality of the IEEPA tariffs. I think on that front, there are really two things to watch. The first is what President Trump does in response. Right now, there's an expectation that he will just replace the tariffs with other existing authorities, which I think probably should still be our base case. There's obviously a growing possibility, we think, that he actually takes a lighter touch on tariffs, given the concerns around affordability. And then the second thing I would say is on the refunds piece. So, if the Supreme Court does, in fact, say that the Treasury has to pay back the tariff revenue that it's collected, we've investigated some different scenarios what that could look like. In short, we think it's going to be dragged out over a long time period, probably six months at a minimum. And a lot of this will come down to the implementation and what specifically Treasury and CBP, its Customs and Border Protection, sets up to get that money back out to companies.The second catalyst on the trade front is really the USMCA review. So, this is an important topic because it matters a lot for the nearshoring narrative, for the trade relationship that the U.S. has with Mexico and Canada. And there are a number of sectors that come into scope. Obviously, Autos is the clearest impact.So, that's something that's going to happen by the middle of next year. But early in January, the USTR has to give his evaluation of the effectiveness of the USMCA to Congress. I think at that point we're going to start to see headlines. We're going to go start to see lawmakers engage more publicly with this topic. And again, a lot at stake in terms of North American supply chains. So that's going to be a really interesting development to keep an eye on next year too.Michael Zezas: So, what about things that Congress might do? Recently the President and Democrats have been talking about the concept of affordability in the wake of some of the off-cycle elections, where that appeared to influence voter behavior and give Democrats an advantage. So are there policies, any legislative policies in particular, that might come to the forefront that might impact how consumers behave?Ariana Salvatore: So a really important starting point here is just on the process itself, right? So, as we've said, one of the more reliable historical priors is that it's difficult to legislate during election years. That's a function of the fact that lawmakers just aren't in D.C. as often. You also have limited availabilities in terms of procedure itself because Republicans would have to probably do another Reconciliation Bill unless you get some bipartisan support.But hitting on this topic of affordability, there really are a few different things on the table right now. Obviously, the President has spoken about these tariff dividend checks, the $2,000. They've spoken about making changes on housing policy, so housing deregulation, and then the third is on these expanded ACA subsidies.Those were obviously the crux of the government shutdown debate. And for a variety of reasons, I think each of these are really challenging to see moving over the finish line in the coming months. We think that you would need to see some sort of exogenous economic downturn, which is not currently in our economists' baseline forecast, to really get that kind of more reactive fiscal policy.And because of those procedural constraints, I would just go back to the point we were saying earlier around tariff policy and maybe the Supreme Court decision, giving Trump this opportunity to pull back a little bit. It's really the easiest and most available policy lever he has to address affordability. And to that point, the administration has already taken steps in this direction. They provided a number of exemptions on agricultural products and said they weren't going to move forward with the Section 232 tariffs on semiconductors in the very near term. So, we're already seeing directionally, I would say, movement in this area.Michael Zezas: Yeah. And I think we should also keep our eye on potential legislation around energy exploration. This is something that in the past has had bipartisan support loosening up regulations around that, and it's something that also ties into the theme of developing AI as a national imperative. That being said, it's not in our base case because Democrats and Republicans might agree on the high points of loosening up regulations for energy exploration. But there's a lot of disagreements on the details below the surface.But there's also the midterm elections next year. So, how do you think investors should be thinking about that – as a major catalyst for policy change? Or is it more of the same: It's an interesting story that we should track, but ultimately not that consequential.Ariana Salvatore: So obviously we're still a year out. A lot can change. But obviously we're keeping an eye on polling and that sort of data that's coming in daily at this point. The historical precedent will tell you that the President's party almost always loses seats in a midterm election. And in the House with a three-seat majority for Republicans, the bar's actually pretty low for Democrats to shift control back. In the Senate, the map is a little bit different. But let's say you were to get something like a split Congress, we think the policy ramifications there are actually quite limited. If you get a divided government, you basically get fiscal gridlock. So, limits to fiscal expansion, absent like a recession or something like that – that we don't expect at the moment. But you really will probably see legislation only in areas that have bipartisan support.In the meantime, I think you could also expect to see more kind of political fights around things like appropriations, funding the government, the debt ceiling that's typical of divided governments, unless you have some area of bipartisan support, like I said. Maybe we see something on healthcare, crypto policy, AI policy, industrial policy is becoming more of the mainstream in both parties, so potentially some action there.But I think that's probably the limit of the most consequential policy items we should be looking out for.Michael Zezas: Right, so the way I've been thinking about it is: No clear new policies that someone has to account for coming out of the midterms. However, we definitely have to pay attention. There could be some soft signals there about political preferences and resulting policy preferences that might become live a couple years down the line after we get into the 2028 general elections – and the new power configuration that could result from that.So – interesting, impactful, not clear that there'll be fundamental catalysts. And probably along the way we should pay attention because markets will discount all sorts of potential outcomes. And it could get the wrong way on interpreting midterm outcomes, which could present opportunities. So, we'll certainly be tracking that throughout 2026.Ariana Salvatore: Yeah. And if you think about the policy items that President Trump has leaned on most heavily this year and that have mattered for markets, there are things in the executive branch, right? So, tariff policy obviously does not depend on Congress. Deregulation helps if you have fundamental backing from Congress but can occur through the executive agencies. So, to your point, less to watch out for in terms of how it will shift Trump's behavior.Michael Zezas: Well, Ariana, thanks for taking the time to talk.Ariana Salvatore: Always great speaking with you, Michael.Michael Zezas: And to our audience, thanks for listening. If you enjoy thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen.

Our Chief Fixed Income Strategist Vishy Tirupattur responds to some of the feedback from clients on Morgan Stanley's 2026 global outlooks.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. Today, I consider the pushback we've received on our 2026 outlooks – distilling the themes that drew the most debate and our responses to the debates. It's Tuesday, Dec 16th at 3:30pm in New York. It's been a few weeks [since] we published our 2026 outlooks for the global economy and markets. We've had lots of wide-ranging conversations, much dialogue and debate with our clients across the globe on the key themes that we laid out in our outlook. Feedback has ranged from strong alignment to pointed disagreement, with many nuanced views in between. We welcome this dialogue, especially the pushback, as it forces us to re-examine our assumptions and refine our thinking. Our constructive stance on AI and data center-related CapEx, along with the pivotal role we see for the credit market channels, drew notable scrutiny. Our 2026 CapEx projections was anchored by a strong conviction – that demand for compute will far outstrip the supply over the next several years. We remain confident that credit markets across unsecured, structured, and securitized instruments in both public and private domains will be central to the financing of the next wave of AI-driven investments. The crucial point here is that we think this spending will be relatively insensitive to the macro conditions, i.e., the level of interest rates and economic growth. Regarding the level of AI investment, we received a bit of pushback on our economics forecast: Why don't we forecast even more growth from AI CapEx? From our perspective, that is going to be a multi-year process, so the growth implications also extend over time. Our U.S. credit strategists' forecast for IG bond supply – $2.25 trillion in gross issuance; that's up 25 percent year-over-year, or $1 trillion in net issuance; that's 60 percent year-over-year – garnered significant attention. There was some pushback to the volume of the issuance we project. As CapEx growth outpaces revenue and pressures free cash flow, credit becomes a key financing bridge. Importantly, AI is not the sole driver of the surge that we forecast. A pick-up in M&A activity and the resulting increase in acquisition-driven IG supply also will play a key role, in our view. We also received pushback on our expectation for modest widening in credit spreads, roughly 15 basis points in investment grade, which we still think will remain near the low end of the historical ranges despite this massive surge in supply. Some clients argued for more widening, but we note that the bulk of the AI-related issuance will come from high-quality – you know AAA-AA rated issuers – which are currently underrepresented in credit markets relative to their equity market weight. Additionally, continued policy easing – two more rate cuts – modest economic re-acceleration, and persistent demand from yield-focused buyers should help to anchor the spreads. Our macro strategists' framing of 2026 as a transition year for global rates – from synchronized tightening to asynchronous normalization as central banks approach equilibrium – was broadly well received, as was their call for government bond yields to remain broadly range-bound. However, their view that markets will price in a dovish tilt to Fed policy sparked considerable debate. While there was broad agreement on the outlook for yield curve steepening, the nature of that steepening – bull steepening or bear steepening – remained a point of contention. Outside the U.S., the biggest pushback was to the call on the ECB cutting rates two more times in 2026. Our economists disagreed with President Lagarde – that the disinflationary process has ended. Even with moderate continued euro area growth on German fiscal expansion, but consolidation elsewhere, we still see an output gap that will eventually lead inflation to undershoot the ECB's 2 percent target. We also engaged in lively dialogue and debate on China. The key debate here comes down to a micro versus macro story. Put differently, the market is not the economy and the economy is not the market. Sentiment on investments in China has turned around this year, and our strategists are on board with that view. However, from an economics point of view, we see deflation continuing and fiscal policy from Beijing as a bit too modest to spark near-term reflation. 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.

Our CIO and Chief U.S. Equity Strategist Mike Wilson explains the significance of the Fed's decision to resume buying $40 billion of Treasury bills monthly. Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief U.S. Equity Strategist.Today on the podcast I'll be discussing the Fed's decision last week and what it means for stocks.It's Monday, December 15th at 11:30am in New York. So, let's get after it.Last week's Fed meeting provided incremental support for our positive 2026 outlook on equities. The Fed delivered on its expected hawkish rate cut but also indicated it would do more if the labor market continues to soften. More important than the rate cut was the Fed's decision to restart asset purchases. More specifically, the Fed intends to immediately begin buying $40 billion of T-Bills per month to ensure the smooth operation of financial markets. Based on our conversations with investors prior to the announcement, this amount and timing of bill buying exceeded both consensus, and my own expectations. It also confirms a key insight I have been discussing for months and highlighted in our Year Ahead Outlook. First, the Fed is not independent of markets, and market stability often plays a dominant role in Fed policy beyond the stated dual mandate of full employment and price stability.Second, given the size of the debt and deficit, the Fed has an additional responsibility to assist Treasury in funding the government, and will likely continue to work more closely with Treasury in this regard.Finally, the decision to intervene in funding markets sooner and more aggressively than expected may not be ‘Quantitative Easing' as defined by the Fed. However, it is a form of debt monetization that directly helps to reduce the crowding out from the still growing Treasury issuance, especially as Treasury issues more Bills over Bonds.At the Fed's October meeting, it indicated some concern about tightening liquidity which I have discussed on this podcast as the single biggest risk to the bull market in stocks. Evidence of this tightness can be seen in the performance of asset prices most sensitive to liquidity, including crypto currencies and profitless growth stocks.While the Fed probably isn't too concerned about the performance of these asset classes, it does care about financial stability in the bond, credit and funding markets. This is what likely prompted it to restart asset purchases sooner and in a more significant way than most expected.We view this as a form of debt monetization as I mentioned, given the Treasury's objective to issue more bills going forward. More importantly, these purchases provide additional liquidity for markets, and in combination with rate cuts, suggest the Fed is likely less worried about missing its inflation target. This is very much in line with our run it hot thesis dating back to early 2021. As a reminder, accelerating inflation is positive for asset prices as long as it doesn't force the Fed's hand to take the punch bowl away like in 2022. Ironically, the risk in the near-term is that this larger than expected asset purchase program may be insufficient if the Fed has materially underestimated the level of reserves necessary for markets to operate smoothly. This is what happened in 2019 and why the Fed created the Standing Repo Facility in the first place. However, this is more of a tool that is used on an as-needed basis. What the markets may want or need is a larger buffer if the Fed has underestimated the level of reserves required for smoothly functioning financial markets.To be clear, I don't know what that level is, but I do believe markets will tell us if the Fed has done enough with this latest provision. Liquidity-sensitive asset classes and areas of the equity market will be important to watch in this regard, particularly given how weak they traded last Friday and this morning.Bottom line, the Fed has reacted to the markets' tremors over the past few months. Should markets wobble again, we are highly confident the Fed will once again react until things calm down. Last week's FOMC meeting only increases our conviction in that case and keeps us bullish over the next 6-12 months, and our 7800 price target on the S&P 500. We would welcome a correction in the short term as a buying opportunity. 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!

Our Head of Corporate Credit Research Andrew Sheets explains why 2026 might bring a credit cycle that burns hotter before it burns out.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts in the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.Today I'm going to talk about our outlook for global credit markets in 2026 and why we think the credit cycle burns hotter before it burns out.It's Friday, December 12th at 2pm in London.Surely it can't go on like this. That phrase is probably coming up a lot as global credit investors sit down and plan for 2026. Credit spreads are sitting at 25 year plus tights in the U.S. and Asia. Issuance in corporate activity are increasingly aggressive. Corporate CapEx is surging. Signs of pressure are clear in the lowest rated parts of the market. And credit investors are trained to worry. Aren't all of these and more signs that a credit cycle is starting to crack under its own weight?Not quite yet, according to our views here at Morgan Stanley. Instead, we think that 2026 brings a credit cycle that burns hotter before it burns out. The reason is partly due to an unusually stimulative backdrop. Central banks are cutting interest rates. Governments are spending more money, and regulatory policy is easing. All of that, alongside maybe the largest investment cycle in a generation around artificial intelligence, should spur more risk taking from a corporate sector that has the capacity to do so.In turn, we think the playbook for credit is going to look a lot like 2005 or 1997-1998. Both periods saw levels of capital expenditure, merger activity, interest rates, and an unemployment rate that are pretty similar to what Morgan Stanley expects next year. And so, looking ahead to 2026, these two periods offer two competing ways to view the year ahead.2025 might be more similar to a period where the low-end consumer really is starting to struggle, but that another force – back then it was China, now it might be AI spending – keeps the broader market humming. 1997 or 1998, on the other hand, would be more similar to a narrative that investors are growing more confident that a new technology is really transformative. Back then, it was the internet and now it's AI.Corporate bond issuance we think will be central to how this resolves itself. This is a strong regional theme and a key driver of our views across U.S., European and Asia Credit. We forecast net issuance to rise significantly in U.S. investment grade up over 60 percent versus 2025 to a total of around $1 trillion.That rise is powered by a continued increase in technology spending to fund AI as well as a broader increase in capital expenditure and merger activity. All of those bonds being sold to the market should mean that U.S. spreads need to move wider to adjust. And that's true, even if underlying demand for credit remains pretty healthy, thanks to high yields, and the economy ultimately holds up.We think this story is a bit better in other areas and regions that have less relative issuance, including European and Asian investment grade and global high yield. They all outperform U.S. investment grade on our forecast. In total returns, we think that all of these markets produce a return of around 4 to 6 percent, and if that's true, it would underperform, say U.S. equities, but outperform cash.More granularly similar to 2025 or 2005, we think that single name and sector dispersion remain major themes. And where you position in maturity should also matter. Credit curves are steep and our U.S. interest rate strategist are expecting the U.S. Treasury curve to steepen significantly Further. That should mean that so-called carry and roll down and where you position on the maturity curve are a pretty big driver of your ultimate result. In our view, corporate bonds between five- and 10-year maturity in both the U.S. and Europe will offer the best risk reward.The most significant risk for global credit remains recession, which we think would argue for wider spreads on both economic rounds, but also through weaker demand as yields would fall. It would mean that our spread forecasts are too optimistic and that our expectation that high yield outperforms investment grade would be wrong. And then there's a milder version of this bear case – that aggression and corporate supply are even stronger than we think, and that creates conditions closer to late 1998 or 1999.Back then, U.S. investment grade spreads were roughly 30 basis points wider than current levels, even though the economy was strong and even though the equity market kept going up.Thank you as always for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen. And also, please tell a friend or colleague about us today.

Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen discuss the Fed's path as inflation remains above its target and the labor market continues cooling.Read more insights from Morgan Stanley.----- Transcript -----Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy. Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist. Matthew Hornbach: Yesterday, the FOMC meeting delivered another quarter percentage point rate cut. Today we're here to discuss what happens next.It's Thursday, December 11th at 8:30 AM in New York. So, Mike, once again, the Fed cut rates by 25 basis points. That outcome was not a surprise, and the markets reacted positively. But there were some surprises. A bit of a divided FOMC, if you will. How did things play out during the meeting and what are some important takeaways to keep in mind? Michael Gapen: Yeah, well certainly Matt, it is a divided committee. I think that's clear. I think one key takeaway for me is the idea that the Fed is done with risk management rate cuts, and now we're back to data dependent. So, what does that mean? I mean, a risk management rate cut isn't necessarily about the data you have in hand and the data you see; it's your view about the distribution of risks around that. So, in some ways, you're not data dependent when you're making those cuts. Now, I think the challenge at this press conference for Powell was to say, ‘Well, now things are different.' And it was a nuance in the sense that cuts from here, if and when they come, will be data dependent. But I think at the same time he did not want to communicate that the bar for those rate cuts were exceptionally high. But I think he threaded the needle quite well in transitioning from risk management cuts, which aren't data dependent to an outlook, which is now more data dependent. And I thought he did that artfully well. So, for me, that's the big key. Secondarily I'd add a takeaway for me was he seems fairly confident that inflation will be coming down, and I think he still believes the labor market is cooling. The blend of that came across as a bit dovish to me. And then the third thing I would add is he fairly explicitly ruled out the risk of rate hikes. So, I think the combination of those three things: data dependence, still concerns about cooling in the labor market, and chopping off the upper half of the rate path distribution – those were kind of the key takeaways from my point. Matthew Hornbach: So, Mike, with respect to the labor market, Chair Powell did address it in a couple of different ways. But one of the ways that stood out to my ears was how he described some technical factors that people are well aware of – that could mean the economy is actually shedding jobs to the tune of about 20,000 per month. I was wondering if you could just briefly address what those factors – that are supposedly so well known – might be. Michael Gapen: Sure. So, obviously the data that gets released, there are the initial releases and then there are revisions. And in the labor market, there are what are called annual benchmark revisions. So, the BLS released a preliminary estimate of that benchmark revision several months ago, and if you apply that initial estimate, it would suggest that job growth in 2025 could be about 60,000 jobs per month, less than has already been reported. But at the same time, we know immigration controls are slowing growth in the labor force. So, this is what Powell is calling the really curious balance. How can you have employment growth basically zero, maybe even negative, after these revisions come in – and the unemployment rate relatively stable. Yes, it's gone up a few tenths, but not like you would normally expect that rise would be if we were shedding jobs. So that to me is why he… You know; the technical factors about revisions and things that lead them to be, I think, very unsure about where the labor market is; and lean in the direction of thinking lower rates are better to manage those risks than where they were six months ago. Matthew Hornbach: One of the points that you raised in your opening explanation of the meeting was about inflation. And Chair Powell mentioned an expectation that the inflation related to tariffs would be peaking in the first quarter of the year. That sounded very familiar to me because I believe that's your expectation as well. I'm curious. How are you looking at tariffs and the inflation related to tariffs today? And do you agree with Chair Powell still? Michael Gapen: We do. Our modeling of the tariff pass through and our conversations with clients and firms and what we hear on corporate earnings calls suggests that this is a long process. Meaning tariffs go in place, prices don't go up the next month. Firms make pricing decisions that take time to implement. So, we agree that the tariff pass through story will extend into 2026 and likely through the end of the first quarter. And if that's true, then goods prices should continue to move higher. The year-on-year rate of inflation should move higher, peaking at 3 percent or a little above in the first quarter of the year. And then tat effect should we think be over, which would open the door for overall inflation to start coming back down. So, I will use the dreaded T-word. We think ultimately inflation from tariffs will be transitory. And I agree with the Chair's timeline; inflation should peak in the first quarter of the year and then start to trend down. That said, we think inflation will be above the Fed's 2 percent target into 2027, and this is the cost of providing insurance to the labor market. Matthew Hornbach: So finally, all things considered, what is your outlook for Fed policy in 2026? Michael Gapen: Yeah, and the key here, Matt, is that exactly what you just implied about tariffs and inflation still going on into 2026, right? Because what we know is while firms are gauging exactly where they should be pricing, they've been offsetting tariffs through lower demand for labor. So, we think the Fed will be cutting again in January. We have three months of employment data that come across two employment reports between now and the January meeting. We think they will show continued cooling in the labor market. And then we have a second cut next year in in April. So, while tariffs are getting passed through, we think the labor market will continue to cool. And this Fed will be biased to cutting rates to provide support to the labor market in the process. That would mean the federal funds rate gets to 3 – 3.25 percent in the second quarter of 2026, where we think it'll stay.So Matt, I'd like to ask you a question. What I noticed was the rate market backed up going into the meeting, despite the fact that market participants were projecting a cut. And then the rate market rallied, in my view, significantly during the meeting and right after. What do you think was happening there? Matthew Hornbach: So, there's a phenomenon that happens in all markets where investors often speculate on a potential outcome. And if the outcome is then delivered, the follow-on price action is underwhelming. That is colloquially known as buying the rumor and selling the fact. So, I think going into this meeting kind of in line with your expectations, investors were forming very similar expectations about how the FOMC statement itself would change and the implications that that might have for the future of Fed policy. When that hawkish cut was delivered almost exactly as you had expected, Mike, I think, investors started thinking about the future in a slightly different way. Now that their expectations were met with the meeting outcome, they started to consider, the data that is forthcoming. And whenever, officials at the Fed talk about data in the way that Chair Powell spoke about the data – and by which I mean labeled the labor market as potentially losing jobs at the moment, and labeling inflation as transitory, that we'd be past the peak of tariff related inflation after the first quarter of the year. Investors can kind of look at those factors and extrapolate going forward, what that may mean for Fed policy in the first half of 2026. So, I think similar to your expectations for policy after this meeting, investors probably became a bit more confident in your outlook for Fed policy that we would see additional rate cuts in the first half of next year. And then, of course, after the April meeting, the baton will be passed to the next Fed chair, and I think investors are considering what policy might look like under that new regime at the Fed. And on the margin, the view is that the next Fed chair would be more likely than not to continue the process of lowering policy rates. So, I think all of those factors played into the post press conference, and even during the press conference reaction. Michael Gapen: Okay Matt, one last question, if I may. How did the events of the FOMC this week and the market reaction, how does that dovetail with how you're thinking about longer term rates, in particular where you see 10-year yields going? And the dollar? Matthew Hornbach: So, 10-year yields are relatively close to 4 percent at this juncture, and we expect them to drift modestly lower in the first half of 2026, as the Fed continues this process of lowering the policy rate. One point that's very important to make here is that the longer-term Treasury yields today are now sitting well above the Fed's policy rate, and that hasn't been the case for many, many years now. A lot of investors with whom we speak think that longer term yields can head a lot higher from here. But we're skeptical – because the higher that those yields go relative to the Fed's policy rate, the more attractive those bonds become for other investors to buy. So, we don't expect a big increase in longer term interest rates. Unlike some investors, we are expecting interest rates in the long end to remain relatively stable with a downward bias.On the dollar, similarly, we have the dollar continuing its depreciation trend, which it began in January of 2025, earlier this year. We expect that depreciation trend to continue in the first half of 2026 before – similar to the interest rate path – we see a little bit of dollar strength in the second half of the year. And so, you know this being the last FOMC meeting of the year, Mike, I guess we're going to have to take a wait and see approach until the FOMC reconvenes in the new year. Thanks a lot for taking the time to talk about the Fed with me this year. Michael Gapen: Great speaking with you Matt. See you in 2026. Matthew Hornbach: 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.

Our Chief Asia Economist Chetan Ahya and Chief China Equity Strategist Laura Wang unpack Asia's broadening economic recovery and focus on China's path to market stability in 2026.Read more insights from Morgan Stanley.----- Transcript -----Laura Wang: Welcome to Thoughts on the Market. I'm Laura Wang, Morgan Stanley's Chief China Equity Strategist.Chetan Ahya: And I'm Chetan Ahya, Chief Asia Economist.Laura Wang: Today – our 2026 macro outlook for Asia with a particular focus on China's equity market.It's Wednesday, December 10th at 10am in Hong Kong.Chetan, as 2025 draws to a close; and if we try to remember what we were thinking about this time last year, I think, probably a lot of the market participants were expecting headwinds going into 2025 on the exports and trade front. But turns out that Asia's export growth is tracking at 8 percent this year so far. What's your explanation for this surprise?Chetan Ahya: Well, yes, Laura, you know, we were all concerned that there will potentially be tariffs, especially on China. And therefore, we were concerned that [the] regions' exports may be affected negatively. However, what has happened is that tech exports have driven the strength in the overall exports for the region. And that is all because of the story on AI and tech development that we have all been watching.But the good news is that non-tech exports will recover in 2026. In fact, that's the key call we are making – that from early next year, you will see that improvement in the U.S. domestic demand that helps Asia's exports. And at the same time, we are expecting that bulk of this tariff-related uncertainty would be behind us. And so those are the two factors we think will support this recovery in non-tech exports in 2026.Laura Wang: That's great. How significant is the shift in exports from tech to non-tech?Chetan Ahya: Well, we think that's very important for [the] regions' economic outlook. Because when you think about the tech exports recovery, it was helpful to keep [the] regions' overall exports growth strong, but it did not have the broader multiplier effect on the economy. So, for example, when you think about the tech exports, it tends to be more capital intensive, and we don't see much benefit on job growth.I think the best example I can give you is when you look at the Taiwan economic numbers. We've seen very strong GDP growth year-to-date. But at the same time, consumption numbers have been very weak. And so, non-tech exports recovery is very important for the broader economic recovery, and that is precisely what we expect in 2026. You will see that broadening out of growth with follow up in CapEx, job growth, and consumption recovery.Laura Wang: Your work suggests that Asia inflation will pick up modestly in 2026. What factors are behind this trend?Chetan Ahya: Well, as the non-tech exports recovery materializes, you should see improvement in capacity utilization across the board in the region. That should reduce the disinflationary pressures that we've been seeing year-to-date. And at the same time, we are expecting that the disinflationary pressures that the region was facing from China is also going to ease in 2026.Laura Wang: How will Asia central banks respond to keep inflation within their comfort zones? And what does this mean for monetary policy across the region in 2026?Chetan Ahya: Well actually, there's not much concern about keeping the inflation within the central bank's comfort zone because what we've seen year-to-date in Asia is that Inflation has been much lower than the central bank's target for a number of economies in the region. And they have been responding to this with more interest rate cuts.But going forward, as disinflationary pressure is reduced, we are expecting that the central banks in the region would end their rate cutting cycle. We should see just about one to two more rate cuts for some of the central banks. And then policy rates should remain largely stable through to the end of 2026.So, Laura, let me come to you now. So, 2025 was a very strong year for China markets. And you see 2026 as a ‘keep it steady' year rather than a breakout year. What does stability look like for investors and companies?Laura Wang: That's right, 2025 was a very good year for China equity market. We saw both MSCI China and Han Sang Index delivering more than 30 percent return in absolute terms. Going into 2026, we see it as a year for investors and for the market to preserve and protect what has been achieved in 2025 so far, but not with significantly much higher upside at this point. This is because the valuation re-reading we've seen so far in 2025 is already more than 30 percent, close to 40 percent.In [20]26, we think the valuation will largely stay at its current level, and further upside for the market will be more driven by solid earnings growth. For 2026, we see MSCI China's earnings growth year-on-year at around 6 percent.Chetan Ahya: So, with that backdrop, Laura, do you expect more inflows into the market next year?Laura Wang: Absolutely. Actually, we have already talked to so many investors on a global basis, and we are seeing much higher level of interest in investing in Chinese equities, particularly in some R&D and innovation heavy sectors.That being said, what we are seeing also is relatively light positioning by global investors in Chinese equities – actually across the board, still a quite sizable underweight, which means there will be much higher room for them to increase their allocation gradually in 2026 back to China.Chetan Ahya: And with the U.S.-China tensions easing a bit, and China doubling down on AI and smart manufacturing, where do you see the real-world opportunities from that?Laura Wang: There will be a lot of opportunities inside Chinese equity market, but we do want to stay with the names that will be delivering very solid earnings growth in the next few years. And we also want to highlight the next five years growth strategy laid out by Chinese policy makers.We want to make sure that we focus on the sectors that are very well aligned with the national growth strategy with a strong focus in R&D and innovation – and that would include AI as well as smart manufacturing, automation, robotics, and biotech. We also have collected very high level of interest from global investors in these sectors.At the same time, as we start to see less deflation pressure in 2026, but still with it potentially persisting into 2027, we want investors to still hold on to some exposure to high quality dividend plays. The steady cash returns from these stocks will help you navigate through some volatilities in the market in next year.Chetan Ahya: So, you expect global investors returning, mainland investors shifting money from savings into stocks, and strong cross-border trading within Hong Kong. What does that mean for market behavior and thematic opportunities?Laura Wang: One very positive development we have observed in 2025 is the strong capital market activities in Hong Kong. Hong Kong at single stock exchange basis actually is the most active IPO market in the world in 2025, and with policy support for Hong Kong to continue as a global financial hub, we expect this trend to continue. So, we are seeing more and more capital market activities happening in Hong Kong and mainland China in the next year. And in terms of thematic opportunities, I already mentioned that opportunities align with the national growth strategy with very heavy innovation and R&D focus. Along these opportunities, we're also heavy recommending investors to focus on thematic opportunities such as anti-evolution, as well as corporate governance reform.That summarizes our New Year outlook for Asia economy as well as China equity market. Chetan, thanks so much for taking the time to talk to me.Chetan Ahya: Great speaking with you, Laura.Laura Wang: 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.

Our Head of Research Product in Europe Paul Walsh and Chief European Equity Strategist Marina Zavolock break down the key drivers, risks, and sector shifts shaping European equities in 2026. Read more insights from Morgan Stanley.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's Head of Research Product in Europe.Marina Zavolock: And I'm Marina Zavolock, Chief European Equity Strategist.Paul Walsh: And today – our views on what 2026 holds for the European stock market.It's Tuesday, December 9th at 10am in London.As we look ahead to 2026, there's a lot going on in Europe stock markets. From shifting economic wins to new policies coming out of Brussels and Washington, the investment landscape is evolving quite rapidly. Interest rates, profit forecasts, and global market connections are all in play.And Marina, the first question I wanted to ask you really relates to the year 2025. Why don't you synthesize your, kind of, review of the year that we've just had?Marina Zavolock: Yeah, I'll keep it brief so we can focus ahead. But the year 2025, I would say is a year of two halves. So, we began the year with a lot of, kind of, under performance at the end of 2024 after U.S. elections, for Europe and a decline in the euro. The start of 2025 saw really strong performance for Europe, which surprised a lot of investors. And we had kind of catalyst after catalyst, for that upside, which was Germany's ‘whatever it takes' fiscal moment happened early this year, in the first quarter.We had a lot of headlines and kind of anticipation on Russia-Ukraine and discussions, negotiations around peace, which led to various themes emerging within the European equities market as well, which drove upside. And then alongside that, heading into Liberation Day, in the months, kind of, preceding that as investors were worried about tariffs, there was a lot of interest in diversifying out of U.S. equities. And Europe was one of the key beneficiaries of that diversification theme.That was a first half kind of dynamic. And then in the second half, Europe has kept broadly performing, but not as strongly as the U.S. We made the call, in March that European optimism had peaked. And the second half was more, kind of, focused on the execution on Germany's fiscal. And post the big headlines, the pace of execution, which has been a little bit slower than investors were anticipating. And also, Europe just generally has had weak earnings growth. So, we started the year at 8 percent consensus earnings growth for 2025. At this point, we're at -1, for this year.Paul Walsh: So, as you've said there, Marina, it's been a year of two halves. And so that's 2025 in review. But we're here to really talk about the outlook for 2026, and there are kind of three buckets that we're going to dive into. And the first of those is really around this notion of slipstream, and the extent to which Europe can get caught up in the slipstream that the U.S., is going to create – given Mike Wilson's view on the outlook for U.S. equity markets. What's the thesis there?Marina Zavolock: Yeah, and thank you for the title suggestion, by the way, Paul of ‘Slipstream.' so basically our view is that, well, our U.S. equity strategist is very bullish, as I think most know. At this stage he has 15 percent upside to his S&P target to the end of next year; and very, very strong earnings growth in the U.S. And the thesis is that you're getting a broadening in the strength of the U.S. economic recovery.For Europe, what that means is that it's very, very hard for European equities to go down – if the U.S. market is up 15 percent. But our upside is more driven by multiple expansion than it is by earnings growth. Because what we continue to see in Europe and what we anticipate for next year is that consensus is too high for next year. Consensus is anticipating almost 13 percent earnings growth. We're anticipating just below 4 percent earnings growth. So, we do expect downgrades.But at the same time, if the U.S. recovery is broadening, the hopes will be that that will mean that broadening comes to Europe and Europe trades at such a big discount, about 26 percent relative to the U.S. at the moment – sector neutral – that investors will play that anticipation of broadening eventually to Europe through the multiple.Paul Walsh: So, the first point you are making is that the direction of travel in the U.S. really matters for European stock markets. The second bucket I wanted to talk about, and we're in a thematically driven market. So, what are the themes that are going to be really resonating for Europe as we move into 2026?Marina Zavolock: Yeah, so let me pick up on the earnings point that I just made. So, we have 3.6 percent earnings growth for next year. That's our forecast. And consensus – bottom-up consensus – is 12.7 percent. It's a very high bar. Europe typically comes in and sees high numbers at the beginning of the year and then downgrades through the course of the year. And thematically, why do we see these downgrades? And I think it's something that investors probably don't focus on enough. It's structurally rising China competition and also Europe's old economy exposure, especially in regards to the China exposure where demand isn't really picking up.Every year, for the last few years, we've seen this kind of China exposure and China competition piece drive between 60 and 90 percent of European earnings downgrades. And looking at especially the areas of consensus that are too high, which tend to be highly China exposed, that have had negative growth this year, in prior years. And we don't see kind of the trigger for that to mean revert. That is where we expect thematically the most disappointment. So, sectors like chemicals, like autos, those are some of the sectors towards the bottom of our model. Luxury as well. It's a bit more debated these days, but that's still an underweight for us in our model.Then German fiscal, this is a multi-year story. German fiscal, I mentioned that there's a lot of excitement on it in the first half of the year. The focus for next year will be the pace of execution, and we think there's two parts of this story. There's an infrastructure fund, a 500-billion-euro infrastructure fund in Germany where we're seeing, according to our economists, a very likely reallocation to more kind of social-related spend, which is not as great for our companies in the German index or earnings. And execution there hasn't been very fast.And then there's the Defense side of the story where we're a lot more optimistic, where we're seeing execution start to pick up now, where the need is immense. And we're seeing also upgrades from corporates on the back of that kind of execution pickup and the need. And we're very bullish on Defense. We're overweight the issue for taking that defense optimism and projecting out for all of Europe is that defense makes up less than 2 percent of the European index. And we do think that broadens to other sectors, but that will take years to start to impact other sectors.And then, couple other things. We have pockets of AI exposure in the enabler category. So, we're seeing a lot of strength in those pockets. A lot of catch up in some of those pockets right now. Utilities is a great example, which I can talk about. So, we think that will continue.But one thing I'm really watching, and I think a lot of strategists, across regions are watching is AI adoption. And this is the real bull case for me in Europe. If AI adoption, ROI starts to become material enough that it's hard to ignore, which could start, in my opinion, from the second half of next year. Then Europe could be seen as much more of a play on AI adoption because the majority of our index is exposed to adoption. We have a lot of low hanging fruit, in terms of productivity challenges, demographics, you know, the level of returns. And if you track our early adopters, which is something we do, they are showing ROI. So, we think that will broaden up to more of the European index.Paul Walsh: Now, Marina, you mentioned, a number of sectors there, as it relates to the thematic focus. So, it brings us onto our third and final bucket in terms of what your model is suggesting in terms of your sector preferences…Marina Zavolock: Yeah. So, we have, data driven model, just to take a step back for a moment. And our model incorporates; it's quantum-mental. It incorporates themes. It incorporates our view on the cycle, which is in our view, we're late cycle now, which can be very bullish for returns. And it includes quant factors; things like price target, revisions breadth, earnings revisions breadth, management sentiment.We use a Large Language Model to measure for the first time since inception. We have reviewed the performance of our model over the last just under two years. And our top versus bottom stocks in our model have delivered 47 percent in returns, the top versus bottom performance. So now on the basis of the latest refresh of our model, banks are screening by far at the top.And if you look – whether it's at our sector model or you look at our top 50 preferred stocks in Europe, the list is full of Banks. And I didn't mention this in the thematic portion, but one of the themes in Europe outside of Germany is fiscal constraints. And actually, Banks are positively exposed to that because they're exposed to the steepness – positively to the steepness – of the yield curve.And I think investors – specialists are definitely optimistic on the sector, but I think you're getting more and more generalists noticing that Banks is the sector that consistently delivers the highest positive earnings upgrades of any sector in Europe. And is still not expensive at all. It's one of the cheapest sectors in Europe, trading at about nine times PE – also giving high single digit buyback and dividend yield. So that sector we think continues to have momentum.We also like Defense. We recently upgraded Utilities. We think utilities in Europe is at this interesting moment where in the last six months or so, it broke out of a five-year downtrend relative to the European index. It's also, if you look at European Utilities relative to U.S. Utilities – I mentioned those wide valuation discounts. Utilities have broken out of their downtrend in terms of valuation versus their U.S. peers. But still trade at very wide discounts. And this is a sector where it has the highest CapEx of any sector in Europe – highest CapEx growth on the energy transition. The market has been hesitant to kind of benefit the sector for that because of questions around returns, around renewables earlier on. And now that there's just this endless demand for power on the back of powering AI, investors are more willing to benefit the sector for those returns.So, the sector's been a great performer already year to date, but we think there's multiple years to go.Paul Walsh: Marina, a very comprehensive overview on the outlook for European equities for 2026. Thank you very much for taking the time to talk.Marina Zavolock: Thank you, Paul.Paul Walsh: 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.

Mike Wilson, our CIO and Chief U.S. Equity Strategist, and Dan Skelly, Senior Investment Strategist at Morgan Stanley Wealth Management, discuss the outlook for the U.S. stock market in 2026 and the most significant themes for retail investors. Read more insights from Morgan Stanley.----- Transcript -----Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson. Morgan Stanley's CIO and Chief U.S. Equity Strategist. Daniel Skelly: And I'm Dan Skelly, Senior Investment Strategist for Morgan Stanley Wealth Management. Mike Wilson: Today we're going to have a conversation about our views on the U.S. stock market in 2026, and what matters most to retail investors in particular. It's Monday, December 8th at 9am in New York. So, let's get after it. Dan, it's great to see you. We always talk about the markets together. I think this is a great opportunity for us to share those thoughts with listeners. Our view coming into this year is still pretty bullish for 2026. We've been bullish on [20]25 as you have, probably for, you know, similar – maybe some slightly different reasons. I think one of our differentiating views is that we do think inflation is still a major risk for individual investors. And institutional investors, quite frankly, which is why stocks have done so much better. A concept, I think you're well aware of. And I think, you know, the risk for retail is that there's going to be; it's going to be volatile. So, point-to-point, we're still bullish as you are. How are you thinking about managing that point-to-point path? And how are you structuring your portfolio as we go into 2026 with a bullish outlook – but understanding that it's not always going to be smooth. Daniel Skelly: So, like you said, we've also shared this view that next year's going to be positive, albeit there's going to be more volatility. And when I think about the two main risks that retail investors are facing today, one of them is definitely inflation. We're seeing that in services. We're seeing that in housing. We've had the labor market shrink over the recent couple of quarters, so who knows if wage inflation pops up again. But there are ways to definitely hedge against that in an equity portfolio. We think, for instance, owning parts of the AI infrastructure cohort is one of the ways of hedging, whether that be in utilities, pipelines, energy infrastructure in general. These are areas that we think are a necessary hedge against inflation risk. And number two are a positive diversifier. And second key point, Mike, just thinking about that diversification comment. Look, we all know that in many ways the Mag 7 – and the technology strength that we've seen this past year – has driven a fairly concentrated market. I think what people, particularly on the individual side, are recognizing less is just how much AI cuts across many other sectors in parts of the market. And again, we think that risk of over concentration is still out there. And we like the idea of thinking of embedding natural diversification into the equity portfolio. Mike Wilson: Yeah. I mean, it's interesting. Inflation, you know, is part of that story too because AI is somewhat disinflationary or deflationary. I think, you know, investing in things that can drive higher productivity even away from AI can mitigate some of that risk in the economic outlook. But if I think about, you know, the Mag 7 dominance, and just this concentrated market risk, which you spoke about. If inflation re-accelerates next year, which, you know, is one of our core views as the economy improves – doesn't that broaden out the opportunity set? And you know, like there's been this idea that, ‘Oh, you have to own these seven stocks and nothing else.' I mean, part of our view for next year is that we think the market's going to broaden out. How are you set up for that broadening out? And how are you thinking about picking stocks and new themes that can work – that maybe people aren't paying attention to right now? Daniel Skelly: Yeah, it's a great point, Mike. And so, on the first topic, we do think there's broadening, and that's a combination of factors. Number one is just the market becoming more convicted about the Fed cutting path, which we've talked about, and the firm's view reaffirms for next year. Number two is starting to see some of the benefits of deregulation, right, which should impact maybe some of the more cyclical sectors out there – Financials, Energy being two of them. Maybe seeing more M&A activity too as a byproduct of deregulation. And that should bode better for mid- and maybe small caps as well as they receive a M&A premia in the valuations. And I know you've talked about small caps recently in your commentary. But last point I'll make Mike, and it comes back to AI. It almost feels like AI is this huge inflationary ramp at first to get to that deflationary nirvana down the road – with productivity. I think one of the key factors we think about, in terms of a bottom-up perspective, which is what we focus on in across the portfolio, is definitely pricing power. Who owns the pricing power and the key data and the key AI adoption outlook in order to absorb all the different tools and technology diffusion we've seen in the last three years. And that's going to play out, Mike, as you well know, across a variety of sectors and themes. So, agreed, we should see broadening for all those varying reasons. Mike Wilson: So, I mean, there are a couple areas I think, where we overlap. Financials…Daniel Skelly: Yep. Mike Wilson: Industrials, Healthcare, some of the themes that I think we both; we share our bullish views. And what do you think those areas are, within those sectors? You think that you have a differentiated view maybe than the consensus being Financials, Industrials, Healthcare? That the market may be missing, which offers more upset? Daniel Skelly: Sure. I'll start with Financials, which has been an overweight call for us for some time, as I know it has for you as well. And I think that kind of cyclical re-acceleration in the economy is one part. I think the Fed cutting is another part. I think deregulation is clearly another driver. Fourth Capital Markets recovery, which we have seen now. We had a little bit of a technical lull with the government shutdown in terms of filings and issuance, but we see all of the pipeline indicators, indicating green lights for next year in terms of recovery. I think the one thing I would argue that I've observed in looking at all of our vast data sets is that despite all these different bullish factors, this still maybe has been a theme or a sector that investors have traded in and out of, right? I don't think I've even seen like a real strong, consistent overweight. So, I think number one, that's an opportunity. And last point is, listen, there's different sub-sector bifurcation going on, as you know, within the industry, whereas money centers and large banks are performing really well. The same is not the case of regionals and alts managers. And there are varying reasons for that. But we would even argue, Mike, there could be catchup trades within the sector next year. Mike Wilson: Yeah, I would agree on that. I mean, the regional over money centers and actually regionals over alt managers, because I mean – I think the Treasury Secretary has talked about this, you know. Trying to get the regulated banking system kind of back in the game may actually be an opportunity to take share back from some of those alt managers, which have actually done quite well. What about on Healthcare? We upgraded that back in the summer. I think you've been constructive on parts of Healthcare, right. Wwhat do you think people are missing there and why could that be a good sector for next year? Daniel Skelly: Yeah. We were definitely, I'll say, earlier than you and wrong. You had really good timing in terms of your Healthcare upgrade last summer. And look, the sector was out of favor for two years. What we think we observed in the kind of July-August period is: First and foremost, I think we got past the point of maximum policy concern and risk. And ironically, we saw some kind of nominal or surface level deal signed with the government around most favored nation pricing. And it was really, not a lot to write home about. It wasn't as egregious as a policy inflection as some had feared. So, I think that was the first key catalyst. Second, we just saw a really good revisions breadth. And I know this is a comment you make a lot in your work. But we saw across big pharma, tools and life science, medical technology, and devices. We saw really good positive earnings revisions coming out of third and even starting the second quarter. Thirdly, I think if you're talking about an M&A in capital markets recovery, you can't not talk about Healthcare. I think that's a space that'll be ripe for deal making. And then just fourth, right? Look, as the market broadens out, and as people are stopping or maybe slowing the crowding and the key leadership, they're going to go again from AI enablers to AI adopters. And we think AI is going to be a vector that cuts across the Healthcare industry in a really positive way. Mike Wilson: Yeah, I mean, the efficiencies that are, you know, possible in the Healthcare sector seem immense. I mean, it, it appears to me that that's going to be an area where there's probably some new solutions, some new companies we don't even know about yet. So, to me that's a very exciting area that's been dormant for quite a while. What about Consumer, Dan? It's been this K economy. It's been very bifurcated, you know, high-end versus middle-income, lower-income. I mean, what are the themes within consumer that you're finding in putting to work in your portfolio? Daniel Skelly: Yeah. We've talked a lot, Mike, in the last year or so about playing Consumer platforms, particularly domestically oriented versus global consumer brands. And there's a couple of key drivers behind that. But first, when you look at what's going on in consumer land, and Simeon Gutman's been a really good, kind of, analyst looking at this theme over time. In many ways it's starting to resemble the Mag 7 in terms of winner take all phenomena. If you look at some of the major consumer big box platforms, they're taking 50- 60 percent of share of total retail sales. Just a couple of companies. So, number one, we're really focused on platforms where market share gains, free cash flow and revenue – recurring revenue – in particular, are leading to even stronger competitive moats, particularly in a capital-intensive industry. And what we've observed about retail is that as those leaders in big box areas take more share, they can reinvest that winning capital in their advertising growth in their online channel and widen their moats even more. Secondly though, in order to have a positive theme, I've always said you got to fund it from somewhere. And so, what we've observed again over the last year or so is – when I think about some of the even highest quality global brands they've suffered seeing less traction in China. And that's amid less of a willingness from Chinese consumers to own American and European brands. There's a lot to that, but I think culturally, obviously the trade war, the AI war for prominence leading to maybe some of that lack of cultural traction. Secondly, we've also, I think, started to see the growth of AI tools start to weigh on established brands. I think what makes a brand cool and the barriers to entry in terms of creating brands is going to go down in the future because of AI influencing and advertising tools. And so, simply put, we continue to like, Mike, the big box consumer platforms across, clothing and food, housing, across e-commerce. That continues to be one of our higher conviction themes. Mike Wilson: All right, Dan, I want to come back to, kind of, AI infrastructure. I mean, AI spending has been the big, big theme. But there's other types of infrastructure spend and CapEx. It's been dormant, quite frankly, and with the [One] Big Beautiful Bill [Act] perhaps incentivizing some of that. How does that play into your thought process around other industrial stocks that could benefit? Daniel Skelly: Absolutely, Mike. You cited the AI infrastructure spending. We think continues kind of unimpeded going into next year. Number two, we think the Fed cutting, just creating better financing conditions in terms of bigger projects. You mentioned as well, the fiscal incentives. And look, I think Chris Snyder has been spot on the last year or so talking about reshoring production wins coming back to the U.S. I don't think this is certainly as cognizant on the – or on the minds of individual investors. Maybe not even institutional investors. But the U.S. is winning manufacturing production share and has been for some time. And we've seen that no doubt ramp up post the announcement of the [One] Big Beautiful Bill {Act]. No doubt. But we think that has implications, Mike, for stocks and stock picking within what we would call, kind of, shorter cycle themes. And I think whether that be in Logistics and Transports or HVAC or some of the Non-Resi, Non-Datacenter related verticals. There are a whole bunch of stocks that have been kind of dormant for two to three years as we've been in this ISM recession that we think could certainly wake up next year as things broaden out. Mike Wilson: Yeah, we would agree with that. And I guess lastly, you know, there's always this Johnny come lately, you know, fear factor of, ‘Well … stocks are up a ton. My neighbor's bragging how much money they're making. So, I must have missed it all.' And I think embedded within that is this fear of valuation. The valuations are now very rich. What's your response to individual clients about – it's not too late, they haven't missed it. It's still a bull market. In fact, we would argue a new bull market began in April with a new economic cycle. What is your response to those folks who have that angst? Daniel Skelly: Two things. One is the market today looks totally different than it did in the past, and AI is no doubt one big part of that. The composition of the market in many ways is higher quality, less debt, more recurring revenue. Big call option on productivity coming from AI earnings, power, et cetera. So, we think the market should trade at richer levels than it did in the past, point number one. Point number two, we would say whereas most people say time is your friend – for individual investors, they would also say valuation is no short term or short run indicator, but it's the best long run indicator. And looking at today's, again, extended levels of valuation relative to history – they would say that's not going to play out well over the long run. I would actually take the other side of that. I think that the earnings and the economic potential unleashed not just from AI, but some of these fiscal and monetary policies could create tremendous margin earnings potential in the long run. And so, I think today we're looking at a level of multiples that appears artificially high. And based on what could be a big earnings inflection point in that multi-year timeframe could frankly just be superficially high. Mike Wilson: Well, Dan, it's always great to get your perspective. I always enjoyed chatting with you. Daniel Skelly: Likewise. Mike Wilson: Thanks for coming on the show and sharing it with our listeners. It's great to see you. Daniel Skelly: Thanks Mike. Mike Wilson: And thanks to our listeners. Thanks for tuning in and 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.

Live from the Morgan Stanley Global Consumer & Retail Conference, our analysts discuss how AI is reshaping the future of shopping in the U.S.Read more insights from Morgan Stanley.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. We're coming to you live from Morgan Stanley's Global Consumer and Retail Conference in New York City, where we have more than 120 leading companies in attendance. Today's episode is the second part of our live discussion of the U.S. consumer and how AI is changing consumer companies. With me on stage, we have Arunima Sinha from the Global and U.S. Economics team, Simeon Guttman, our U.S. Hardlines, Broad Lines, and Food Retail Analyst, and Megan Clap, U.S. Food Producers and Leisure Analyst. It's Friday, December 5th at 10am in New York. So, Simeon, I want to start with you. You recently put out a piece assessing the AI race. Can you take us through how you're assessing current AI implementation? And can you give us some real-world examples of what it looks like when a company significantly integrates AI into their business? Simeon Gutman: Sure. So, the Consumer Discretionary and Staples teams went to each of their covered companies, and we started searching for what those companies have disclosed and communicated regarding their AI. In some cases, we used AI to do this search. But we created a search and created this universe of factors and different ways AI is being implemented. We didn't have a framework until we had the entire universe of all of these AI use cases. Once we did, then we were able to compartmentalize them. And the different groups; we came up with six groups that we were able to cluster. First, personalization and refined search; second, customer acquisition; third product innovation; fourth, labor productivity; fifth, supply chain and logistics. And lastly, inventory management. And using that framework, we were able to rank companies on a 1 to 10 scale. Across – that was the implementation part – across three different dimensions: breadth, how widely the AI is deployed across those categories; the depth, the quality, which we did our best to be able to interpret. And then the last one was proprietary initiatives. So, that's partnerships, could be with leading AI firms. So that helped us differentiate the leaders with others, not necessarily laggards, but those who were ahead of in the race. In some cases, companies that have communicated more would naturally scream more, so there is some potential bias in that. But otherwise, the fact pattern was objective. Walmart has full scale AI deployment. They're integrated across their business. They've introduced GenAI tools. That's like their Sparky shopping assistant. As well as integrated to in-store features. They talked about it. It's been driving a 25 percent increase in average shopper spend. They've recently partnered with OpenAI to enable ChatGPT powered Search and Checkout, positioning where the company, where the customer is shopping. They're also layering on augmented reality for holiday shopping, computer vision for shelf monitoring. LLMs for inventory replenishment. Autonomous lifts, the list goes on and on. But it covers all the functional categories in our framework. Michelle Weaver: And how about a couple examples of the ways companies are using these? Any interesting real world use cases you've seen so far? Simeon Gutman: So, one of them was in marketing personalization, as well as in product cataloging. That was one of the more sided themes at this conference. So, it was good timing. So, the idea is when product is staged on a company's website; I don't think we all appreciate how much time and many hours and people and resources it takes to get the correct information, to get the right pictures and to show all the assortment – those type of functions AI is helping enable. And it sounds like we're on the cusp of a step change in personalization. It sounds like AI, machine learning or algorithm driven suggestions to consumers. We didn't get practical use cases, but a lot of companies talked about the deployment of this into 2026, which sounds like it's something to look forward to. Michelle Weaver: And Megan, how would you describe AI adoption in your space in terms of innings and what kind of criteria are you using to assess the future for AI opportunity and potential? Megan Clapp: Yeah, I would say; I'd characterize adoption in the Food and broader Staples space today is still relatively early innings. I think most companies are still standing up the data infrastructure, experimenting with various tools. We're seeing companies pilot early use cases and start to talk about them, and that was evident in the work we did with the note that Simeon just talked about. And so, the opportunity, I think, going ahead, lies in kind of what we see in terms of scaling those pilots to become more impactful. And for Staples broadly, and Food, you know, ties into this. I think, these companies start with an advantage and that they sit on a tremendous amount of high frequency consumption data. So, the data availability is quite large. The question now is, you know, can these large organizations move with speed and translate that data into action? And that's something that we're focused on when we think about feasibility. I think we think about the opportunity for Food and Staples broadly as we'd put it into kind of two areas. One is what can they do on the top line? Marketing, innovation, R&D, kind of the lifeblood of CPG companies, and that's where we're seeing a lot of the early use cases. I think ultimately that will be the most important driver – driving top line, you know, tends to be the most important thing in most consumer companies. But then on the other side, there are a lot of cost efforts, supply chain savings, labor productivity. Those are honestly a bit easier to quantify. And we're seeing real tangible things come out of that. But overall I think the way we think about it is the large companies with scale and the ability to go after the opportunity because they have the scale and the balance sheet to do so – will be winners here, as well as the smaller, more nimble companies that, you know, can move a little bit faster. And so that's how we're thinking about the opportunity. Michelle Weaver: Can you give us also just a couple examples of AI adoption that's been successful that you've seen so far? Megan Clapp: Yeah, so on the top line side, like I said, kind of marketing innovation, R&D. One quick example on the Food side. Hershey, for example, they're using algorithms to reallocate advertising spend by zip code, based on the real time sell through. So, they can just be much more targeted and more efficient, honestly, with that advertising spend. I think from an innovation perspective too, these companies are able to identify on trend things faster and incorporate that and take the idea to shelf time down significantly. And then on the cost side, you know, General Mills is a company is actually relatively, far ahead, I'd say, in the AI adoption curve in Staples broadly. And what they've done is deployed what they call digital twins across their network, and it has improved forecast accuracy. They've taken their historical productivity savings from 4 percent annually to 5 percent. That's something that's structural. So, seeing real tangible benefits that are showing up in the PNL. And so, I think broadly the theme is these companies are using AI to make faster, and more precise decisions. And then I thought, I'd just mention on the leisure side, something that I felt was interesting that we learned from Shark Ninja yesterday at the conference is – when asked about the role of Agentic AI in future commerce, thinks it'll be huge was how he described; the CEO described it. And what they're doing actively right now is optimizing their D2C website for LLMs like ChatGPT and Gemini. And his point was that what drives conversion on D2C today may not ultimately be what ranks on AI driven search. But he said the expectation is that by Christmas of next year, commerce via these AI platforms will be meaningful; mentioned that OpenAI is already experimenting with curated product transactions. So, they're really focused on optimizing their portfolio. He thinks brands will win; but you have got to get ahead of it as well. Michelle Weaver: And that's great that you just brought up Agentic commerce. We've heard about it quite a bit over the past couple of days, Simeon. And I know you recently put out a big piece on this theme. Agentic commerce introduces a lot of possibility for incremental sales, but it also introduces the possibility for cannibalization. Where do you see this shaking out in your space? Are you really concerned about that cannibalization possibility? Simeon Gutman: Yeah, so the larger debate is a little bit of sales cannibalization and a potential bit of retail media cannibalization. So, your first point is Agentic theoretically opens up a bigger e-commerce penetration and just more commerce. And once you go to more e-commerce, that could be beneficial for some of these companies. We can also put the counter argument of when e-commerce came, direct-to-consumer type of selling could disintermediate the captive retailer sales again. Maybe, maybe not. Part of this answer is we created a framework to think about what retailers can protect themselves most from this. Two of them; two of the five I's are infrastructure and inventory. So, the more that your inventory is forward position, the more infrastructure you have; the AI and the agent will still prioritize that retailer within that network. That business will likely not go elsewhere. And that's our premise. Now, retail media is a different can of worms. We don't know what models are going to look like. How this interaction will take place? We don't know who controls the data. The transactions part of this conference is we were hearing, ‘Well, the retailers are going to control some of the data and the transaction.' Will consumers feel comfortable giving personal information, credit card to agents? I'm sure at some point we'll feel comfortable, but there are these inertia points and these are models that are getting worked out today. There's incentives for the hyperscalers to be part of this. There's incentive for the retailers to be part of it. But we ultimately don't know. What we do know is though forward position inventory is still going to win that agent's business if you need to get merchandise quickly, efficiently. And if it's a lot of merchandise at once. Think about the largest platforms that have been investing in long tail of product and speed to getting it to that consumer. Michelle Weaver: And Arunima, I want to bring this back to the macro as well. As AI adoption starts to ramp the labor market then starts to get called into question. Is this going to be automation or is it going to be augmentation as you see a ramp in AI adoption? So how are your expectations for AI being factored into your forecast and what are you expecting there? Arunima Sinha: There are two ways that we think about just sort of AI spending mattering for our growth forecasts. One part is literally the spend, the investment in the data centers and the chips and so on. And then the other is just the rise in productivity. So, does the labor or does the human capital become more productive? And if we sum both of those things together, we think that over 2026 – [20]27, they add anywhere between 40-45 basis points to growth. And just to put things in perspective, our GDP growth estimate for the end of this year in 2026 is 1.8 percent. For 2027, it's 2.0 percent. So, it's an important part of that process. In terms of the labor market itself, the work that you have led, as well as the work that we've been doing – which is this question about adoption at the macro level, that's still fairly low. We look at the census data that tracks larger companies or mid-size companies on a monthly basis to say, ‘How much did you use AI tools in the last couple of weeks.' And that's been slowly increasing, but it's still sort of in the mid-teens in terms of how many companies have been using as a percentage. And so, we think that adoption should continue to increase. And as that does, for now, we think it is going to be a compliment to labor. Although there are some cohorts within sort of demographic cohorts in terms of ages that are probably going to be disproportionately impacted, but we don't think that that's a sort of near term 2026 story. Michelle Weaver:  Well, thank you all for joining us and please follow Thoughts on the Market wherever you listen to podcasts. Thank you to our panel participants for this engaging discussion and to our live and podcast audiences. 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.

Live from the Morgan Stanley Global Consumer & Retail Conference in New York, our analysts discuss the latest macro trends and pressures impacting the U.S. consumer.Read more insights from Morgan Stanley.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. We're coming to you live from Morgan Stanley's Global Consumer and Retail Conference in New York City, where we have more than 120 leading companies in attendance. Today's episode is the first in a two-part special focused on the consumer where we'll focus on the K economy and the health of the U.S. Consumer. Tomorrow for the next episode, we'll turn our attention to AI. My colleagues and I are eager to dig into this discussion. With me on stage, we have Arunima Sinha from the Global and U.S. Economics team, Simeon Guttman, our U.S. Hardlines, Broad Lines, and Food Retail Analyst, and Megan Clap, U.S. Food Producers and Leisure Analyst.It's Thursday, December 4th at 10:00 AM in New York. So, to start, I want to go through the health of the consumer. That's of course been a theme that's been on display at the conference today. And 2025 has really been a year of mixed signals. But overall spending has held up while inflation has weighed on confidence, especially among lower- and middle-income households. Arunima, I want to start with you on the macro front as we head into year end. How would you describe the overall state of the consumer? What are you expecting in terms of real wage growth and spending? Arunima Sinha: If we'll just look at the rearview mirror in terms of Q1 through Q3, this year spending growth on a real basis has been holding up. So, in the first half of this year, about 1.5 percent on average. For the third quarter, given the data that we do now have in hand, we're tracking about 3 percent, quarter-on-quarter, on a real basis. But I think it is important to emphasize that this is already a step down than the numbers that we were seeing last year. So, in 2024 on these Q-on-Q numbers, we were running somewhere between 3.9-4 percent. So there already has been some slowdown. The recurring theme that we've had this year is how are the drivers of consumption going to weigh on different cohorts? And so, how is the labor market going away and how are wealth effects going to play out? And that, sort of, tied in squarely with the narrative that we've been emphasizing this whole year, which is that for the upper income cohorts, those net wealth effects have been very, very supportive. $50 trillion in net wealth that's been created just over the last three years. And that has continued for this year as well. And so, meanwhile the labor market has downshifted and that's had a read through into both just nominal wage growth as well as real wage growth. So, for example, on a three-month, three-month basis, that real wage growth, after we've adjusted for the nominal for inflation, has slowed down essentially to stall speed. It used to run, somewhere between 2-2.5 percent, in the first part of this year. And that we think is going to have a read through as we go into this upcoming quarter of Q4, as well as in the first quarter of next year. So just this lagged effect from the slowdown on labor market income is going to weigh; continue to weigh on the middle-income and sort of the upper-, lower- part of the income cohort. So, in terms of our growth forecasts for spending, over this quarter in Q4 and over next quarter in Q1, we are expecting about 1 percent real growth for consumption. That is a two-percentage point step down from where we were in Q3. And then just in terms of disposable income, we're also thinking this particular quarter in Q4 is going to be fairly weak. Michelle Weaver: You spoke a little bit about the different income cohorts there, but I want to double click on that. The K economy has been a really persistent theme as higher income households have benefited from strong market returns. But higher price levels have weighed on lower-income households. What are your expectations for the high versus low-income consumer next year? Arunima Sinha: So next year, we do think that there could be some broadening out in consumption growth. Just overall we have a sequential step up in growth that begins to take place, starting in the second quarter of [20]26. So, we have consumption growth that starts to slowly inch up from about just under 1 percent in the first quarter of [20]26 – all the way up to about 2 percent by the end of the year. What that's going to be driven by, we think that there are going to be some lessening of pressures on the middle-income cohorts. And where is that going to come from? It's going to come from perhaps a still moderate labor market. So, we're not – we don't think we're going to be seeing these big 100,000-150,000 plus jobs being added every month. We're thinking maybe about 60,000 on average per month, for most of next year. But just less policy uncertainty, some boost from the fiscal bill, the fact that monetary policy is going to be heading towards neutral. All of those things should be supportive. Given that the upper-income didn't really slow down this year, we'd also don't think there's going to be a giant acceleration next year. And so, some of that uptick in consumption growth, we think could actually come from the middle-income. And we also think that some of those tariff pressures on inflation are going to start to dissipate after peaking in the first quarter next year. Michelle Weaver: And Simeon, I want to bring the company side into the conversation. What's the early read you've gotten on Black Friday? Expectations into the shopping season were pretty weak. Do you think things could turn out to be better than feared? And are you seeing any differences by income cohort there? Simeon Gutman: The overall take is, it's mixed – to maybe slightly a little worse. I'll answer it in a few different ways. First, the old-fashioned tire kicking that the retail analysts have done during the holiday season. In our hard line, broad line, food retail space mixed to slightly a little worse. In Alex Straton's softline world sounded a little bit better. And then if we combine the takeaways that we've had from companies, at least who presented yesterday, Walmart, Target and some other category killer retailers, it sounded about inline. Underlying trend is relatively stable.I sat on a panel earlier today, with a data aggregator who suggested that the holiday was a little underwhelming. What we don't see; and the underwhelming being at a minus 2 percent run rate for the – I guess, the November to date period, that doesn't include Cyber Monday. What this doesn't account for is the market share shifts. So, one of the ongoing themes across the entire retail landscape has been this big, getting bigger – we say it a lot – but the narrowing funnel of market share. So, the inline updates are probably coming from some of the largest companies, even if the overall holiday was a little underwhelming. Now inline is not anything to write home about. It's harder to get to an inline holiday if you started out below. So inline's okay but not gangbusters. That's probably the right way to characterize it. Michelle Weaver: Megan, same question to you. How is holiday shopping tracking in your space? Have you learned anything surprising about holiday during the conference? Megan Clap: Yeah, I would agree with Simeon relatively inline. I'd say kind of so far so good is what we heard from companies at the conference. We had both Mattel and Shark Ninja product companies that sell into many of the larger retailers that are winning that – that Simeon talked about.Holiday matters a lot for both of them. So, we're still many weeks ahead of us in terms of POS, but Mattel talked about positive POS continuing through the Black Friday season. They left their guidance unchanged today. They're seeing replenishment from their retailers and orders in line with expectations, which was a question just given some of the uncertainty in the landscape. Shark Ninja sells small appliances. They spoke to a strong Black Friday – again, seeing the fourth quarter and holiday play out in line with their expectations. Maybe a couple themes that stood out and one of them was particularly interesting to me. You talked about the K economy, I think, you know, it was very clear the higher end consumer continues to spend and outperform. Value and innovation continue to be things that consumers are looking for. Online seem to do better than in stores. That's what we heard from a lot of companies coming out of last week. And then newer channels like TikTok Shop are coming into the mix and, and brands are seeing, you know, strong growth from those channels as well. Michelle Weaver: And Arunima, I want to wrap this section on Fed policy. How do you expect Fed policy in 2026 to influence consumer spending and recovery, especially for those middle- and lower-income households? Arunima Sinha: We still have the Fed on an easing path into the first half of 2026. So we think 75 basis points and additional policy cuts into next year. But that more or less just takes monetary policy to some estimate of neutral. So, the point is that it's not monetary policy's becoming easier, it is simply just getting too neutral. And so, if we think about the most interest sensitive types of consumption, it's going to come from Housing and it's going to come from Durables. And what our housing strategists are thinking is that given this sort of front end of the curve, our tenure forecast for the middle of next year is still at about 3.75. And so, mortgage rates could dip below 6 percent. So, it's not the front end of the curve. It is that sort of belly of the curve there that's important there. And so there could be some pickup in housing that's going to be important. I think for the middle-income consumer affordability, we think it's still going to be an important concern for housing, but perhaps the middle-income could benefit from some of those lower mortgage rates that are going to come in. Michelle Weaver: ​ Arunima, Simeon, and Megan, thanks for all your insights. And to our live and podcast audiences, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.

Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas and Chief Global Cross-Asset Strategist Serena Tang address themes that are key for markets next year.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Serena Tang: And I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist.Michael Zezas: Today we'll be talking about key investor debates coming out of our year ahead outlook.It's Wednesday, December 3rd at 10:30am in New York. So, Serena, it was a couple weeks ago that you led the publication of our cross-asset outlook for 2026. And so, you've been engaging with clients over the past few weeks about our views – where they differ. And it seems there's some common themes, really common questions that come up that represent some important debates within the market. Is that fair?Serena Tang: Yeah, that's very fair. And, by the way, I think those important debates, are from investors globally. So, you have investors in Europe, Asia, Australia, North America, all kind of wanting to understand our views on AI, on equity valuations, on the dollar.Michael Zezas: So, let's start with talking about equity markets a bit. And one of the common questions – and I get it too, even though I don't cover equity markets – is really about how AI is affecting valuations. One of the concerns is that the stock market might be too high, might be overvalued because people have overinvested in anything related to AI. What does the evidence say? How are you addressing that question? Serena Tang: It is interesting you say that because I think when investors talk about equities being too high, of valuations – AI related valuations being very stretched, it's very much about parallels to that 1990s valuation bubble.But the way I approach it is like there are some very important differences from that time period, from valuations back then. First of all, I think companies in major equity indices are higher quality than the past. They operate more efficiently. They deliver strong profitability, and in general pretty solid free cash flow.I think we also need to consider how technology now represents a larger share of the index, which has helped push overall net margins to about 14 percent compared to 8 percent during that 1990s valuation bubble. And you know, when margins are higher, I think paying premium for stocks is more justified.In other words, I think multiples in the U.S. right now look more reasonable after adjusting for profit margins and changes in index composition. But we also have to consider, and this is something that we stress in our outlook, the policy backdrop is unusually favorable, right? Like you have economists expecting the Fed to continue easing rates into next year. We have the One Big Beautiful Bill Act that could lower corporate taxes, and deregulation is continuing to be a priority in the U.S. And I think this combination, you know, monetary easing, fiscal stimulus, deregulation. That combination rarely occurs outside of a recession. And I think this creates an environment that supports valuation, which is by the way why we recommend an overweight position in U.S. equities, even if absolute and relative valuation look elevated.Michael Zezas: Got it. So, if I'm hearing you right, what I think you're saying is that comparisons to some bubbles of the past don't necessarily stack up because profitability is better. There aren't excesses in the system. Monetary policy might be on the path that's more accommodative. And so, when compared against all of that, the valuations actually don't look that bad.Serena Tang: Exactly.Michael Zezas: Got it. And sticking with the equity markets, then another common question is – it's related to AI, but it's sort of around this idea that a small set of companies have really been driving most of the growth in the market recently. And it would be better or healthier if the equity market were to perform across a wider set of companies and names, particularly in mid- and small cap companies. Is that something that we see on the horizon?Serena Tang: Yes. We are expecting U.S. stock earnings to sort of broaden out here and it's one of the reasons why our U.S. equity strategy team has upgraded small caps and now prefer it over large caps. And I think like all of this – it comes from the fact that we are in a new bull market. I think we have a very early cycle earnings recovery here. I mean, as discussed before, the macro environment is supportive. And Fed rate cuts over the next 12 months, growth positive tax and regulatory policies, they don't just support valuations. They also act as a tailwind to earnings.And I think like on top of that, leaner cost structures, improving earnings revisions, AI driven efficiency gains. They all support a broad-based earnings upturn. and our U.S. equity strategy team do see above consensus 2026 earnings growth at 17 percent. The only other region where we have earnings growth above consensus in 2026 is Japan; for both Europe and the EM we are below, which drive out equal weight and slight underweight position in those two indices respectively.Michael Zezas: Got it. And so, since we can't seem to get away from talking about AI and how it's influencing markets, the other common question we get here is around debt issuance related to AI.So, our colleagues put together a report from earlier this year talking about the potential for nearly $3 trillion of AI related CapEx spending over the next few years. And we think about half of that is going to have to be debt financed. That seems to be a lot of debt, a lot of potential bonds that might be issued into the market – which, are credit investors supposed to be concerned about that?Serena Tang: We really can't get away from AI as a topic. And I think this will continue because AI-related CapEx is a long-term trend, with much of the CapEx still really ahead. And I think this goes to your question. Because this really means that we expect nearly another [$]3 trillion of data center related CapEx from here to 2028. You know, while half of the spend will come from operating cash flows of hyperscalers, it still leaves a financing gap of around [$]1.5 trillion, which needs to be sourced through various credit channels.Now, part of it will be via private credit, part of it would be via Asset Backed Securities. But some of it would also be via the U.S. investment grade corporate credit bond space. So, add in financing for faster M&A cycle, we forecast around [$]1 trillion in net investment grade bond issuance, you know, up 60 percent from this year.And I think given this technical backdrop, even though credit fundamentals should stay fine, we have doubled downgraded U.S. investment grade corporate credit to underweight within our cross asset allocation.Michael Zezas: Okay, so the fundamentals are fine, but it's just a lot of debt to consume over the next year. And so somewhat strangely, you might expect high yield corporate bonds actually do better.Serena Tang: Yes, because I think a high yield doesn't really see the same headwind from the technical side of things. And on the fundamentals front, our credit team actually has default rates coming down over the next 12 months, which again, I think supports high yield much better than investment grade.Michael Zezas: So, before we wrap up, moving away from the equity markets, let's talk about foreign exchange. The U.S. dollar spent much of last year weakening, and that's a call that our team was early to – eventually became a consensus call. It was premised on the idea that the U.S. was going to experience growth weakness, that there would also be these questions among investors about the role of the dollar in the world as the U.S. was raising trade barriers. It seemed to work out pretty well. Going into 2026 though, I think there's some more questions amongst our investors about whether or not that trend could continue. Where do we land?Serena Tang: I think in the first half of next year that downward pressure on the dollar should still persist. And you know, as you said, we've had a very differentiated view for most of this year, expecting the dollar to weaken in the first half versus G10 currencies. And several things drive this. There is a potential for higher dollar negative risk premium, driven by, I think, near term worries about the U.S. labor markets in the short term. And as investors, I think, debate the likely composition of the FOMC next year. Also, you know, compression in U.S. versus rest of the world. Rate differentials should reduce FX hedging costs, which also adds incentive for hedging activity and dollar selling. All this means that we see downward pressure on the dollar persisting in the first half of next year with EUR/USD at 123 and USD/JPY at 140 by the end of first half 2026.Michael Zezas: All right. Well, that's a pretty good survey about what clients care about and what our view is. So, Serena, thanks for taking the time to talk with me today.Serena Tang: And thank you for inviting me to the show today.Michael Zezas: And to our audience, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and share the podcast. We want everyone to listen.

Our South Asia Energy Analyst Mayank Maheshwari discusses how the unprecedented demand to power AI is set to transform the power industry for years to come.Read more insights from Morgan Stanley.----- Transcript -----Mayank Maheshwari: Welcome to Thoughts on the Market. I'm Mayank Maheshwari, Morgan Stanley's South Asia Energy Analyst. Today: how AI and electrification are rewriting the rules of global power. It's Tuesday, December 2nd at 9 pm in Singapore. If you've noticed your electricity bills are climbing and headlines are buzzing with talk of AI, you're not alone. The way we use – and need – power is changing fast, and it's impacting everyone from homeowners to major tech companies. Global power consumption is surging at the fastest pace in over a decade. Annual demand is set to rise by more than one trillion kilowatt-hours every year through 2030, with AI-driven data centers contributing nearly a fifth of that growth. We estimate about [U.S.]$3 trillion investments in datacenters by 2028, with power consumption growth of nearly about 126GW in these three years till [20]28. This is almost as large as Canada's total [annual] power consumption. And in this context, power prices are set to further rise. In 2024 – the latest full-year data available – global power sector investments hit a new high of $1.5 trillion, and consumer power prices have risen by about 15 percent. By 2030, U.S. power markets will account for half of the global data center power consumption. And Asia will also see about a 15 percent spillover of that U.S. hyperscaler demand, which will be also part of why some of the power markets in Asia will get a lot tighter. As power consumption rises, the difference between the price at which electricity is sold and the cost to generate it – also known as power spreads – are likely to rise by nearly 15 percent. This expansion in profit margins could lead to higher earnings forecasts for power generation companies and create $350 billion in value creation through the entire power supply chain. At the same time, years of under-investments in electric grids have led to bottlenecks, sparking a wave of new spending and pushing the industry to rely more on natural gas and energy storage and other new technologies – while also supporting that option of renewable power. In 2024, gas investments hit record highs, and starting in 2026 gas is set to become a new truly global source of new power generation. Looking ahead, natural gas is expected to meet about a fifth of [the] world's new power needs, excluding China. And nuclear energy is well positioned for increased investments; while batteries – which is energy storage – is also getting to get a new set in terms of new investments across datacenters and in markets like China . Moving forward, the power industry faces a multi-decade transformation, marked by unexpected shifts and opportunities. We'll see increased collaboration between fossil and non-fossil fuels, wider adoption of tiered pricing, and a surge in spot market and behind-the-meter sales all driving longer-lasting, elevated power spreads. Gas, nuclear, energy storage, and fuel cell supply chains – especially in Asia and the U.S. – stand to gain from stronger pricing power [and] new growth prospects, while grid operators benefit from higher investment and better returns. On the flip side, pure solar and wind producers may continue to see rising costs in Asia, something we have already seen in [the] U.S. and Europe, as [the] global grid leans more on batteries and steady fossil fuel supplies to balance the requirements of the rising needs of power across the supply chains – in AI as well as domestic utilization of manufacturing. Ultimately, as AI and electrification supercharge power demand, the real challenge isn't just adding renewables. It's about building a resilient, flexible grid and navigating the new economics of energy. 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.

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.

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.

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.

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.

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!

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.

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 stents 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 rate issuance. While fundamentals in corporate and securitized credit remain solid, the very scale of issuance ahead points to spread widening investment rate 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.

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.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!

Our Chief Global Economist Seth Carpenter and Global Cross-Asset Strategist Serena Tang return to conclude their two-part episode on 2026 outlooks and explain why the market environment is turning in favor of risk assets, especially U.S. stocks.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.Serena Tang: And I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist.Seth Carpenter: Yesterday, Serena, we discussed our views on the global economy, and today I'm going to turn the tables on you and start asking you questions about our market outlook and how to invest across regions and across asset classes.It's Tuesday, November 18th at 10am in New York.Alright, Serena in 2025, global markets rode some significant volatility driven by tariffs, policy uncertainty. Things went up, they went down. Equities ultimately outperformed bonds as rate cuts began. But cross-asset strategy depended so much on identifying correlations, opportunities – all in a world that is still adapting to the new geopolitical dynamics and what seemed like evolving rules.So, with that backdrop, could you just broadly tell us what the investment strategy should be in 2026?Serena Tang: We think 2026 will be a strong year for risk assets as you have unusually pro-cyclical policy mix that's supportive of earnings. And that frees up markets to shift the focus from global macro concerns, which of course have dominated this year, to more micro asset specific narratives. Particularly those related to AI CapEx investment.And I think such a constructive environment really calls for a risk on tilt. We recommend equities over credit and government bonds, with a preference for U.S. assets.Seth Carpenter: Okay. I think last year we had some preference, at least for U.S. equities. Are there any other big rotations versus more of the same that you really want to highlight for folks?Serena Tang: In terms of, I think the strategy outlook itself, a big shift has been what we think drive investor focus the most. Our strategy mid-year outlook had focused heavily on global macro risks, right? Especially those, I think, emanated from trade tensions, which you alluded to earlier.I think this time around as the distribution of outcomes on tariffs, I think, has become a bit narrower, it's very much more about asset specific stories. And yes, you know, to your point about being, bullish on U.S. equities, we've maintained that view this time round and believe that U.S. equities can generally do better than rest of world.As you know, Mike Wilson, a colleague and chief U.S. equity strategist, he has a price target of 7800 for the S&P 500 index …Seth Carpenter: Wow.Serena Tang: Beating the expected returns from other regional equities by like quite a bit. So that's not changed. But I think that with this backdrop of post cyclical policy combo lifting U.S. earnings, we've also turned more bullish on high-yield corporate credit – that is bonds which are riskier.I think very much like U.S. equities, we believe that the asset class can benefit from the combination of monetary deregulation policy. But there's also like a very interesting technical component there, which is, as we expect, a surge in investment grade issuance to fund AI related CapEx. I think the high-yield market will be more insulated from this, which means outperformance versus higher quality corporate bonds.Seth Carpenter: Got it. Okay. So, as you're coming up with these strategies and these recommendations in lots of ways, it just relies on forecasting. And I have to say I'm sympathetic to how hard forecasting is, especially when it comes to the future. In our economic forecast, we also included a bunch of different alternate scenarios because I just see that much uncertainty in the global economy.So, with that as a backdrop, nothing is for sure. But where would you say your highest conviction calls are when it comes to investing in 2026?Serena Tang: Well, as I mentioned, we like U.S. equities and that remains a very high conviction call for us. [I] sort of dug through the details of that already. And so, I want to turn to a[n]other high conviction view, which is curve steepening. We see pretty material U.S. treasury curve steepening over the next year. I think even as a macro strategist, actually expect yields at least in the backend to be mostly range bound. And this steepening will be very much driven by what happens in the two-year point – I think as markets continue to, we think, underpriced, future Fed easing and growth slow down tail risks.Seth Carpenter: So that's super helpful in terms of the places where you're convicted. Let me be perhaps a little bit unfair because nothing is in fact certain. And so, if there are things that we feel pretty sure about, there've got to be things where we're either not sure or parts of the market that really pose the most risk.So, if I asked you then, where do you see the biggest risk for investors in markets next year, what would you say?Serena Tang: So, one of them really is AI investment cycle abruptly ending. And this has been a topic of huge debate in all of the investor meetings that we've had over the last several weeks. Because the idea is you have a sharp pullback in investment in the next 12 months, which could trigger a pretty cascading effect. And of course that would likely pressure U.S. equities, I think given hyperscalers index weight. But could weirdly enough benefit IG credit by reducing issuance, which has been the main driver of wider spreads in our forecast. But I think the other risk here actually is if animal spirits run a bit too hot. Underlying our equities over credit over rates allocation is some revival in animal spirits, but it's not the kind of irrational exuberance that marks the end of cycle in our view.Given, I think there's still rational belief in that policy triumvirate that we touched on earlier, that can still be supportive of risk. But you know, I think if sentiment does overheat then our allocation tilt towards cyclicals and beta would be wrong. And historically late cycle expansions see investment grade outperforming high yield inequities, with bonds eventually leading returns.The last risk, I think, to our asset allocation, is really the Fed. Either the FOMC not easing further over the next 12 months or if it changes its reaction function. And I think both of those will have very different implications of what happens to the front end of the yield curve. So, my question to you, Seth, is what do you see as the probability around both of those scenarios?Seth Carpenter: Look, with the data that we have before the government shut down, it was clear there was a tension. Spending by households, spending by businesses was strong. Employment data were getting weaker and weaker, and the Fed has decided to start cutting to err on the side of insulating against further deterioration in the labor market.So, one thing that could upend our forecast is that the real signal is from the spending. Spending stays strong, the labor market eventually catches up to the stronger spending, and we start to see job gains come back. If that happens, especially with inflation now running notably above the Fed's target, I just don't really think we're going to get anywhere near the number of rate cuts that we forecast or that are already priced into market. So, you'd have to see a reversal.How likely is that you can't rule it out? I'd say 20 percent or something like that. Maybe a little bit more. On the other hand, to the downside. I wonder if what you're getting at a little bit is there's going to be some turnover in the personnel at the Fed. And do we have to worry about a fundamentally different reaction function from the Fed going forward and cutting rates aggressively, even if the macro considerations don't warrant? Is that really what you were getting at?Serena Tang: Yes. I think that has been the question on the forefront of investors' minds…Seth Carpenter: Yeah, I think that's a real question. The way I look at it is Chair Powell is in charge of the Fed now. His term goes through May of next year. And so, until we get to the middle of next year, I don't really think there's any fundamental change in how the Fed does business. But it really does seem like we're going to have a new Fed chair in June of next year. But even there, we have got to remember that the committee is a committee and that's how policy is decided. And so, if there was a new chair who really, really, really wanted to take policy in a truly unorthodox way, I also don't think that's really feasible over the second half of next year – because there just won't have been that much turnover in terms of the personnel of the Fed. That's how we're looking at it for now. I really don't think that latter version of the world is a big risk. That said, I'm going to throw it back to you [be]cause I always have to get the last word.You talked about asset classes, bullish on U.S. equities. We talked about high yield bonds; we talked about some of the risks that markets have to face. But one thing I didn't hear – and we do have a global investor base – Is about currencies and specifically the dollar.So, this time last year, the team made a pretty bold call that the dollar would depreciate a great deal. And here we are and the dollar has come off a lot on net over this year. That stabilized a little bit. Maybe not for the whole year [be]cause that kind of forecasting is hard for currencies. But what do you see over the next few months called the next half year for the dollar? Is it going to continue the trend or do you think we should see a reversal?Serena Tang: So, we do think the dollar will continue its trend downwards from here to the middle of next year. And I know, I know. There's been a lot of discussion, there's been a lot of debate around whether the dollar has basically stopped where we are. But the thing is, you know, going back to what you mentioned around the path for growth in the U.S. and unemployment in the U.S. – if we do see softer economic data in the first half of next year, that can drive the dollar downwards. In fact, we're once again, more bearish than consensus on the dollar by the middle of next year.Seth Carpenter: Got it. All right. That's super helpful. Serena, thank you so much for taking the time to talk with me today and let me ask the questions of you.Serena Tang: Always a pleasure, Seth.Seth Carpenter: And thank you 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 a colleague today.

In the first of a two-part episode presenting our 2026 outlooks, Chief Global Cross-Asset Strategist Serena Tang has Chief Global Economist Seth Carpenter explain his thoughts on how economies around the world are expected to perform and how central banks may respond.Read more insights from Morgan Stanley.----- Transcript -----Serena Tang: Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist. Seth Carpenter: And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. Serena Tang: So today and tomorrow, a two-part conversation on Morgan Stanley's year ahead outlook. Today, we'll focus on the all-important macroeconomic backdrop. And tomorrow, we'll be back with our views on investing across asset classes and markets. Serena Tang: It's Monday, November 17th at 10am in New York. So, Seth, 2025 has been a year of transition. Global growth slowed under the weight of tariffs and policy uncertainty. Yet resilience in consumer spending and AI driven investments kept recession fears at bay. Your team has published its economic outlook for 2026. So, what's your view on global growth for the year ahead? Seth Carpenter: We really think next year is going to be the global economy slowing down a little bit more just like it did this year, settling into a slower growth rate. But at the same time, we think inflation is going to keep drifting down in most of the world. Now that anodyne view, though, masks some heterogeneity around the world; and importantly, some real uncertainty about different ways things could possibly go. Here in the U.S., we think there is more slowing to come in the near term, especially the fourth quarter of this year and the beginning of next year. But once the economy works its way through the tariffs, maybe some of the lagged effects of monetary policy, we'll start to see things pick up a bit in the second half of the year. China's a different story. We see the really tepid growth there pushed down by the deflationary spiral they've been in. We think that continues for next year, and so they're probably not quite going to get to their 5 percent growth target. And in Europe, there's this push and pull of fiscal policy across the continent. There's a central bank that thinks they've achieved their job in terms of inflation, but overall, we think growth there is, kind of, unremarkable, a little bit over 1 percent. Not bad, but nothing to write home about at all. So that's where we think things are going in general. But I have to say next year, may well be a year for surprises. Serena Tang: Right. So where do you see the biggest drivers of global growth in 2026, and what are some of the key downside risks? Seth Carpenter: That's a great question. I really do think that the U.S. is going to be a real key driver of the story here. And in fact – and maybe we'll talk about this later – if we're wrong, there's some upside scenarios, there's some downside scenarios. But most of them around the world are going to come from the U.S. Two things are going on right now in the U.S. We've had strong spending data. We've also had very, very weak employment data. That usually doesn't last for very long. And so that's why we think in the near term there's some slowdown in the U.S. and then over time things recover. We could be wrong in either direction. And so, if we're wrong and the labor market sending the real signal, then the downside risk to the U.S. economy – and by extension the global economy – really is a recession in the U.S. Now, given the starting point, given how low unemployment is, given the spending businesses are doing for AI, if we did get that recession, it would be mild. On the other hand, like I said, spending is strong. Business spending, especially CapEx for AI; household spending, especially at the top end of the income distribution where wealth is rising from stocks, where the liability side of the balance sheet is insulated with fixed rate mortgages. That spending could just stay strong, and we might see this upside surprise where the spending really dominates the scene. And again, that would spill over for the rest of the world. What I don't see is a lot of reason to suspect that you're going to get a big breakout next year to the upside or the downside from either Europe or China, relative to our baseline scenarios. It could happen, but I really think most of the story is going to be driven in the U.S. Serena Tang: So, Seth, markets have been focused on the Fed, as it should. What is the likely path in 2026 and how are you thinking about central bank policy in general in other regions? Seth Carpenter: Absolutely. The Fed is always of central importance to most people in markets. Our view – and the market's view, I have to say, has been evolving here. Our view is that the Fed's actually got a few more rate cuts to get through, and that by the time we get to the middle of next year, the middle of 2026, they're going to have their policy rate down just a little bit above 3 percent. So roughly where the committee thinks neutral is. Why do we think that? I think the slowing in the labor market that we talked about before, we think there's something kind of durable there. And now that the government shutdown has ended and we're going to start to get regular data prints again, we think the data are going to show that job creation has been below 50,000 per month on average, and maybe even a few of them are going to get to be negative over the next several months. In that situation, we think the Fed's going to get more inclination to guard against further deterioration in the labor market by keeping cutting rates and making sure that the central bank is not putting any restraint on the economy. That's similar, I would say, to a lot of other developed markets' central banks. But the tension for the ECB, for example, is that President Lagarde has said she thinks; she thinks the disinflationary process is over. She thinks sitting at 2 percent for the policy rate, which the ECB thinks of as neutral, then that's the right place for them to be. Our take though is that the data are going to push them in a different direction. We think there is clearly growth in Europe, but we think it's tepid. And as a result, the disinflationary process has really still got some more room to run and that inflation will undershoot their 2 percent target, and as a result, the ECB is probably going to cut again. And in our view, down to about 1.5 percent. Big difference is in Japan. Japan is the developed market central bank that's hiking. Now, when does that happen? Our best guess is next month in December at the policy meeting. We've seen this shift towards reflation. It hasn't been smooth, hasn't been perfectly linear. But the BoJ looks like they're set to raise rates again in December. But the path for inflation is going to be a bit rocky, and so, they're probably on hold for most of 2026. But we do think eventually, maybe not till 2027, they get back to hiking again – so that Governor Ueda can get the policy rate back close to neutral before he steps down. Serena Tang: So, one of the main investor debates is on AI. Whether it's CapEx, productivity, the future of work. How is that factoring into your team's view on growth and inflation for the next year? Seth Carpenter: Yeah, I mean that is absolutely a key question that we get all the time from investors around the world. When I think about AI and how it's affecting the economy, I think about the demand side of the economy, and that's where you think about this CapEx spending – building data centers, buying semiconductors, that sort of thing. That's demand in the economy. It's using up current resources in the economy, and it's got to be somewhat inflationary. It's part of what has kept the U.S. economy buoyant and resilient this year – is that CapEx spending. Now you also mentioned productivity, and for me, that's on the supply side of the economy. That's after the technology is in place. After firms have started to adopt the technology, they're able to produce either the same amount with fewer workers, or they're able to produce more with the same amount of workers. Either way, that's what productivity means, and it's on the supply side. It can mean faster growth and less inflation. I think where we are for 2026, and it's important that we focus it on the near term, is the demand side is much more important than the supply side. So, we think growth continues. It's supported by this business investment spending. But we still think inflation ends 2026, notably above the Fed's inflation target. And it's going to make five, five and a half years that we've been above target. Productivity should kick in. And we've written down something close to a quarter percentage point of extra productivity growth for 2026, but not enough to really be super disinflationary. We think that builds over time, probably takes a couple of years. And for example, if we think about some of the announcements about these data centers that are being built, where they're really going to unleash the potential of AI, those aren't going to be completed for a couple of years anyway. So, I think for now, AI is dominating the demand side of the economy. Over the next few years, it's going to be a real boost to the supply side of the economy. Serena Tang: So that makes a lot of sense to me, Seth. But can you put those into numbers? Seth Carpenter: Sure, Serena totally. In numbers, that's about 3 percent growth. A little bit more than that for global GDP growth on like a Q4-over-Q4 basis. But for the U.S. in particular, we've got about 1.75 percent. So that's not appreciably different from what we're looking for this year in 2025. But the number really, kind of, masks the evolution over time. We think the front part of the year is going to be much weaker. And only once we get into the second half of next year will things start to pick up. That said, compared to where we were when we did the midyear outlook, it's actually a notable upgrade. We've taken real signal from the fact that business spending, household spending have both been stronger than we think. And we've tried to add in just a little bit more in terms of productivity growth from AI. Layer on top of that, the Fed who's been clearly willing to start to ease interest rates sooner than we thought at the time of the mid-year outlook – all comes together for a little bit better outlook for growth for 2026 in the U.S. Serena Tang: Seth thanks so much for taking the time to talk. Seth Carpenter: Serena, it is always my pleasure to get to talk to you. Serena Tang: And thanks for listening. Please be sure to tune into the second half of our conversation tomorrow to hear how we're thinking about investment strategy in the year ahead. 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.

Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, highlights what investors need to watch out for ahead of next year's U.S. congressional elections.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Today, we're tackling a question that's top of mind after last week's off-cycle elections in New Jersey, New York, Virginia, and California: What could next year's midterm elections mean for investors, especially if Democrats take control of Congress?It's Friday, Nov 14th at 10:30am in New York.In last week's elections, Democrats outperformed expectations. In California, a new redistricting measure could flip several house seats; and in New Jersey and Virginia Democrat candidates, won with meaningfully higher margins than polls suggested was likely. As such prediction markets now give Democrats a roughly 70 percent chance of winning the House next year.But before we jump to conclusions, let's pump the brakes. It might not be too early to think about the midterms as a market catalyst. We'll be doing plenty of that. But we think it's too early to strategize around it. Why? First, a lot can change—both in terms of likely outcomes and the issues driving the electorate. While Democrats are favored today, redistricting, turnout, and evolving voter concerns could reshape the landscape in the months to come. Second, even if Democrats take control of the House, it may not change the trajectory of the policies that matter most to market pricing. In our view, Republicans already achieved their main legislative goals through the tax and fiscal bill earlier this year. The other market-moving policy shifts this year—think tariffs and regulatory changes—have come through executive action, not legislation. The administration has leaned heavily on executive powers to set trade policy, including the so-called Liberation Day tariffs, and to push regulatory changes. Future potential moves investors are watching, like additional regulation or targeted stimulus, would likely come the same way. Meanwhile, the plausible Republican legislative agenda—like further tax cuts—would face steep hurdles. Any majority would be slim, and fiscal hawks in the party nearly blocked the last round of cuts due to concerns over spending offsets. Moderates, for their part, are unlikely to tolerate deeper cuts, especially after the contentious debate over Medicaid in the OBBBA (One Big Beautiful Bill Act). So, what could change this view? If we're wrong, it's likely because the economy slows and tips into recession, making fiscal stimulus more politically appealing—consistent with historical patterns. Or, Democrats could win so decisively on economic and affordability issues that the White House considers standalone stimulus measures, like reducing some tariffs. How does this all connect to markets? For U.S. equities, the current policy mix—industrial incentives, tax cuts, and AI-driven capex—has supported risk assets and driven opportunities in sectors like technology and manufacturing. But it also means that, looking deeper into next year, if growth disappoints, fiscal concerns could emerge as a risk factor challenging the market. There doesn't appear an obvious political setup to shift policies to deal with elevated U.S. deficits, meaning the burden is on better growth to deal with this issue. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and share the podcast. We'll keep you updated as the story unfolds.

Live from Morgan Stanley's European Tech, Media and Telecom Conference in Barcelona, our roundtable of analysts discusses tech disruptions and datacenter growth, and how Europe factors in.Read more insights from Morgan Stanley.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's European Head of Research Product. Today we return to my conversation with Adam Wood. Head of European Technology and Payments, Emmet Kelly, Head of European Telco and Data Centers, and Lee Simpson, Head of European Technology. We were live on stage at Morgan Stanley's 25th TMT Europe conference. We had so much to discuss around the themes of AI enablers, semiconductors, and telcos. So, we are back with a concluding episode on tech disruption and data center investments. It's Thursday the 13th of November at 8am in Barcelona. After speaking with the panel about the U.S. being overweight AI enablers, and the pockets of opportunity in Europe, I wanted to ask them about AI disruption, which has been a key theme here in Europe. I started by asking Adam how he was thinking about this theme. Adam Wood: It's fascinating to see this year how we've gone in most of those sectors to how positive can GenAI be for these companies? How well are they going to monetize the opportunities? How much are they going to take advantage internally to take their own margins up? To flipping in the second half of the year, mainly to, how disruptive are they going to be? And how on earth are they going to fend off these challenges? Paul Walsh: And I think that speaks to the extent to which, as a theme, this has really, you know, built momentum. Adam Wood: Absolutely. And I mean, look, I think the first point, you know, that you made is absolutely correct – that it's very difficult to disprove this. It's going to take time for that to happen. It's impossible to do in the short term. I think the other issue is that what we've seen is – if we look at the revenues of some of the companies, you know, and huge investments going in there. And investors can clearly see the benefit of GenAI. And so investors are right to ask the question, well, where's the revenue for these businesses? You know, where are we seeing it in info services or in IT services, or in enterprise software. And the reality is today, you know, we're not seeing it. And it's hard for analysts to point to evidence that – well, no, here's the revenue base, here's the benefit that's coming through. And so, investors naturally flip to, well, if there's no benefit, then surely, we should focus on the risk. So, I think we totally understand, you know, why people are focused on the negative side of things today. I think there are differences between the sub-sectors. I mean, I think if we look, you know, at IT services, first of all, from an investor point of view, I think that's been pretty well placed in the losers' buckets and people are most concerned about that sub-sector… Paul Walsh: Something you and the global team have written a lot about. Adam Wood: Yeah, we've written about, you know, the risk of disruption in that space, the need for those companies to invest, and then the challenges they face. But I mean, if we just keep it very, very simplistic. If Gen AI is a technology that, you know, displaces labor to any extent – companies that have played labor arbitrage and provide labor for the last 20 - 25 years, you know, they're going to have to make changes to their business model. So, I think that's understandable. And they're going to have to demonstrate how they can change and invest and produce a business model that addresses those concerns. I'd probably put info services in the middle. But the challenge in that space is you have real identifiable companies that have emerged, that have a revenue base and that are challenging a subset of the products of those businesses. So again, it's perfectly understandable that investors would worry. In that context, it's not a potential threat on the horizon. It's a real threat that exists today against certainly their businesses. I think software is probably the most interesting. I'd put it in the kind of final bucket where I actually believe… Well, I think first of all, we certainly wouldn't take the view that there's no risk of disruption and things aren't going to change. Clearly that is going to be the case. I think what we'd want to do though is we'd want to continue to use frameworks that we've used historically to think about how software companies differentiate themselves, what the barriers to entry are. We don't think we need to throw all of those things away just because we have GenAI, this new set of capabilities. And I think investors will come back most easily to that space. Paul Walsh: Emett, you talked a little bit there before about the fact that you haven't seen a huge amount of progress or additional insight from the telco space around AI; how AI is diffusing across the space. Do you get any discussions around disruption as it relates to telco space? Emmet Kelly: Very, very little. I think the biggest threat that telcos do see is – it is from the hyperscalers. So, if I look at and separate the B2C market out from the B2B, the telcos are still extremely dominant in the B2C space, clearly. But on the B2B space, the hyperscalers have come in on the cloud side, and if you look at their market share, they're very, very dominant in cloud – certainly from a wholesale perspective. So, if you look at the cloud market shares of the big three hyperscalers in Europe, this number is courtesy of my colleague George Webb. He said it's roughly 85 percent; that's how much they have of the cloud space today. The telcos, what they're doing is they're actually reselling the hyperscale service under the telco brand name. But we don't see much really in terms of the pure kind of AI disruption, but there are concerns definitely within the telco space that the hyperscalers might try and move from the B2B space into the B2C space at some stage. And whether it's through virtual networks, cloudified networks, to try and get into the B2C space that way. Paul Walsh: Understood. And Lee maybe less about disruption, but certainly adoption, some insights from your side around adoption across the tech hardware space? Lee Simpson: Sure. I think, you know, it's always seen that are enabling the AI move, but, but there is adoption inside semis companies as well, and I think I'd point to design flow. So, if you look at the design guys, they're embracing the agentic system thing really quickly and they're putting forward this capability of an agent engineer, so like a digital engineer. And it – I guess we've got to get this right. It is going to enable a faster time to market for the design flow on a chip. So, if you have that design flow time, that time to market. So, you're creating double the value there for the client. Do you share that 50-50 with them? So, the challenge is going to be exactly as Adam was saying, how do you monetize this stuff? So, this is kind of the struggle that we're seeing in adoption. Paul Walsh: And Emmett, let's move to you on data centers. I mean, there are just some incredible numbers that we've seen emerging, as it relates to the hyperscaler investment that we're seeing in building out the infrastructure. I know data centers is something that you have focused tremendously on in your research, bringing our global perspectives together. Obviously, Europe sits within that. And there is a market here in Europe that might be more challenged. But I'm interested to understand how you're thinking about framing the whole data center story? Implications for Europe. Do European companies feed off some of that U.S. hyperscaler CapEx? How should we be thinking about that through the European lens? Emmet Kelly: Yeah, absolutely. So, big question, Paul. What… Paul Walsh: We've got a few minutes! Emmet Kelly: We've got a few minutes. What I would say is there was a great paper that came out from Harvard just two weeks ago, and they were looking at the scale of data center investments in the United States. And clearly the U.S. economy is ticking along very, very nicely at the moment. But this Harvard paper concluded that if you take out data center investments, U.S. economic growth today is actually zero. Paul Walsh: Wow. Emmet Kelly: That is how big the data center investments are. And what we've said in our research very clearly is if you want to build a megawatt of data center capacity that's going to cost you roughly $35 million today. Let's put that number out there. 35 million. Roughly, I'd say 25… Well, 20 to 25 million of that goes into the chips. But what's really interesting is the other remaining $10 million per megawatt, and I like to call that the picks and shovels of data centers; and I'm very convinced there is no bubble in that area whatsoever.So, what's in that area? Firstly, the first building block of a data center is finding a powered land bank. And this is a big thing that private equity is doing at the moment. So, find some real estate that's close to a mass population that's got a good fiber connection. Probably needs a little bit of water, but most importantly needs some power. And the demand for that is still infinite at the moment. Then beyond that, you've got the construction angle and there's a very big shortage of labor today to build the shells of these data centers. Then the third layer is the likes of capital goods, and there are serious supply bottlenecks there as well.And I could go on and on, but roughly that first $10 million, there's no bubble there. I'm very, very sure of that. Paul Walsh: And we conducted some extensive survey work recently as part of your analysis into the global data center market. You've sort of touched on a few of the gating factors that the industry has to contend with. That survey work was done on the operators and the supply chain, as it relates to data center build out. What were the key conclusions from that? Emmet Kelly: Well, the key conclusion was there is a shortage of power for these data centers, and… Paul Walsh: Which I think… Which is a sort of known-known, to some extent. Emmet Kelly: it is a known-known, but it's not just about the availability of power, it's the availability of green power. And it's also the price of power is a very big factor as well because energy is roughly 40 to 45 percent of the operating cost of running a data center. So, it's very, very important. And of course, that's another area where Europe doesn't screen very well.I was looking at statistics just last week on the countries that have got the highest power prices in the world. And unsurprisingly, it came out as UK, Ireland, Germany, and that's three of our big five data center markets. But when I looked at our data center stats at the beginning of the year, to put a bit of context into where we are…Paul Walsh: In Europe… Emmet Kelly: In Europe versus the rest. So, at the end of [20]24, the U.S. data center market had 35 gigawatts of data center capacity. But that grew last year at a clip of 30 percent. China had a data center bank of roughly 22 gigawatts, but that had grown at a rate of just 10 percent. And that was because of the chip issue. And then Europe has capacity, or had capacity at the end of last year, roughly 7 to 8 gigawatts, and that had grown at a rate of 10 percent. Now, the reason for that is because the three big data center markets in Europe are called FLAP-D. So, it's Frankfurt, London, Amsterdam, Paris, and Dublin. We had to put an acronym on it. So, Flap-D. Good news. I'm sitting with the tech guys. They've got even more acronyms than I do, in their sector, so well done them. Lee Simpson: Nothing beats FLAP-D. Paul Walsh: Yes. Emmet Kelly: It's quite an achievement. But what is interesting is three of the big five markets in Europe are constrained. So, Frankfurt, post the Ukraine conflict. Ireland, because in Ireland, an incredible statistic is data centers are using 25 percent of the Irish power grid. Compared to a global average of 3 percent.Now I'm from Dublin, and data centers are running into conflict with industry, with housing estates. Data centers are using 45 percent of the Dublin grid, 45. So, there's a moratorium in building data centers there. And then Amsterdam has the classic semi moratorium space because it's a small country with a very high population. So, three of our five markets are constrained in Europe. What is interesting is it started with the former Prime Minister Rishi Sunak. The UK has made great strides at attracting data center money and AI capital into the UK and the current Prime Minister continues to do that. So, the UK has definitely gone; moved from the middle lane into the fast lane. And then Macron in France. He hosted an AI summit back in February and he attracted over a 100 billion euros of AI and data center commitments. Paul Walsh: And I think if we added up, as per the research that we published a few months ago, Europe's announced over 350 billion euros, in proposed investments around AI. Emmet Kelly: Yeah, absolutely. It's a good stat. Now where people can get a little bit cynical is they can say a couple of things. Firstly, it's now over a year since the Mario Draghi report came out. And what's changed since? Absolutely nothing, unfortunately. And secondly, when I look at powering AI, I like to compare Europe to what's happening in the United States. I mean, the U.S. is giving access to nuclear power to AI. It started with the three Mile Island… Paul Walsh: Yeah. The nuclear renaissance is… Emmet Kelly: Nuclear Renaissance is absolutely huge. Now, what's underappreciated is actually Europe has got a massive nuclear power bank. It's right up there. But unfortunately, we're decommissioning some of our nuclear power around Europe, so we're going the wrong way from that perspective. Whereas President Trump is opening up the nuclear power to AI tech companies and data centers. Then over in the States we also have gas and turbines. That's a very, very big growth area and we're not quite on top of that here in Europe. So, looking at this year, I have a feeling that the Americans will probably increase their data center capacity somewhere between – it's incredible – somewhere between 35 and 50 percent. And I think in Europe we're probably looking at something like 10 percent again. Paul Walsh: Okay. Understood. Emmet Kelly: So, we're growing in Europe, but we're way, way behind as a starting point. And it feels like the others are pulling away. The other big change I'd highlight is the Chinese are really going to accelerate their data center growth this year as well. They've got their act together and you'll see them heading probably towards 30 gigs of capacity by the end of next year. Paul Walsh: Alright, we're out of time. The TMT Edge is alive and kicking in Europe. I want to thank Emmett, Lee and Adam for their time and I just want to wish everybody a great day today. Thank you.(Applause) That was my conversation with Adam, Emmett and Lee. Many thanks again to them. Many thanks again to them for telling us about the latest in their areas of research and to the live audience for hearing us out. And a thanks to you as well for listening. Let us know what you think about this and other episodes by living us a review wherever you get your podcasts. And if you enjoy listening to Thoughts on the Market, please tell a friend or colleague about the podcast today.

Live from Morgan Stanley's European Tech, Media and Telecom conference in Barcelona, our roundtable of analysts discuss artificial intelligence in Europe, and how the region could enable the Agentic AI wave.Read more insights from Morgan Stanley.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's European head of research product. We are bringing you a special episode today live from Morgan Stanley's, 25th European TMT Conference, currently underway. The central theme we're focused on: Can Europe keep up from a technology development perspective?It's Wednesday, November the 12th at 8:00 AM in Barcelona. Earlier this morning I was live on stage with my colleagues, Adam Wood, Head of European Technology and Payments, Emmet Kelly, Head of European Telco and Data Centers, and Lee Simpson, Head of European Technology Hardware. The larger context of our conversation was tech diffusion, one of our four key themes that we've identified at Morgan Stanley Research for 2025. For the panel, we wanted to focus further on agentic AI in Europe, AI disruption as well as adoption, and data centers. We started off with my question to Adam. I asked him to frame our conversation around how Europe is enabling the Agentic AI wave. Adam Wood: I mean, I think obviously the debate around GenAI, and particularly enterprise software, my space has changed quite a lot over the last three to four months. Maybe it's good if we do go back a little bit to the period before that – when everything was more positive in the world. And I think it is important to think about, you know, why we were excited, before we started to debate the outcomes. And the reason we were excited was we've obviously done a lot of work with enterprise software to automate business processes. That's what; that's ultimately what software is about. It's about automating and standardizing business processes. They can be done more efficiently and more repeatably. We'd done work in the past on RPA vendors who tried to take the automation further. And we were getting numbers that, you know, 30 – 40 percent of enterprise processes have been automated in this way. But I think the feeling was it was still the minority. And the reason for that was it was quite difficult with traditional coding techniques to go a lot further. You know, if you take the call center as a classic example, it's very difficult to code what every response is going to be to human interaction with a call center worker. It's practically impossible. And so, you know, what we did for a long time was more – where we got into those situations where it was difficult to code every outcome, we'd leave it with labor. And we'd do the labor arbitrage often, where we'd move from onshore workers to offshore workers, but we'd still leave it as a relatively manual process with human intervention in it. I think the really exciting thing about GenAI is it completely transforms that equation because if the computers can understand natural human language, again to our call center example, we can train the models on every call center interaction. And then first of all, we can help the call center worker predict what the responses are going to be to incoming queries. And then maybe over time we can even automate that role. I think it goes a lot further than, you know, call center workers. We can go into finance where a lot of work is still either manual data re-entry or a remediation of errors. And again, we can automate a lot more of those tasks. That's obviously where, where SAP's involved. But basically what I'm trying to say is if we expand massively the capabilities of what software can automate, surely that has to be good for the software sector that has to expand the addressable markets of what software companies are going to be able to do. Now we can have a secondary debate around: Is it going to be the incumbents, is it going to be corporates that do more themselves? Is it going to be new entrants that that benefit from this? But I think it's very hard to argue that if you expand dramatically the capabilities of what software can do, you don't get a benefit from that in the sector. Now we're a little bit more consumer today in terms of spending, and the enterprises are lagging a little bit. But I think for us, that's just a question of timing. And we think we'll see that come through.I'll leave it there. But I think there's lots of opportunities in software. We're probably yet to see them come through in numbers, but that shouldn't mean we get, you know, kind of, we don't think they're going to happen. Paul Walsh: Yeah. We're going to talk separately about AI disruption as we go through this morning's discussion. But what's the pushback you get, Adam, to this notion of, you know, the addressable market expanding? Adam Wood: It's one of a number of things. It's that… And we get onto the kind of the multiple bear cases that come up on enterprise software. It would be some combination of, well, if coding becomes dramatically cheaper and we can set up, you know, user interfaces on the fly in the morning, that can query data sets; and we can access those data sets almost in an automated way. Well, maybe companies just do this themselves and we move from a world where we've been outsourcing software to third party software vendors; we do more of it in-house. That would be one. The other one would be the barriers to entry of software have just come down dramatically. It's so much easier to write the code, to build a software company and to get out into the market. That it's going to be new entrants that challenge the incumbents. And that will just bring price pressure on the whole market and bring… So, although what we automate gets bigger, the price we charge to do it comes down. The third one would be the seat-based pricing issue that a lot of software vendors to date have expressed the value they deliver to customers through. How many seats of the software you have in house. Well, if we take out 10 – 20 percent of your HR department because we make them 10, 20, 30 percent more efficient. Does that mean we pay the software vendor 10, 20, 30 percent less? And so again, we're delivering more value, we're automating more and making companies more efficient. But the value doesn't accrue to the software vendors. It's some combination of those themes I think that people would worry about. Paul Walsh: And Lee, let's bring you into the conversation here as well, because around this theme of enabling the agentic AI way, we sort of identified three main enabler sectors. Obviously, Adam's with the software side. Cap goods being the other one that we mentioned in the work that we've done. But obviously semis is also an important piece of this puzzle. Walk us through your thoughts, please. Lee Simpson: Sure. I think from a sort of a hardware perspective, and really we're talking about semiconductors here and possibly even just the equipment guys, specifically – when seeing things through a European lens. It's been a bonanza. We've seen quite a big build out obviously for GPUs. We've seen incredible new server architectures going into the cloud. And now we're at the point where we're changing things a little bit. Does the power architecture need to be changed? Does the nature of the compute need to change? And with that, the development and the supply needs to move with that as well. So, we're now seeing the mantle being picked up by the AI guys at the very leading edge of logic. So, someone has to put the equipment in the ground, and the equipment guys are being leaned into. And you're starting to see that change in the order book now. Now, I labor this point largely because, you know, we'd been seen as laggards frankly in the last couple of years. It'd been a U.S. story, a GPU heavy story. But I think for us now we're starting to see a flipping of that and it's like, hold on, these are beneficiaries. And I really think it's 'cause that bow wave has changed in logic. Paul Walsh: And Lee, you talked there in your opening remarks about the extent to which obviously the focus has been predominantly on the U.S. ways to play, which is totally understandable for global investors. And obviously this has been an extraordinary year of ups and downs as it relates to the tech space. What's your sense in terms of what you are getting back from clients? Is the focus shifts may be from some of those U.S. ways to play to Europe? Are you sensing that shift taking place? How are clients interacting with you as it relates to the focus between the opportunities in the U.S. and Asia, frankly, versus Europe? Lee Simpson: Yeah. I mean, Europe's coming more into debate. It's more; people are willing to talk to some of the players. We've got other players in the analog space playing into that as well. But I think for me, if we take a step back and keep this at the global level, there's a huge debate now around what is the size of build out that we need for AI? What is the nature of the compute? What is the power pool? What is the power budgets going to look like in data centers? And Emmet will talk to that as well. So, all of that… Some of that argument's coming now and centering on Europe. How do they play into this? But for me, most of what we're finding people debate about – is a 20-25 gigawatt year feasible for [20]27? Is a 30-35 gigawatt for [20]28 feasible? And so, I think that's the debate line at this point – not so much as Europe in the debate. It's more what is that global pool going to look like? Paul Walsh: Yeah. This whole infrastructure rollout's got significant implications for your coverage universe… Lee Simpson: It does. Yeah. Paul Walsh: Emmet, it may be a bit tangential for the telco space, but was there anything you wanted to add there as it relates to this sort of agentic wave piece from a telco's perspective? Emmet Kelly: Yeah, there's a consensus view out there that telcos are not really that tuned into the AI wave at the moment – just from a stock market perspective. I think it's fair to say some telcos have been a source of funds for AI and we've seen that in a stock market context, especially in the U.S. telco space, versus U.S. tech over the last three to six months, has been a source of funds. So, there are a lot of question marks about the telco exposure to AI. And I think the telcos have kind of struggled to put their case forward about how they can benefit from AI. They talked 18 months ago about using chatbots. They talked about smart networks, et cetera, but they haven't really advanced their case since then. And we don't see telcos involved much in the data center space. And that's understandable because investing in data centers, as we've written, is extremely expensive. So, if I rewind the clock two years ago, a good size data center was 1 megawatt in size. And a year ago, that number was somewhere about 50 to 100 megawatts in size. And today a big data center is a gigawatt. Now if you want to roll out a 100 megawatt data center, which is a decent sized data center, but it's not huge – that will cost roughly 3 billion euros to roll out. So, telcos, they've yet to really prove that they've got much positive exposure to AI. Paul Walsh: That was an edited excerpt from my conversation with Adam, Emmet and Lee. Many thanks to them for taking the time out for that discussion and the live audience for hearing us out.We will have a concluding episode tomorrow where we dig into tech disruption and data center investments. So please do come back for that very topical conversation. As always, thanks for listening. Let us know what you think about this and other episodes by leaving us a review wherever you get your podcasts. And if you enjoy Thoughts on the Market, please tell a friend or colleague to tune in today.

Our Research and Investment Management analysts Michael Cyprys and Denny Galindo discuss how and why cryptocurrencies are transitioning from niche speculation to portfolio staples. Read more insights from Morgan Stanley.----- Transcript -----Michael Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Head of U.S. Brokers, Asset Managers and Exchanges for Morgan Stanley Research.Denny Galindo: And I'm Denny Galindo, Investment Strategist for Morgan Stanley Wealth Management.Michael Cyprys: Today we break down the forces making crypto more accessible and what this shift means for investors everywhere.It's Tuesday, November 11th at 10am in New York.We've seen cryptocurrencies move from the fringes of finance to being considered a legitimate part of mainstream asset allocation. Financial platforms, especially those serving institutional clients, are starting to integrate crypto more than ever.Denny, you've written extensively about the crypto market for some time now among your many jobs here at Morgan Stanley. So, from your perspective in wealth management, what are you hearing from retail clients about their growing interest in crypto?Denny Galindo: Yeah, we actually started writing about crypto back in 2017. We had our first explainer deck, and we started writing extensive educational reports in 2021. So, we've covered it for a while.Advisors who dabble in crypto typically had this one client. He asked a lot of questions about when they could do more. We also had some clients who were curious, maybe their neighbor made a lot of money, bought a new boat and they were like wondering, you know, what is this Bitcoin thing?Now, this year we've seen a sea change. I think it was the election really started it; the Genius Act, and some of the legislation also kind of added to it. Almost all this interest is really on Bitcoin only, although we also have gotten a decent amount of interest about stablecoins and how those might impact things. But it's really just the beginning and I think it's an area that's; it's not going to go away.Mike, on the institutional side, what trends are you seeing among asset managers and brokers in terms of crypto adoption integration?Michael Cyprys: So, we've seen a big move into the ETF space as large money managers make crypto easier to access for both retail and institutional investors. Now this comes on the back of the SEC approving the first spot Bitcoin and Ethereum ETFs back in 2024. And since then, we've seen firms from BlackRock to Fidelity, Franklin, Invesco, and many others, including crypto native firms having launched spot Bitcoin ETFs and spot Ethereum ETFs. And these steps in the minds of many investors have legitimized crypto as an investible asset class.Most recently, we've seen the SEC adopt generic ETF listing standards for crypto ETFs that can make it easier to accelerate ETF launches in reduced regulatory frictions. And today the crypto ETF space is about $200 billion of assets under management and saw inflows of over [$]40 billion last year, over [$]45 billion so far this year – despite some of the near-term volatility. And most of the asset class today is in Bitcoin, single token ETFs, with BlackRock and Fidelity managing the largest ETFs in the space.Speaking of products, what types of crypto are retail investors most curious about? And why do those particular ones make sense for their portfolios?Denny Galindo: Yeah, I think you hit the nail on the head. The most popular products are really the Bitcoin products. We as a firm allowed solicitation in Bitcoin ETPs more than a year ago in brokerage accounts. We just expanded them to allow them in Advisory in October. So, we're still early days here. There really hasn't been that much interest in the other crypto products.Now when people think about this, there's three buckets here. There are some people that think of it like digital gold. And they're worried about inflation. They're worried about government deficits. And that's kind of the angle that they're approaching crypto from. A second group think of it like a venture capital, like a disruptive innovation in tech that's going after this big addressable market. And, you know, hopefully the penetration will rise in the future. And then the third bucket is really thinking [of it] out it as a diversifier. So, they're saying, ‘Hey, this thing is volatile. It doesn't match stocks, bonds, other assets. And so, I kind of want to use it for diversification.'Now, Mike, when you have these discussions with institutional clients, how do they view the risk and potential of these different cryptocurrencies?Michael Cyprys: What's interesting with the crypto space is adoption started on the retail side with institutions now slowly beginning to explore allocations. And that's the opposite of what we've seen historically with institutions leaning in ahead of retail in areas, whether it's commodities or private markets. But it's still early days.On the institutional side, we're starting to see some pensions, endowments, foundations begin to make some small allocations to Bitcoin as a long-term inflation hedge. But keep in mind, institutions tend to make investments in the context of strategic asset allocations, often with a broader macro framework.Denny, you've written quite a bit about the four-year crypto cycle. Could you explain what that is and where you think we are in the current crypto cycle?Denny Galindo: Yeah, if you look at the data, you see a pretty clear trend of a four-year cycle. So, there's three up years and one down year, and it's been like clockwork, since Bitcoin was invented.Now when you see something like that, you always try to explain like: why is this happening? So, there's two kind of dominant explanations that we've seen. So, one's macro, one's micro. Now the macro version for crypto is really the M2 cycle. So, we see that M2 to that global M2 money supply has kind of accelerated and decelerated in four-year cycles, and Bitcoin tends to really match that cycle. It tends to accelerate when M2's accelerating and it tends to decline when it's decelerating or declining.But there's also this bottoms-up way of looking at it, and commodities are really the place we go to for that analysis. So, a lot of commodities, you know, could be coffee, could be oil – if something disrupts supply, you tend to get the shortage, you get the price moving up.Then you get commodity speculators piling in, adding leverage. And it'll just kind of go parabolic. At some point something pops the bubble, usually more supply, and then you get like a great depression. You get like an 80 percent draw down. All the leverage comes out and the whole thing crashes. So crypto has also followed that.Now, we break the four-year cycle into four seasons: spring, summer, fall, and winter. And each season has a different characteristic about which parts of the market work, which don't work, what things look like. We are in the fall season right now. And that tends to last about a year. We wrote a note last year on this. Fall is the time for harvest. So, it's the time you want to take your gains.But the debate is, you know, how long will this fall last? When will the next winter start? Or maybe this pattern won't even hold in the future. And so, this is the big debate in the crypto circles these days.And Mike, given the volatility, given the great depressions we talked about in Bitcoin with these, you know, 70-80 percent drawdowns, how do you see it fitting into institutional portfolios compared to other cryptocurrencies?Michael Cyprys: Compared to other cryptocurrencies, Bitcoin is still viewed as the flagship asset within the crypto space – just given higher adoption, greater liquidity, the sheer market value. It has longer history and better regulatory clarity as compared to other tokens. But given the volatility as you mentioned, and the early days nature of cryptocurrencies, adoption is still quite nascent amongst institutional investors.Some institutional investors view Bitcoin as digital gold or macro hedge against inflation and monetary debasement. It's also sometimes viewed as a low correlation diversifier within multi-asset portfolios. But even that's also been a debate in the marketplace too.As we look forward from here, crypto adoption within institutional portfolios could potentially expand as regulatory clarity establishes a clear framework for digital assets, right? We had the Genius Act recently that focused on stablecoins. Next up is market structure. There's a bill working its way through Congress.We've also had developments on the ETF side that lower[s] barriers for institutions to gain exposure there. Not only is it more accessible within traditional portfolios, but the ETF fits nicely into day-to-day workflow.So, bottom line is institutional views on Bitcoin and crypto are evolving, and how firms view Bitcoin – we think will depend upon the institution's objectives, their risk tolerance and portfolio context. And keep in mind that institutional allocations don't turn on a dime. They tend to be slower moving.Denny, do retail clients take a similar approach or are they more likely to take bigger bets?Denny Galindo: Our clients struggle with this question. And so, we get a lot of questions like, ‘Okay, I don't want to miss this. I'm a little nervous about it. What allocation should I use here?' And so, we go back to our three, kind of, typical investors when we try to answer this question. We really try and help people figure out where is equal weight.So, we wrote a note in February called “Are you Underweight Bitcoin?” And we have three different answers depending on how you're thinking of it. And, you know, there's a big debate. There's no clear answer. And that's not really where we want our clients. We want them to be smaller where they can have some exposure if they want it. Not everyone wants it, but if you do want it, you can have it. And it won't really dominate the volatility of the portfolio.Now, on another note, Mike, are you seeing legacy platforms start to offer crypto as well?Michael Cyprys: So crypto ETFs are generally available in self-directed brokerage accounts across the industry today. Schwab, for example, commented that their customers hold $25 billion in crypto ETFs, which is about, call it 20 percent share of the ETF space. But access to these crypto ETFs is a bit more restricted within the Advisor-led channel. But we're starting to see that broaden out for ETFs and eventually might see model portfolios with allocations toward crypto ETFs.But when you look at spot crypto trading, though, that generally remains out of reach of most legacy platforms. The key hurdle for that has been regulatory clarity and with a more crypto friendly administration that is changing here.So, Schwab, for example, acknowledged that they have the regulatory clarity needed and they're working towards launching their spot crypto trading platform in the first half of next year.On that topic, Denny, how do you view the merits of holding crypto directly versus through an exchange-traded product like ETFs?Denny Galindo: Yeah, I mean, our clients are mostly not day trading this product and kind of moving it back and forth.So, the ETPs have been a pretty good answer for them. The one issue is liquidity. And so, we're not used to thinking of this in; the U.S. equity markets are the most liquid markets. But in crypto, the crypto markets, the spot markets are actually more liquid than the equity markets.So, you get a lot of liquidity even after hours, even 24x7. And as other markets around the world kind of take the lead. But most of our investors aren't treating it that way. They're not day trading it, and they're really keeping it more like that digital gold allocation. And so, they just need to adjust the position size, you know, once a month, once a year maybe; just kind of buy and hold.But I wonder, you know, as more people get more comfortable, it could become more important in the future. So, it's an open question, but for now, the ETPs have been a pretty good answer here.Michael Cyprys: Fascinating space. Denny, thanks so much for taking the time to talk.Denny Galindo: It was great speaking with you, Mike.Michael Cyprys: 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.

Our CIO and Chief U.S. Equity Strategist Mike Wilson unpacks why stocks are likely to stay resilient despite uncertainties related to Fed rates, government shutdown and tariffs.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief U.S. Equity Strategist. Today on the podcast, I'll be discussing recent concerns for equities and how that may be changing. It's Monday, November 10th at 11:30am in New York. So, let's get after it.We're right in the middle of earnings season. Under the surface, there may appear to be high dispersion. But we're actually seeing positive developments for a broadening in growth. Specifically, the median stock is seeing its best earnings growth in four years. And the S&P 500 revenue beat rate is running 2 times its historical average. These are clear signs that the earning recovery is broadening and that pricing power is firming to offset tariffs. We're also watching out for other predictors of soft spots. And over the past week, the seasonal weakness in earnings revision breath appears to be over. For reference, this measure troughed at 6 percent on October 21st, and is now at 11 percent. The improvement is being led by Software, Transports, Energy, Autos and Healthcare. Despite this improvement in earnings revisions, the overall market traded heavy last week on the back of two other risks. The first risk relates to the Fed's less dovish bias at October's FOMC meeting. The Fed suggested they are not on a preset course to cut rates again in December. So, it's not a coincidence the U.S. equity market topped on the day of this meeting. Meanwhile investors are also keeping an eye on the growth data during the third quarter. If it's stronger than anticipated, it could mean there's less dovish action from the Fed than the market expects or needs for high prices.I have been highlighting a less dovish Fed as a risk for stocks. But it's important to point out that the labor market is also showing increasing signs of weakness. Part of this is directly related to the government shutdown. But the private labor data clearly illustrates a jobs market that's slowing beyond just government jobs. This is creating some tension in the markets – that the Fed will be late to cut rates, which increases the risk the recovery since April falls flat. In my view, 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. But, without official jobs data confirming this trend, the Fed is moving slower than the equity market may like. The other risk the market has been focused on is the government shutdown itself. And there appears to be two main channels through which these variables are affecting stock prices. The first is tighter liquidity as reflected in the recent decline in bank reserves. The government shutdown has resulted in fewer disbursements to government employees and other programs. Once the government shutdown ends which appears imminent, these payments will resume, which translates into an easing of liquidity.The second impact of the shutdown is weaker consumer spending due to a large number of workers furloughed and benefits, like SNAP, halted. As a result, Consumer Discretionary company earnings revisions have rolled over. The good news is that the shutdown may be coming to an end and alleviate these market concerns. Finally, tariffs are facing an upcoming Supreme Court decision. There were questions last week on how affected stocks were reacting to this development. Overall, we saw fairly muted relative price reactions from the stocks that would be most affected. We think this relates to a couple of variables. First, the Trump administration could leverage a number of other authorities to replace the existing tariffs. Second, even in a scenario where the Supreme Court overturns tariffs, refunds are likely to take a significant amount of time, potentially well into 2026.So what does all of this all mean? Weak earnings seasonality is coming to an end along with the government shutdown. Both of these factors should lead to some relief in what have been softer equity markets more recently. But we expect volatility to persist until the Fed fully commits to the run it hot strategy of the administration. 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!

Our Chief U.S. Economist Michael Gapen and Global Head of Macro Strategy Matthew Hornbach discuss potential next steps for the FOMC and the risks to their views from the U.S. government shutdown. Read more insights from Morgan Stanley.----- Transcript -----Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.Matthew Hornbach: The October FOMC meeting delivered a quarter percent rate cut as widely expected – but things are more complicated, and policy is not on a preset path from here.It's Friday, November 7th at 10am in New York.So, Mike, the Fed did cut by 25 basis points in October, but it was not a unanimous decision. And the Federal Open Market Committee decided to end the reduction of its balance sheet on December 1st – earlier than we expected. How did things unfold and does this change your outlook in any way?Michael Gapen: Yeah, Matt, it was a surprise to me. Not so much the statement or the decision, but there were dissents. There was a dissent in favor of a 50-basis point cut. There was a dissent in favor of no cut. And that foreshadowed the press conference – where really the conversation was about, I think, a divided committee; and a committee that didn't have a lot of consensus on what would come next.The balance sheet discussion, which we can get into, it came a little sooner than we thought, but it was largely in line with our view. And I'm not sure it's a macro critical decision right now. But I do think it was a surprise to markets and it was certainly a surprise to me – how much Powell's tone shifted between September and October, in terms of what the market could expect from the Fed going forward.So, what he said in essence, the key points, you know. The policy's not on a preset path from here. Or [a] cut in December is maybe not decidedly part of the baseline; or certainly is not a foregone conclusion. And I think what that reflects is a couple of things.One is that they're recalibrating policy based on a risk management view. So, you can cut almost independent of the data, at least in the beginning. And so now I think Powell's saying, ‘Well, at least from here, future cuts are probably more data dependent than those initial cuts.' But second, and I think most importantly is the division that appeared within the Fed. I think there's one group that's hawkish, one group that's dovish, and I think it reflects the division and the tension that we have in the economic data.So, I think the hawkish crowd is looking at strong activity data, strong AI spending, an upper income consumer that seems to be doing just fine. And they're saying, ‘Why are we cutting? Financial conditions for the business community is pretty easy. Maybe the neutral rate of interest is higher. We're probably less restrictive than you think.' And then I think the other side of the committee, which I believe still that Chair Powell is in, is looking at a market slowdown in hiring a weak labor market. What that means for growth in real income for those households that depend on labor market income to consume; there's probably some front running of autos that artificially boosted growth in the third quarter.So, I think that the dissents, or I should say the division within the FOMC, I think reflects the tension in the underlying data. So, to know which way monetary policy evolves, Matt, it's essentially trying to decide: does the labor market rebound towards the activity data or does the activity data decelerate at least temporarily to the labor market?Matthew Hornbach: Mike, you talked a lot about data just now, and we're not exactly getting a lot of government data at the moment. How are you thinking about the path for the data in terms of its availability between now and the December FOMC meeting? And how do you think that may affect the Fed's willingness to move forward with another rate cut in the cycle?Michael Gapen: Right. So that's key and critical to understanding, right? We're operating under the assumption, of course the federal government shutdowns going to end at some point. We're going to get all this back data released and we can assess where the economy is or has been. I think the way markets should think about this is if the government shutdown has ended in the next few weeks, say before Thanksgiving – then I think we, markets, the Fed will have the bulk of the data in front of them and available to assess the economy at the December FOMC meeting.They may not have it all, but they should get at least some of that data released. We can assess it. If the economy has moderated and weakened a bit, the labor market has continued to cool, the Fed can cut. If it shows maybe the labor market rebounding downside risk to employment being diminished, maybe the Fed doesn't cut.So that's a world and it is our expectation the shutdown should end in the next few weeks. We're already at the longest shutdown on record, so we will get some data in hand to make the decision for December. Perhaps that's wishful thinking, Matt, and maybe we go beyond Thanksgiving, and the shutdown extends into December.My suspicion though, is if the government is still shut down in December, I can't imagine the economy's getting better. So, I think the Fed could lean in the direction of taking one more step.Matthew Hornbach: This is going to be very critical for how the markets think about the outlook in 2026 and price the outlook for 2026. The last FOMC meeting of the year has that type of importance for markets – pricing, the path of Fed policy, and the path of the economy into 2026. Because if we end up receiving a rate cut from the Fed, the dialogue in the investment community will be focused on when might the next cut arrive. Versus if we don't get that rate cut in December, the dialogue will focus on, maybe we will never see another rate cut in the cycle. And what if we see a rate hike as we make our way through the second half of 2026? So that can have a dramatic impact on the U.S. Treasury market and how investors think about the outlook for policy and the economy.Michael Gapen: So, I think that's right. And as you know, our baseline outlook is at least through the first quarter, if not into the second quarter. The private sector will still be attempting to pass through tariffs into prices. And I think in the meantime, demand for labor and the hiring rate will remain low.And so, we look for additional labor market slack to build. Not a lot, but the unemployment rate moving to more like 4.6, maybe 4.7 – and that underpins our expectation the Fed will be reducing rates in in 2026. But I think as you note, and as I mentioned earlier, there is this tension in the data and it's not inconceivable that the labor market accelerates. And you get, kind of, an animal spirits driven 2026; where a combination of momentum in the data, AI-related business spending, wealth effects for upper income consumers and maybe a larger fiscal stimulus from the One Big Beautiful Bill Act, lead the economy to outperform.And to your point, if that is happening, it's not farfetched to think, well, if the Fed put in risk management insurance cuts, perhaps they need to take those out. And that could build in a way where that expectation, let's say towards the second half or the fourth quarter maybe of 2026, maybe it takes into 2027. But I agree with you that if the Fed can't cut in December because the economy's doing well and the data show that, and we learn more of that in 2026, you're right.So, it would… And may maybe to put it more simply, the more the Fed cuts, the more you need to open both sides of the rate path distribution, right? The deeper they cut, the greater the probability over time, they're going to have to raise those rates. And so, if the Fed is forced to stop in December, yeah, you can make that argument.Matthew Hornbach: Indeed, a lot of the factors that you mentioned are factors that are coming up in investor conversations increasingly. The way I've been framing it in my discussions is that investors want to see the glass as half full today, versus in the middle of this year the glass was looking half empty. And of course, as we head into the holiday season, the glass will be filled with something perhaps a bit tastier than water. And so…Michael Gapen: Fill my glass please.Matthew Hornbach: Indeed. So, I do think that we could be setting up for a bright 2026 ahead. And so, with that, Mike, look forward to seeing you again in December – with a glass of eggnog perhaps. And a decision in hand for the meeting that the Fed holds then. Thanks for taking the time to talk.Michael Gapen: Great speaking with you, Matt.Matthew Hornbach: 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.

Earlier this week, the U.S. Supreme Court heard a case challenging the current administration's tariff policy. Our Head of Fixed Income Research and Public Policy Research explains the potential magnitude of the case's outcome for markets.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Today, we discuss the challenge against tariffs at the Supreme Court and how it might affect markets.It's Thursday, Nov 6th at 11am in New York.This week, the U.S. Supreme Court heard arguments about the legality of most of the tariffs implemented by the Trump administration. Investors are paying close attention because if the Supreme rules against the administration, it could undo much of the four-five times tariff increase that's taken place in the U.S. this year. That would seem to set up this hearing, and a subsequent ruling which could come as early as this month, as a clear market catalyst. But, like many policy issues affecting the economic and markets outlook, the reality is more complicated. Here's what you need to know.First, there's ample debate among experts about how the court will rule. That may seem surprising given the court's makeup. Three of the nine judges were appointed by President Trump, and six of the nine by Republican Presidents. But it's not clear they'll agree that the President used his executive power in a way consistent with the law that granted the executive branch this particular power. That law is the International Emergency Economic Powers Act, or IEEPA. And, without getting into too much detail, the law appears to have been designed to deal with economic crises and foreign adversaries, which the court might argue is not evident when considering tariffs levied against traditional allies.But, the next important point is that a ruling against the Trump administration might not actually change much around U.S. tariff levels. How is that possible? It's because the administration has other executive tariff powers it can deploy if needed, and ones that are arguably more durable. For example, Section 301 gives a President wide latitude to designate a trading partner as undertaking unfair trade practices. So this authority could be swapped in for IEEPA. That could take time, as Section 301 requires a study to be submitted, but there are other temporary authorities that could bridge the gap. So the U.S. can likely ensure continuity of current tariff levels if it wants – keeping tariffs more of a constant than a variable in our outlook.Of course, we have to consider ways we could be wrong. For example, the administration could use a ruling against it to re-focus instead on product specific tariffs through Section 232. That likely would result in U.S. effective tariff rates drifting a bit lower, alleviating some of the pressure our economists see on the consumer and corporate importers, adding more support to risk assets. But that scenario might come with some volatility along the way if the administration feels the need to float larger product specific tariff levels before settling on more palatable levels – similar to what happened in April.So bottom line, there's more tariff policy noise to navigate this year. It could bring some market volatility, and maybe even a bit of upside, but the most likely outcome is that we circle back to the approximate levels we are today. Setting up for 2026, that means other debates – like how companies respond to tariffs and capital spending incentives – are probably more important to the outlook than the level of tariffs themselves. We're digging in on all that and will keep you in the loop.Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen.

Concluding a two-part roundtable discussion, our global heads of Research, Thematic Research and Firmwide AI focus on the human impacts of AI adoption in the workplace.Read more insights from Morgan Stanley.----- Transcript -----Kathryn Huberty: Welcome to Thoughts in The Market, and to part two of our conversation on AI adoption. I'm Katy Huberty, Morgan Stanley's Global Head of Research. Once again, I'm joined by Stephen Byrd, Global Head of Thematic Research, and Jeff McMillan, Morgan Stanley's Head of Firm-wide AI. Today, let's focus on the human level. What this paradigm shift means for individual workers. It's Wednesday, November 5th at 10am in New York. Kathryn Huberty: Stephen, there's a lot of simultaneous fear and excitement around widespread AI adoption. There's obviously concern that AI could lead to massive job losses. But you seem optimistic about this paradigm shift. Why is that? Stephen Byrd: Yeah, as I mentioned in part one, this is the most popular discussion topic with my children. And I would say younger folks are quite concerned about this. There's a lot of angst among young folks thinking about what is that job market really going to look like for them. And admittedly, AI could be quite disruptive. So, we don't want to sugarcoat that. There's clearly going to be impacts across many jobs. Our work showed that around 90 percent of jobs will be impacted in some way. Oh, in the long term, I would guess nearly every job will be impacted in some way. The reason we are more optimistic is that what we see is a range of what we would think of as augmentation, where AI can essentially help you do something much better. It can help you expand your capabilities. And it will result in entirely new jobs. Now with any new technology, it's always hard to predict exactly what those new jobs are. But examples that I see in my world of energy would be smart grid analysis, predictive maintenance, managing systems in a much more efficient way. Systems that are so complicated that they're really beyond the capability of humans to manage very effectively. So, I'm quite excited there. I'm extremely excited in the life sciences where we could see entire new approaches to curing some of the worst diseases plaguing humankind. So, I am really very excited in terms of those new areas of job creation. In terms of job losses, one interesting analysis that a lot of investors are really focused on that we included in our Future of Work report was the ratio – within a job – of augmentation to automation. The lower the ratio, the higher the risk of job loss in the sense that that shows a sign that more of what AI is going to do, is going to replace that type of human work. Examples of that would be in professional services. As I mentioned, you know, one of my former professions, law would be an example of an area where you could see this. But essentially, tasks that don't require a lot of proprietary data, require less creativity. Those are the types of tasks that are more likely to be automated. Kathryn Huberty: One theme I hear both in Silicon Valley and in our industry is the value of domain expertise goes up. So, the lawyer that's very good in the courtroom or handling a really complicated situation because they have decades of experience, the value of that labor and talent goes up. And so, when my friends ask me what their kids should pursue in school and as a career, I tell them it's less about what job they pursue. Pick a passion and become a domain expert really quickly. Stephen Byrd: I think that's excellent advice. Kathryn Huberty: Jeff, how do you see AI changing the skills we'll need at Morgan Stanley and the way that people should think about their careers? Jeff McMillan: I think you have to break this down into three pieces – and Stephen sort of alluded to it. One, you have to look at the jobs that are likely to disappear. Two, you have to look at the jobs that are going to change. And then finally, you have to look at the new jobs that are going to actually emerge from this phenomena. You should be thinking right now about how you are going to prepare yourself with the right skills around learning how to prompt and learning how to move into those functions that are not going to be eliminated. In terms of jobs that are changing, they're going to require a far, far greater sense of collaboration, creativity. And again, prompting; prompt engineering is sort of the center of that. And I would highly encourage every single person who's listening to this to become the single best prompt engineer in their group, in their friend[s group], in their organization. And then in terms of the jobs that are being created, I'm actually pretty optimistic here. As we build agents, there's actually a bull case that we're going to create so much complexity in our environment that we're going to need more people to help manage that. But the skills are not going to be repetitive linear skills. They're going to require real time decision-making, leadership skills, collaboration skills. But again, I would go back to every single person: learn how to talk to the machine, learn how to be creative, and practice every day your engagement with this technology. Kathryn Huberty: So then how are companies balancing the re-skilling with the inevitable culture shifts that come with any new paradigm? Jeff McMillan: So, first of all, I think if you think about this as a tool, you've already lost the plot. I think that number one, you have to remind yourself what your strategy is; whatever that strategy is, this is an enabler of your strategy. The second point I'd make is that you have to go from both – the top down, in terms of leadership messaging that this change is here, it's important and it needs to be embraced. And then it's a bottoms-up because you have to empower people with the right tools and the technology to transform their own work. Because if you're trying to tell people that this is the path that they have to follow. You don't get the buy-in that you need. You really want to empower people to leverage these tools. And what excites me most is when people walk into my office and say, ‘Hey Jeff, let me show you what I built today.' And it could be some 22-year-old who; it's their first month on the job. And what's exciting about this technology is you do not need a technology background. You need to be smart; you need to be creative. And if you've got those skills, you can build things that are really innovative. And I think that's what's exciting. So, if you can combine the top down that this is important and the bottoms up with giving people the skills and the technology and the motivation – that's the secret sauce. Kathryn Huberty: Jeff, what's your advice for the next generation college students, recent college graduates as they're thinking about navigating the early parts of their career in this environment? Jeff McMillan: Well, Katy, I first of all, I'd agree with what you say. You know, everyone's like, ‘What should I study?' And the answer is – I don't actually know the answer to that question. But I would study what you care about. I would do something that you're passionate about. And the second point, and I hate to be a broken record on this. But I would be the single best user of GenerativeAI at your college. Volunteer with some nonprofit, build a use case with your friends. When you walk into your first job, impress in your interview that you are able to use this technology in really effective ways – because that will make a difference, in your first job. Kathryn Huberty: And I'm curious, are there areas where you think humans will always beat AI, whether it's in financial services or other industries? Jeff McMillan: I like to think that we are human and that gives us the ability to build trust and emotional relationships. And I think not only are we going to be better at that than machines are. But I think that's something that we as humans will always want. I think that there may be some individuals in the society that may feel differently. But I think as a general rule, the human-to-human relationship is something that's really important. And I like to think that it will be a differentiator for a long time to come. So, Katy, from where you sit as the Head of Global Research, how has GenAI changed the way research is being done? Kathryn Huberty: With the help of your team, Jeff, we have now embedded AI through the life cycle of investigating a hypothesis, doing the analysis, writing the research in a concise, effective way. Pushing that through our publishing process, developing digital content in our analysts' voice, in the local language of the client. And now we're working on a client engagement tool that helps direct our research team's time. And so, the impact here is it reduces the time to market to get a alpha generating idea to our clients and, you know, and it's freeing up time for our teams. Stephen Byrd: So, Katy, I want to build on that. Productivity is a big theme. And away from the research itself, from a management perspective, how are you and your team using AI? And what do you see as the benefits? And how are you spending the extra time that's freed up by AI? Kathryn Huberty: I like to say that the research AI strategy is less about the tools. I mean, those are critical and foundational. But it's more about how we're evolving workflow and how our teams are spending time. And so, the savings are being reinvested in actually your area – thematic research – which takes a lot more coordination, collaboration. A global cross-asset view, which just takes more time to develop, and test a hypothesis, and debate internally, and get those reports to market. But it's critical for our core strategy, which is to help our clients generate alpha. When you look at equity markets over the past 30 years, a very small number of stocks drive all of the alpha. And they tend to link to themes. And so, we're reinvesting time in identifying those themes earlier than the market to allow our clients to capture that alpha. And then the other piece is when we look at our analyst teams, they spend about a quarter of their time with clients because they have to meet with experts in the industry. They need to do the analysis, they have to build the financial forecast, manage their teams. You know, we have internal activities, build culture. And with the ability to leverage these tools to speed up some of those tasks, we think we can double the amount of time that our analysts are spending with clients. And if we're putting thought-provoking, you know, often thematic global collaborative content into the market, our clients want to spend more time with us. And so, that's the ultimate impact. On a personal level, and I think both of you can relate. I think a lot of the freed-up time right now is just following the fast pace of change in AI and keeping up with the latest technology, the latest vendors. But long term, my hope is that this frees up time for more human activities on a personal level. Learning the arts, staying active. So, this could be potentially very beneficial to society if we reinvest that time in both productive activities that have impact in business. But also productive, rewarding activities outside of the office.As we wrap up, it's clear that the influence of AI is expanding rapidly, not just in digital- and knowledge-based sectors, but increasingly in tangible real-world applications. As these innovations unfold, the way we interact with both technology and our environments will continue to evolve – both on the job and elsewhere in our lives. Jeff, Stephen, thank you both for sharing your insights. And to our listeners, thank you for joining us. If you enjoy the show, please leave us a review wherever you listen, and share Thoughts on the Market with a friend and colleague today.

In the first of a two-part roundtable discussion, our Global Head of Research joins our Global Head of Thematic Research and Head of Firmwide AI to discuss how the economic and labor impacts of AI adoption.Read more insights from Morgan Stanley.----- Transcript ----- Kathryn Huberty: Welcome to Thoughts on the Market. I'm Katy Huberty, Morgan Stanley's Global Head of Research, and I'm joined by Stephen Byrd, Global Head of Thematic Research, and Jeff McMillan, Morgan Stanley's Head of Firm-wide AI.Today and tomorrow, we have a special two-part episode on the number one question everyone is asking us: What does the future of work look like as we scale AI?It's Tuesday, November 4th at 10am in New York.I wanted to talk to you both because Stephen, your groundbreaking work provides a foundation for thinking through labor and economic impacts of implementing AI across industries. And Jeff, you're leading Morgan Stanley's efforts to implement AI across our more than 80,000 employee firm, requiring critical change management to unlock the full value of this technology.Let's start big picture and look at this from the industry level. And then tomorrow we'll dig into how AI is changing the nature of work for individuals.Stephen, one of the big questions in the news – and from investors – is the size of AI adoption opportunity in terms of earnings potential for S&P 500 companies and the economy as a whole. What's the headline takeaway from your analysis?Stephen Byrd: Yeah, this is the most popular topic with my children when we talk about the work that I do. And the impacts are so broad. So, let's start with the headline numbers. We did a deep dive into the S&P 500 in terms of AI adoption benefits. The net benefits based on where the technology is now, would be about little over $900 billion. And that can translate to well over 20 percent increased earnings power that could generate over $13 trillion of market cap upon adoption. And importantly, that's where the technology is now.So, what's so interesting to me is the technology is evolving very, very quickly. We've been writing a lot about the nonlinear rate of improvement of AI. And what's especially exciting right now is a number of the big American labs, the well-known companies developing these LLMs, are now gathering about 10 times the computational power to train their next model. If scaling laws hold that would result in models that are about twice as capable as they are today. So, I think 2026 is going to be a big year in terms of thinking about where we're headed in terms of adoption. So, it's frankly challenging to basically take a snapshot because the picture is moving so quickly.Kathryn Huberty: Stephen, you referenced just the fast pace of change and the daily news flow. What's the view of the timeline here? Are we measuring progress at the industry level in months, in years?Stephen Byrd: It's definitely in years. It's fast and slow. Slow in the sense that, you know, it's taken some companies a little while now and some over a year to really prepare. But now what we're seeing in our CIO survey is many companies are now moving into the first, I'd say, full fledged adoption of AI, when you can start to really see this in numbers.So, it sort of starts with a trickle, but then in 2026, it really turns into something much, much bigger. And then I go back to this point about non-linear improvement. So, what looks like, areas where AI cannot perform a task six months from now will look very different. And I think – I'm a former lawyer myself. In the field of law, for example, this has changed so quickly as to what AI can actually do. So, what I expect is it starts slow and then suddenly we look at a wide variety of tasks and AI is fairly suddenly able to do a lot more than we expect.Kathryn Huberty: Which industries are likely to be most impacted by the shift? And when you broke down the analysis to the industry and job level, what were some of the surprises?Stephen Byrd: I thought what we would see would be fairly high-tech oriented sectors – and including our own – would be top of the list. What I found was very different. So, think instead of sectors where there's fairly low profit per employee, often low margin businesses, very labor-intensive businesses. A number of areas in healthcare staples came to the top. A few real estate management businesses. So, very different than I expected.The very high-tech sectors actually had some of the lowest numbers, simply because those companies in high-tech tend to have extremely high profit per employee. So, the impact is a lot less. So that was surprising learning. A lot of clients have been digging into that.Kathryn Huberty: I could see why that would've surprised you. But let's focus on banking for a moment since we have the expert here. Jeff, what are some of the most exciting AI use cases in banking right now?Jeff McMillan: You know, I would start with software development, which was probably the first Gen AI use case out of the gate. And not only was it first, but it continues to be the most rapidly advancing. And that's probably; mostly a function of the software, you know, development community. I mean, these are developers that are constantly fiddling and making the technology better.But productivity continues to advance at a linear pace. You know, we have over 20,000 folks here at Morgan Stanley. That's 25 percent of our population. And, you know, the impact both in terms of the size of that population and the efficiencies are really, really significant.So, I would start there. And then, you know, once you start moving past that, it may not seem, you know, sexy. It's really powerful around things like document processing. Financial services firms move massive amounts of paper. We take paper in, whether it be an account opening, whether it be a contract. Somebody reads that information, they reason about it, and then they type that information into a system. AI is really purpose built for that.And then finally, just document generation. I mean, the number of presentations, portfolio reviews, you know, even in your world, Katy, research reports that we create. Once again, AI is really just – it's right down the middle in terms of its ability to generate just content and help people reduce the time and effort to do that.Kathryn Huberty: There's a lot of excitement around AI, but as Stephen mentioned, it's not a linear path. What are the biggest challenges, Jeff, to AI adoption for a big global enterprise like Morgan Stanley? What keeps you up at night?Jeff McMillan: I've often made the analogy that we own a Ferrari and we're driving around circles in a parking lot. And what I mean by that is that the technology has so far advanced beyond our own capacity to leverage it. And the biggest issue is – it's our own capacity and awareness and education.So, what keeps me up at night? it's the firm's understanding. It's each person's and each leader's ability to understand what this technology can do. Candidly, it's the basics of prompting. We spend a lot of time here at the firm just teaching people how to prompt, understanding how to speak to the machine because until you know how to do that, you don't really understand the art of the possible. I tell people, if you have $100 to spend, you should start spending [$]90, on educating your employee base. Because until you do that, you cannot effectively get the best out of the technology.Kathryn Huberty: And as we look out to 2026, what AI trends are you watching closely and how are we preparing the firm to take advantage of that?Jeff McMillan: You and I were just out in Silicon Valley a couple of weeks ago, and seemingly overnight, every firm has become an agentic one. While much of that is aspirational, I think it's actually going to be, in the long term, a true narrative, right? And I think that step where we are right now is really about experimentation, right? I think we have to learn which tools work, what new governance processes we need to put in place, where the lines are drawn. I think we're still in the early stage, but we're leaning in really hard.We've got about 20 use cases that we're experimenting with right now. As things settle down and the vendor landscape really starts to pan out, we'll be down position to fully take advantage of that.Kathryn Huberty: A key element of the agentic solutions is linking to the data, the tools, the application that we use every day in our workflow. And that ecosystem is developing, and it feels that we're now on the cusp of those agentic workflow applications taking hold.Stephen Byrd: So, Katy, I want to jump in here and ask you a question too. With your own background as an IT hardware analyst, how does the AI era compare to past tech or computing cycles? And what sort of lessons from those cycles shape your view of the opportunities and challenges ahead?Kathryn Huberty: The other big question in the market right now is whether an AI bubble is forming. You hear that in the press. It's one of the questions all three of us are hearing regularly from clients. And implicit in that question is a view that this doesn't look like past cycles, past trends. And I just don't believe that to be the case.We actually see the development of AI following a very similar path. If you go back to mainframe and then minicomputer, the PC, internet, mobile, cloud, and now AI. Each compute cycle is roughly 10 times larger in terms of the amount of installed compute.The reality is we've gone from millions to billions to trillions, and so it feels very different. But the reality is we have a trillion dollars of installed CPU compute, and that means we likely need $10 trillion of installed GPU compute. And so, we are following the same pattern. Yes, the numbers are bigger because we keep 10x-ing, but the pattern is the same. And so again, that tells us we're in the early innings. You know, we're still at the point of the semiconductor technology shipping out into infrastructure. The applications will come.The other pattern from past cycles is that exponential growth is really difficult for humans to model. So, I think back to the early days when Morgan Stanley's technology team was really bullish, laying the groundwork for the PC era, the internet era, the mobile era. When we go back and look at our forecasts, we always underestimated the potential. And so that would suggest that what we've seen with the upward earnings revisions for the AI enablers and soon the AI adopters is likely to continue.And so, I see many patterns, you know, that are thread across computing cycles, and I would just encourage investors to realize that AI so far is following similar patterns.Jeff McMillan: Katy, you make the point that much of the playbook is the same. But is there anything fundamentally different about the AI cycle that investors should be thinking about?Kathryn Huberty: The breadth of impact to industries and corporates, which speaks to Stephen's work. We have now four times over mapped the 3,700 companies globally that Morgan Stanley research covers to understand their role in this theme.Are they enabling AI? Are they adopting? Are they disrupted by it? How important is it to the thesis? Do they have pricing power? It's very valuable data to go and capture the alpha. But I was looking at that dataset recently and a third of those nearly 4,000 companies we cover, our analysts are saying that AI has an impact on the investment thesis. A third. And yet we're still in the early innings. And so, what may be different, and make the impact much bigger and broader is just the sheer number of corporations that will be impacted by the theme.Let's pause here and pick up tomorrow with more on workforce transformation and the impact on individual workers.Thank you to our listeners. Please join us tomorrow for part two of our conversation. 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.

Our CIO and Chief U.S. Equity Strategist Mike Wilson looks at buying opportunities approaching year-end, as U.S. trade policy and the Fed find middle ground. Read more insights from Morgan Stanley.----- Transcript ----- Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief U.S. Equity Strategist. Today on the podcast I'll be discussing recent macro events and third quarter earnings results.It's Monday, November 3rd at 11:30am in New York. So, let's get after it.Last week marked the passage of two key macro events: the meeting on trade between Presidents Trump and Xi and the October Fed meeting. On the trade front, the U.S. agreed to cut tariffs on China by 10 percent and delay newly proposed tech export controls for a year. In exchange, China agreed to pause its proposed export controls on rare earths, and resume soybean purchases while cracking down on fentanyl. This is a major positive relative to how developments could have gone following the sharp escalation a few weeks ago, and markets have responded accordingly.With respect to the Fed meeting, Powell suggested policy is not on a preset course which took the bond market probability of a December rate cut down from 92 percent before the meeting to 68 percent currently. It also led to some modest consolidation in equity prices while breadth remained very weak. In my view, the market is saying that if growth holds up but the Fed only cuts rates modestly, leadership is likely to remain narrow and up the quality curve.Over the next 6 to 12 months, we think moderate weakness in lagging labor data, and a stronger than expected earnings backdrop ultimately sets the stage for a broadening in market leadership. However, we are also respectful of the signals the markets are sending in the near term. This means it's still too early to press the small cap/low quality/deep cyclical rotation trade until the Fed shows a clear willingness to get ahead of the curve. Perhaps just as important for markets was the Fed's decision to end Quantitative Tightening, or QT, in December.Recently, Jay Powell has acknowledged the potential for rising stress in the funding markets and indicated the Fed could end QT sooner rather than later. Over the past month, expectations for the timing of this QT termination ranged from immediately to as late as February. Powell seemed to split the difference at last week's meeting and this could be viewed as disappointing to some market participants.In order to monitor this development, I will be watching how short-term funding markets behave. Specifically, overnight repo usage has been on the rise and if that continues along with the widening spreads between the Secured Overnight Financing Rate and fed funds, I believe equity markets are likely to trade poorly, especially in some of the more speculative areas. In short, we think higher quality areas of the market are likely to continue to outperform until this dynamic is settled.Meanwhile, earnings season is in full swing and the real standout has been the upside in revenue surprises, which is currently more than double the historical run-rate. We think this could provide further support that our rolling recovery thesis is under way which leads to much better earnings growth than most are expecting.Bottom line, we are gaining more confidence in our core view that a new bull market began in April with the end of the rolling recession and the beginning of a new cycle. This means higher and broader earnings growth in 2026 and a potentially different leadership in the equity market. The full broadening out to lower quality, smaller capitalization stocks is being held back by a Fed that continues to fight inflation; perhaps not realizing how much the private economy and average consumer needs lower rates for this rolling recovery to fully blossom. Last week's Fed meeting could be disappointing in that regard in the short run for equity markets. As a result, stay up the quality curve until we get more clarity on the timing of a more dovish path by the Fed and look for stress in funding markets as a possible buying opportunity into year end.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!

Our 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.

Our analysts Ariana Salvatore and Erin Wright explain the pivotal role of healthcare in negotiations to end the government shutdown.Read more insights from Morgan Stanley.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public Policy Strategist. Erin Wright: And I'm Erin Wright, U.S. Healthcare Services Analyst. Ariana Salvatore: Today we'll talk about what the U.S. government shutdown means for healthcare. It's Thursday, October 30th at 12pm in New York. Thus far, it seems like markets haven't really been paying too much attention to the government shutdown. Obviously, we're aware of the cumulative economic impact that builds every week that it lasts. But we haven't seen any movement from the political front either this week or last, which signals that it could be going on for a while longer. That being said, the end of this month is an important catalyst for a few reasons. First of all, you have the potential rollover of SNAP benefits. You have another potential missed military paycheck. And most importantly, the open enrollment period for healthcare plans. Polling is still showing neither side coming out on top with a clear advantage. Absent that changing, you probably need to see one of two things happen to have any movement forward on this front. Either more direct involvement from President Trump as he wraps up the APEC meeting or some sort of exogenous economic event, like a strike from air traffic controllers. Those types of events obviously are difficult to predict this far in advance. But up until now we know that President Trump has not really been involved in the debate. And the FAA seems to be operating a little bit with delays, but as usual. So, Erin, let's pivot to what's topical in here from a healthcare policy perspective. What are investors that you speak with paying the most attention to? Erin Wright: You bring up some important points Ariana. But from a policy perspective, it's very much an always top of mind for healthcare investors here. Right now, it is a key negotiating factor when it comes to the government shutdown. So, the shutdown debate is predominantly centered around the Affordable Care Act or the healthcare exchanges. This was a part of Obamacare. It was a program where individuals can purchase standalone health insurance through an exchange marketplace.The program has been wildly popular. It's been wildly popular in recent years with 24 million members. Growing 30 per cent last year, particularly with enhanced subsidies that are being offered today. So those subsidies are expected to expire at the end of this year, and those exchange members could be left with some real sticker shock – especially when we're going to see premium increases that could, on average, increase about 25 to 30 percent, in some states even more. So, folks are really starting to see that now. November 1st will be a key date here as open enrollment period begins. Ariana Salvatore: Right. So, as you mentioned, this is pretty key to the entire shutdown debate. Republicans are in favor of letting the expanded subsidies roll off. Democrats want to restore them to that COVID level enhancement. Of course, there's probably some middle path here, and we have seen some background reporting indicating that lawmakers are talking about a potential middle path or concession. So, talk me through what's on the table in terms of negotiating a potential compromise or extension of these subsidies. Erin Wright: So, we could see a permutation of outcomes here. Maybe we don't get a full extension, but we could see something partial come through. We could see something in terms of income caps, which restrict, kind of, the level of participants in the AC exchanges. You could see out-of-pocket minimums, which would eliminate some of those shadow members that we've been seeing and have been problematic across the space. And then you could also grandfather in some existing members that get subsidies today. So, all of those could offer some degrees of positive. And some degrees of relief when it comes to broader healthcare services, when it comes to insurance companies, when it comes to others that are participating in this program, as well as the individuals themselves. So, it's really a patient dynamic that's getting real here. A lot is on the table, but a lot is at stake with the potential for the sunsetting of these subsidies to drive 4 million in uninsured lives. So, it is meaningful, and I think that that's something we have to kind of put into perspective here.So, would love to know Ariana though, beyond healthcare, what are some of those key debates in terms of the negotiations around the shutdown? Ariana Salvatore: Healthcare really is central to this debate. So aside from just the ACA subsidies that we talked about, some Democrats have also been pushing for a repeal or rollback of some of the pieces of the One Big Beautiful Bill Act that passed earlier this year. That was the fiscal bill of Republicans passed through the reconciliation process – that included some cuts to Medicaid down the line. So, there's been talk around that front. I think more of a clear path on the subsidies front, because that seems to be something that Republicans are treating as an absolute no-go. Some of the other really key debates are around just kind of how to keep the ball rolling while we're still in the shutdown. So, I mentioned SNAP at first, the potential release of some contingency funds there. Again, the military paychecks are really critical. And, of course, what this all means for incoming data, which is really important – not just for investors but also for the Fed, as it kind of calibrate[s] their next move. In particular, as we head into the December meeting. I think we got a little bit of a hawkish surprise in yesterday's meeting, and that's something that investors were not expecting. So, obviously the longer that this goes on, the more those risks just continue to grow, and this deadline that we're talking about is a really critical one. It's coming up soon. So we should have a sense of how our prognosis pans out in the coming days. Thanks for the conversation, Erin. Erin Wright: Great talking to you, Ariana. Ariana Salvatore: And to our audience, thanks for listening. Let us know what you think by leaving us a review wherever you listen. And if you like Thoughts on the Market, tell a friend or colleague about the podcast today.

Our Head of Corporate Credit Research Andrew Sheets explains why the recent revival of M&A activity has room to accelerate.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 discussion of merger and acquisition activity or M&A. Last year, we had a view that this activity would pick up significantly. We think we're seeing that increase now. It has further to go. It's Wednesday, October 29th at 2pm in London. We have been firm believers at Morgan Stanley in a significant multi-year uplift in global merger and acquisition activity or M&A. That conviction remains. The incentives for this type of action are strong in our view; activity still lags what fundamentals would suggest, and supportive regulatory shifts are real. M&A has now returned, and importantly, we think there's much further to go. Indeed, M&A is very closely linked to corporate confidence, and we think investors need to consider the possibility that we'll see an even bigger surge in this confidence – or a boom. First, policy uncertainty is declining as U.S. tax legislation has now passed, and tariff rates get finalized. It's the relative direction of this uncertainty that we think matters most for corporate confidence. Second, interest rates are declining with the Fed, European Central Bank, and Bank of England all set to cut rates further over the next 12 months. Third, bank capital requirements may decline in the view of Morgan Stanley analysts, which would unlock more lending for these types of transactions. Fourth, and very importantly, the regulatory backdrop is becoming more accommodative in both the U.S. and in Europe. Indeed, we think that companies may think that this is going to be the most permissive regulatory window for transactions that they might get for some time. Fifth, private equity, which is a big driver of M&A activity, is sitting on over $4 trillion of dry powder in our view – at a time when credit markets look very wide open for financing their transactions. And finally, we're seeing a surge in capital expenditure on Morgan Stanley estimates, which we see as a sign of rising corporate confidence, and importantly an urgency to act – with corporates far less content to simply sit back and repurchase their stock. All of these favorable conditions together argue for activity to push even higher. We forecast global M&A volumes to increase by 32 percent this year, an additional 20 percent next year, and reach $7.8 trillion in volume in 2027. This is a global story with M&A rising across regions, especially in Japan. It has cross-asset implications with M&A already being one of the biggest drivers of bond outperformance within the U.S. high-yield market. And this is also a story where we see a lot of value in bringing together macro and micro perspectives. While we think the top-down conditions look favorable for all the reasons I just mentioned, we also see a very encouraging picture bottom up. We polled a large number of Morgan Stanley sector analyst teams and asked them about M&A conditions in their sector. A large majority of them see more activity. So, where could these more specific implications lie? Well, as you heard on yesterday's episode, Healthcare and Biotech may see an uptick in activity. In the U.S., we also think that Banking and Media stand out. In Europe, Business Services, Metals and Mining, and Telecom seem most ripe for more M&A. Aerospace and Defense is an interesting sector that may see more M&A within multiple regions, including the U.S. and Europe, as companies look for scale. And with smaller companies trading at a valuation discount to their larger peers across the world, Morgan Stanley analysts generally see the strongest case for activity in larger companies acquiring these smaller ones. 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.

Our U.S. Biotech and Biopharma analysts Sean Laaman and Terence Flynn discuss the latest developments that could be positioning the healthcare sector for strong outperformance.Read more insights from Morgan Stanley.----- Transcript -----Sean Laaman: Welcome to Thoughts on the Market. I'm Sean Laaman, Morgan Stanley's U.S. Small and Mid-Cap Biotech Analyst. Terence Flynn: And I'm Terence Flynn, Morgan Stanley's U.S. Biopharma Analyst. Sean Laaman: Today, we'll discuss how a rally in the healthcare sector is being driven by more favorable macro conditions. It's Tuesday, October 28th at 10am in New York. So, Terence, healthcare has lagged the broader market year-to-date, and valuations have been near historical lows. But recent weeks show strengthening performance. Policy headwinds have been front and center.What's changed in the regulatory environment and how is the biopharma sector adapting to these pricing and tariff dynamics? Terence Flynn: Sean, as you know, with many other sectors, tariffs were initially a focus earlier this year. But a number of companies in our space have subsequently announced significant U.S. manufacturing investments to reshore supply chains. And hence, the market's less focused on tariffs in our space right now. But the other policy dynamic and focus is what's called Most Favored Nation or MFN drug pricing. Now, this is where the President's been focused on aligning U.S. drug prices with those in other developed countries. And recently we've seen several companies announce agreements with the administration along these lines, which importantly has provided investors with more visibility here. And we're watching to see if additional agreements get announced. Sean Laaman: Got it. Another hurdle for Large-cap biopharma is a looming expiration of patents with [$]177 billion exposed by 2030. How is this shaping M&A trends and strategic priorities? Terence Flynn: For sure. I mean, as you know, Sean, patent expiry is our normal part of the life cycle of drug development. Every company goes through this at some point, but this does put the focus on company's internal pipelines to continue to progress while also being able to access external innovation via M&A. Recently we have started to see a pickup in deal activity, which could bode well for performance in SMID-cap biotech. Sean Laaman: At the same time, you believe relative valuations look compelling for Large-cap biopharma. Where are valuations versus where they've been historically? What's driving this and how should investors think about positioning? Terence Flynn: Absolutely. Look, on a price to earnings multiple, the sector's trading at about a 30 percent discount to the S&P 500 right now. Now that's in line with prior periods of policy uncertainty. But as policy visibility improves, we expect the focus will shift back to fundamentals. Now, positioning to me still feels light here, given some of the patent cliff dynamics we just discussed. Now, Sean, with the Fed moving toward rate cuts, how do you see this impacting your sector on the biotech side? Sean Laaman: Well, Terence, particularly in my space, which is Small- and Mid-cap biotech companies, they're typically capital consumers are not capital producers. They're particularly sensitive to the current rate environment.Therefore, they're sensitive to spending on pipeline. They're sensitive to M&A. So, as rates come down, we expect more spending on pipeline and more M&A activity, which is generally positive for the sector. Looking forward, biotech sector is generally the best performing sector on a six-to-12-month timeframe post the first rate cut. Terence Flynn: Great. You've also talked about this SMID to Big thesis on the biotech side. Can you explain what's driving that? Sean Laaman: Sure Terence. There's three pieces to the SMID to Big thematic. So, we in SMID-cap biotech, we cover 80 to 90 companies. About a third of those are newly, kind of profitable companies. Those companies are turning from being capital consumers to capital producers. We see about $15 billion of cash on balance sheets for 2025, going to north of 130 billion by 2030. That's the first piece. The second piece is due to regulatory uncertainty at the USFDA. We're seeing more attractive valuations amongst clinical stage names. That's the second piece. And third piece relates to your coverage, Terence. I refer back to that [$]177 billion of LOE. So, we expect generally that M&A activity will be quite high amongst our sector. Terence Flynn: And let's not forget about AI, which has implications across the healthcare space. How much is this changing the dynamic in biotech, Sean? Sean Laaman: It is changing, but we're really at the beginning. I think there's three things to think about. The first one is faster trial recruitment. The second one is faster regulatory submissions. And the third one, which is the most interesting, but we're really at the beginning of, is faster time to appropriately targeted molecules. Terence Flynn: Great. And maybe lastly, what are the key risks and catalysts for SMID-cap biotech in the current environment? Sean Laaman: As always, we're focused on pipeline failures in terms of risk. Secondly, in terms of risk, we're looking at regulatory risk at the FDA. And thirdly, we're looking at the rise in China biotech and the competitive dynamic there.Whether you're watching large cap biopharma, M&A moves, or the rise of cash-rich, SMID-cap biotechs, the healthcare sector setup is unlike anything we've seen in years.Terence, thanks for speaking with me. Terence Flynn: Always a pleasure to be on the show. Thanks for having me, Sean. Sean Laaman: 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.

Our CIO and Chief U.S. Equity Strategist Mike Wilson discusses the outlook for stocks after the preliminary U.S.-China trade agreement and ahead of the Fed meeting and big tech earnings.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief U.S. Equity Strategist. Today on the podcast I'll be discussing the remaining hurdles for equities after what appears to be a preliminary trade deal with China.It's Monday, October 27th at 11:30am in New York. So, let's get after it.Over the past few weeks, trade tensions between the U.S. and China escalated once again focused on rare earths and technology transfers with each country playing its strongest card. Over the weekend, it appears that we have at least a preliminary agreement to de-escalate these tensions which means avoiding prohibitively high tariffs that were scheduled to go on at the end of this month. While we don't have many details on what has been agreed to, it appears that critical rare earths will continue to ship to the U.S. while technology transfer restrictions by the U.S. to China will ease. Presumably, Fentanyl tariffs of 20 percent on China are likely to be part of any broader agreement between Presidents Trump and Xi, if they end up meeting at the upcoming Asia Pacific Economic Cooperation forum.Given the sharp sell-off in stocks a few weeks ago on the news of trade tensions re-escalating, it's not surprising that stocks are rallying sharply this morning on news of a possible deal from last week's talks. Our attention now turns to the other big events this week. First, the Federal Reserve is meeting tomorrow and Wednesday to decide its next move on monetary policy. There is a broad consensus view that the Fed will cut another 25 basis points but there are very different views about how they will address its balance sheet run-off known as quantitative tightening, or QT. Based on my conversations, there is a growing consensus view for the Fed to announce the end of QT but uncertainty around the timing. Our house view is for the Fed to wait until the January meeting to make this official with an end of the program in February. Others believe the Fed could announce something as early as this week. That dispersion in expectations does create some room for disappointment from markets, especially given the recent increase in funding market spreads. More specifically, the widening in spreads suggests banking reserves may already be too low and restrictive for the pick-up in economic activity and capital spending that requires more liquidity. Second, earnings revision breadth has rolled over sharply the past few weeks. Most of this decline is due to normal seasonality and the fact that revisions breadth had reached unsustainably high levels since bottoming out in April. Therefore, a reset should be expected as we previewed over a month ago. Nevertheless, it needs to stabilize and push higher again for stocks to continue their advance in my view. Perhaps most importantly for the S&P 500 is the fact that all of the hyperscalers are reporting this week and will likely determine if revision breadth rebounds. It will also be important to see how those stocks react to what is likely to be continued aggressive guidance on AI capex plans. Since April, the hyperscaler stocks have rewarded higher guidance on spending. Should that change, we may see a different tone to how these companies discuss their spending plans. Bottom line, I remain bullish on my 12 month view for U.S. stocks based on what I believe will be better and broader growth in earnings next year. Nevertheless, the near term window remains a bit cloudy on trade, Fed policy shifts and earnings revisions breadth. Stay patient with new capital deployment and look to take advantage of downdrafts when they arise like a few weeks ago. 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!

Our U.S. Software Analyst Sanjit Singh explains how AI is reshaping software development and why the future for the sector may be brighter – and busier – than ever.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Sanjit Singh, the U.S. Software Analyst at Morgan Stanley.Today: how AI is transforming software and what that means for developers.It's Friday, October 24th, at 10am in New York.There's been a lot of news stories and anecdotal accounts about AI taking over jobs, especially in the software industry. You may have heard of vibe coding, where people can use natural language prompts, guiding AI to build software applications. So yes, AI is creating a world where software writes itself. But at the same time, the demand for human creativity only grows.The introduction of AI coding assistants has dramatically expanded what software can do, fueling a surge in both the volume of code and the complexity of projects. But instead of shrinking the developer workforce, AI is actually supporting continued growth in developer headcount, even as productivity soars.We're estimating the software development market will grow at a 20 percent compound annual growth rate, reaching $61 billion by 2029. And that's up from $24 billion in 2024. And in terms of the developer population, [research] firms like IDC expect it to jump from 30 million paid developers in 2024 to 50 million by 2029 – that's a 10 percent annual growth rate. Even the most conservative estimates, like those from the U.S. Bureau of Labor Statistics, see developer jobs growing roughly 2 percent per year through 2033, outpacing overall employment growth.So, what does this mean for people behind the code? AI isn't replacing developers. It's redefining them. Routine tasks are increasingly handled by AI agents, and this frees up developers to become curators, reviewers, architects, and most important problem-solvers.The upshot? Companies may need fewer developers for repetitive work, but the overall demand for skilled engineers remains robust. As AI lowers the barrier to entry, the pool of people who can build software applications expands dramatically. But at the same time, the complexity and ambitions of projects rise, keeping experienced developers in high demand.No doubt, AI coding tools are delivering real productivity gains. Some teams are reporting nearly doubling their code capacity and cutting pull request times in half after adopting AI assistants. Test coverage has increased sharply, resulting in 20 percent fewer production incidents for some organizations. But there is a catch with all this AI-generated code. It's creating significant new bottlenecks downstream.An example of this is code review, which is becoming a major pain point. Many organizations are experiencing pull request fatigue, with developers rubber-stamping changes just to keep up. Some teams now require three reviewers for AI-generated change, compared to just one before. And in terms of automated testing, systems are getting overwhelmed because every change made with AI sets off a complete round of test.Now we estimate productivity gains from AI in software engineering at about 15–20 percent. But in complex projects, the gains are much lower, as the volume of new code often means more bugs and more rework – and hence more human developers.So where do we go from here? In our view, the future isn't about fully autonomous software development. Instead, large enterprises are likely to favor an integrated approach, where AI agents and human developers work side by side. AI will automate more of the software development lifecycle. And that not only includes coding – which, coding typically accounts for 10-20 percent of the software development effort – but other areas like testing, security, and deployment. But humans will remain in the loop for oversight, design, and decision-making. And as software gets cheaper and faster to build, organizations won't just do the same work with fewer people – they likely will do more.In short, the need for skilled developers isn't going away. But it's definitely evolving. And in the age of AI, it's not about man versus machine. It's about man with machine. And so with more software, we see more developers.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.

Our Head of Corporate Credit Research Andrew Sheets wades into the debate around whether the boom in artificial intelligence investment is a warning sign for credit markets. 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 – the debate about whether elevated capital expenditure and AI technology is showing classic warning signs of overbuilding and worries for credit.It's Thursday, October 23rd at 2pm in London.Two things are true. AI related investment will be one of the largest investment cycles of this generation. And there is a long history of major investment cycles causing major headaches to the credit market. From the railroads to electrification, to the internet to shale oil, there are a number of instances where heavy investment created credit weakness, even when the underlying technology was highly successful.So, let's dig into this and why we think this AI CapEx cycle actually has much further to run.First, Morgan Stanley has done a lot of good collaborative in-depth work on where the AI related spend is coming from and what's still in the pipeline. And importantly, most of the spending that we expect is still well ahead of us. It's only really ramping up starting now.Next, we think that AI is seen as the most important technology of the next decade by some of the biggest, most profitable companies on the planet. We think this increases their willingness to invest and stick with those investments, even if there's a lot of uncertainty around what the return on all of this expenditure will ultimately be.Third, unlike some other major recent capital expenditure cycles – be they the internet of the late 1990s or shale oil of the mid 2010s, both of which were challenging for credit – much of the spending that we're seeing today on AI is backed by companies with extremely strong balance sheets and significant additional debt capacity. That just wasn't the case with some of those other prior investment cycles and should help this one run for longer.And finally, if we think about really what went wrong with some of these prior capital expenditure cycles, it's often really about overcapacity. A new technology – be it the railroads or electricity or the internet – comes along and it is transformational.And because it's transformational, you build a lot of it. And then sometimes you build too much; you build ahead of the underlying demand. And that can lower returns on that investment and cause losses.We can understand why large levels of AI capital investment and the history of large investment cycles in the past causes understandable concern. But when tying these dynamics together, it's important to remember why large investment cycles have a checkered history. It's usually not about the technology not working per se, but rather a promising technology being built ahead of demand for it and resulting in excess capacity driving down returns in that investment, and the builders lacking the financial resources to bridge that gap.So far, that's not what we see. Data centers are still seeing strong underlying demand and are often backed by companies with exceptionally good resources. We need to watch if either of these change.But for now, we think the AI CapEx cycle has much further to go.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

Our analysts Brian Nowak, Keith Weiss and Matt Bombassei break down the most important tech insights from Morgan Stanley's Spark Private Company Conference and industry shifts that will likely shape 2026 and beyond. Read more insights from Morgan Stanley.----- Transcript ----- Brian Nowak: Welcome to Thoughts on the Market. I'm Brian Nowak, Morgan Stanley's Head of U.S. Internet Research. I'm joined today by Keith Weiss, Head of U.S. Software Research and Matt Bombassei from my team.Today we're going to talk about private companies and technology – and how they're showing us the direction of travel for disruptive technologies and emerging investment opportunities.It's Wednesday, October 22nd at 10am in New York.Keith and Matt, we just returned from Morgan Stanley's Spark Private Company Conference last week in Los Angeles. It had over 85 private tech companies, 150 plus investor firms. There were a lot of themes that were discussed across the entire tech space impacting a lot of different sectors, including energy, healthcare, financial services, and cybersecurity.Keith, what were some of the biggest takeaways you took away from Spark this year?Keith Weiss: I'd say just to start off with, the Spark Conference is one of my favorite conferences of the year. It's a more intimate conference where you really get to spend time with both the private company executives and founders, as well as investors from the VC community and public company investors. And the conversations are more broad ranging; they're more about the thematics in the industry. They're more long term in nature.So, it's not just a conversation about what's next quarter going to look like, or what data points are you drumming up. You're having these thoughtful conversations about what's going on in the industry and how that's going to impact business models, how it's going to impact innovation cycles, how it's going to impact pricing models, within these companies. So, it tends to be a very interesting conference for me to attend.So, for me, some of the key takeaways. Typically, when we're in these innovation cycles, it feels like everybody's rowing in the same direction. We all understand where the technology's heading, we're all understanding how it's going to be delivered, and it's a race to get there. And you're having a conversation about who's doing best in that race, who's best positioned, who's got a better motor in their race car, if you will.So, to me, one of the big takeaways was we don't have that agreement today, right? There's different players that are looking at this market evolution differently. On one side of the equation, the application vendors – and a lot of this debate is in SaaS based applications. They see SaaS based applications having a very big role in taking these models that are inherently in-determinative and making them to be more determinative and useful within an enterprise context.Bringing them the data that they need to get the job done and the right data; bringing them the context of the business process being solved; bringing the governance that's necessary to use in an enterprise environment. But most importantly, to make it effective and efficient for the large enterprise.On the other side of the equation, you have venture capital investors and more early-stage investors who are looking at this as a huge phase shift, right? This is going to fundamentally change how we build software, how we utilize software, and they worry about a deprecation of that SaaS application layer. They think the model itself is going to start to encompass, it's going to start to subsume a lot more of that application functionality, a lot more of that analytics. And they see a lot more disruption going forward.So that debate within the marketplace, that's something that's interesting to me. It's something that we don't typically see in these innovation cycles. So that's takeaway number one.Takeaway number two, we're still really early days, and that's a little bit implied in in the first statement; I definitely hear a lot of it when I talk to the end customer. When I talk to CIOs. This wasn't necessarily at Spark, but earlier in the week, I was at a CIO conference, there was 150 CIOs in the room. One of the gentlemen on stage asked a question. ‘Who in the room has a good understanding of what we're talking about when we mean Agentic AI, when we mean agentic computing within our enterprise.' Of the 150 CIOs, four raised their hands. Still very early days in understanding how this is going to evolve, how we're going to actually deliver these capabilities into the enterprise.And the last takeaway I would say is more excitement about the federal government becoming a better customer for software companies overall. People are more interested in new avenues into that federal government. There's been some very successful companies that have opened the door to getting into these federal government contracts without going through the primes, without doing the typical federal government procurement cycles.And that's very interesting to the startup community, which tends to move faster, which tends to drive on innovation versus relationship building; versus being in an existing kind of incumbent prime. So, I thought that opening was – it was pretty interesting as well.Brian Nowak: it sounds like it's still very early, there are a lot of different points of view and no real consensus as to where technologies could go next. However, one theme with an enterprise software – [it] does seem like cybersecurity has a little more of a unified view.So maybe walk us through what you learned from a cybersecurity perspective and what should we be focused on there?Keith Weiss: Yeah, absolutely. If there is a consensus, the consensus is that generative AI and these innovations and the fast pace of innovation is going to be a positive for cybersecurity spending, right? The reason being, there's three main factors that are driving that overall spending.One is expansion of surface area, right? Cybersecurity in one dimension, you can think of how much is there to be protected, right? And if we think about the major themes that we're talking about, we're going to be developing a lot more software, right? The code generation tools are improving software developer productivity. You have an expanding capability of what you can actually automate.We'll be building a lot more software. That software needs to be protected, right? We have new entities that are going to be operating inside of enterprises, and that's the agents. So, CIOs are thinking about this future state where you have tens, thousands, maybe hundreds of thousands of agents operating in the environment, doing work on behalf of end users, but having permissions and having ability to execute business processes. How do we secure that side of the equation? We're talking about outside of just the four walls of the large enterprise, going into more operational technologies, being able to automate more of that work. That needs to be secured as well.So, an expanding surface area is definitely good for the cybersecurity budget. You can almost think of cybersecurity as a tax on that surface area. We generally think about it; somewhere between 4 and 6 percent of IT spend is going to be spent on overall security. So, that's one big driver.The second big driver is the elevated threat environment. So, while we're excited to get our hands on these extended capabilities of generative AI, the bad guys are already there, right? They're taking advantage of this. The sophistication, the volume and the velocity of these attacks is all increasing. That makes a harder job for the existing infrastructure to keep up, and it's going to likely necessitate more spending on cybersecurity to tackle these newer challenges; the newer dynamism within the cybersecurity threat appropriately. So, you're going to have to use generative AI to counter the generative AI.And then the last component of it; the last driver would be the regulatory environment. Regulatory tends to have some cybersecurity angles. If we think about it here, we're seeing it in terms of data governance is probably the big one. Where does this data go when it goes into the model? Are we putting the right controls around it? Do we have the right governance on it? So that's a big area of concern.A lot of complaining going on at the conference about the lack of consistency in that regulatory environment. All these different initiatives coming up from the state – really creates a challenging environment to navigate. But that's all good-ness for cybersecurity vendors that can help you get into compliance with these new regulations that are coming up. So overall, a lot of positivity around cybersecurity spending and startups definitely look to take advantage of that.Brian Nowak: Matt, so Keith says there's lack of consensus and boats being rode in every direction on what should be adopted first. And only 3 percent of CIOs know what agentic AI means. What did you learn about early signal on adoption? And some of the barriers to adoption? And hurdles that companies are talking about that they need to overcome to really adopt some of these new tools?Matt Bombassei: Yeah. Well, to Keith's point, it is really early, right? And that was a consistent theme that we heard from our companies at the conference. They are seeing early signs of cost efficiency, making employees more productive as opposed to maybe broad scale layoffs. But it's the deployment of these model technologies into specific sub-verticals – so accounting, legal engineering – where that adoption is driving greater efficiency within the organization.These companies are also adopting models that are smaller and a bit more fine tuned to their specific work product. And so that comes at a lower cost. We heard companies talking about costs at 1/50 of the cost of the broader foundational models when they're deploying it within the organization. And so, cost efficiency is something that we're seeing.At the same time, to speak to how early it is, one of the biggest hurdles here is change management and actually adoption. Getting people to use these products, getting them to learn the new technologies, that is a big hurdle. You know, you can lead a horse to water, you can't make it drink, right? And so, getting people to actually deploy these technologies is something that organizations are thinking through. How do we approach [it]?Brian Nowak: And you make an autonomous car drive? I know you've been doing a lot of work on autonomous driving more broadly. There were some autonomous driving and autonomous driving technology companies at Spark. What were your takeaways on autonomous driving from last week?Matt Bombassei: Yeah, well, not only can you make an autonomous car drive, you can make a truck drive and a bunch of other physical equipment. I think that was one of the takeaways here was that these neural nets that are powering autonomous vehicles are actually becoming much more generalizable. The integration of the transformer architecture into these neural nets is allowing them to take the context from one sub-vertical and deploy it in another vertical.So, we heard that 80 to 90 percent of the software, the underlying neural net, is applicable across these verticals. So, think applicable from autonomous ride sharing to autonomous trucking, right? What that means from our point of view is that it's important to get the scale of total miles driven – to establish that kind of safety hurdle if you're these companies.But also, don't necessarily think of these companies as defined by the vertical that they're operating in. If these models truly are generalizable, a company that's successful and scaled and autonomous ride hailing can switch or navigate verticals to also become successful potentially in trucking and other industries as well. So, the generalization of these models is particularly interesting for scale, and long-term market position for these companies.Brian Nowak: It's fascinating. Well, from consumer and enterprise adoption, the future of agentic computing and autonomous driving, there will be a lot more themes we all have to stay on top of. Keith, Matt, thanks so much for taking the time today.Keith Weiss: Great speaking with you Brian.Matt Bombassei: Thanks for having us.Brian Nowak: 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.

Our Global Head of Fixed Income Research and Public Policy Michael Zezas discuss the latest developments in U.S.-China relations and how they could affect investors.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy. Today, we're talking about the U.S. and China—why the relationship remains complicated, and what it means for markets. It's Tuesday, Oct 21st, at 12:30pm in New York. If you've been following headlines, you know that U.S.-China relations are rarely out of the news. But beneath the surface, the dynamics are more nuanced than the daily soundbytes suggest. Investors often ask: Are we headed for a decoupling of the two economies, or is there room for cooperation? The answer, as always, is—it's complicated. Let's start with the basics. The U.S. and China are deeply intertwined economically, but strategic competition has intensified. Recent years have seen tariffs, export controls, and restrictions on technology transfer. Yet, there's still plenty of trade between the two countries, and both economies are dependent on each other for growth and innovation. So what's going on now? In recent weeks, China has moved to tighten rare earth export controls and the U.S. has proposed 100 percent tariffs in return. If this came to pass, these events could mark a clear economic split. But given the interdependencies we just cited, neither Washington nor Beijing seems eager for a true split, at least not anytime soon. The economic costs would be staggering, and both sides know it. So, a truce seems more likely, perhaps with somewhat different terms than the narrow semis-for-rare earths agreement they made this spring. And longer term, this episode seems to be a part of a broader dynamic, where rolling negotiations and truces are more likely than either a durable trade peace or a hard economic decoupling. For fixed income investors, this drives some important considerations. First, U.S. industrial policy is ramping up, with clear implications for AI infrastructure. AI is an area where the U.S. views it as essential that they outcompete China. Supported by renewed CapEx incentives from the latest tax bill, it's clear to us that U.S. companies will be pushing further into AI development, where my colleagues have identified $2.9 trillion of data center financing needs over the next three years, about half of which will come from various credit markets. And for credit investors, this presents an important opportunity. Another consideration is how markets will balance near-term growth risks with an array of medium term growth possibilities. As our U.S. economics team has pointed out, the evidence suggests that corporates haven't yet been forced to make tough decisions about passing on or absorbing tariff costs, underscoring that trade-related growth pressures aren't yet in the rearview. The ongoing U.S. government shutdown doesn't help either. It's all a good argument for why bond yields could move lower in the near term. But also, we should expect yield curves could steepen more, with higher relative yields in longer maturities. This would reflect greater uncertainties around higher fiscal deficits, inflation, and economic growth. Our economists have been calling out the mixed messages in economic data, as well as a U.S. fiscal sustainability picture that appears reliant on acceleration in corporate CapEx for a manufacturing and AI-driven growth burst. In sum, the U.S.-China relationship is evolving, with global implications that don't lend themselves to easy narratives or quick fixes. Our challenge will continue to be crafting investment strategies that reflect durable policy undercurrents, the signal amid news headline noise. 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.

As the S&P 500 continues to rally, our CIO and Chief U.S. Equity Strategist Mike Wilson discusses three factors that could lead to a stock market correction in the near term.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief U.S. Equity Strategist. Today on the podcast I'll be discussing why we are still in a new bull market even if a correction is likely in the near term. It's Monday, October 20th at 1pm in New York. So, let's get after it. I continue to believe the sharp selloff in April following Liberation Day marked the trough of what was effectively a three-year rolling recession in the U.S. economy. We have written extensively about this view; but it still remains very much out of consensus. Since 2022 most sectors of the private economy have gone through their own individual recession but at different times. The final trough in the rate of change in economic activity came in April around the tariff announcements which came as a surprise to almost everyone, at least in terms of the magnitude and scope. In short, Liberation Day was really capitulation day on the last piece of bad news for the economic cycle which then bottomed. Stocks seem to agree which is why they have rallied in a straight line since then, much like they do after the trough in any economic cycle. The other proof we have for this claim is the v-shaped recovery in earnings revision breadth, something we have discussed for many months in our written research and on this podcast. Based on our numerous conversations with investors, this view remains very unpopular. Instead, most believe the economy and earnings growth for next year are at risk of being lower rather than higher than expected, as I do. Core to my view is that we are now firmly in an inflationary regime since COVID and the implementation of helicopter money to get us out of that crisis. The government has to run it hot to get us out of the massive debt and deficit problem created over the past 20 years. The end result is that investors need to expect hotter but shorter cycles rather than the elongated 10-year cycles we experienced between 1980-2020 when inflation was falling. That means two-year up cycles followed by one-year down cycles for U.S. equity markets, which is exactly what's happened since 2020. We are now in the midst of a new up cycle that began in April. The key thing to understand during this new regime is that inflation is not bad for stocks so long as it's accelerating and the Fed is on the sidelines or easing like in 2020-21, 2023 and now today. Higher inflation means higher earnings growth which is why price earnings multiples are high today. With inflation likely to accelerate next year, stocks are anticipating better earnings growth. In other words, stocks are a hedge against inflation. In fact, relative to gold, high quality stocks may offer a cheaper inflation hedge at this point given their dramatic underperformance to precious metals year-to-date and since 2021. Eventually, inflation will be a problem again for stocks like in 2022 when the Fed has to react by tightening policy, but that's a story for another day. Having said all this, the equity markets are a bit frothy at the moment and so a 10-15 percent correction in the S&P 500 is not only possible but would be normal at this stage of a new bull market. I see three primary reasons for why we could get that in the near term. First, China-U.S. trade relations have recently escalated again, and we are slowly marching toward a November 1st deadline for tariffs on China to go back to Liberation Day levels. While most investors don't want to get sucked into selling at the worst possible time like they did in April, this risk is real and will weigh on stocks if we don't see evidence of a de-escalation in the next few weeks. Second, funding markets have exhibited some signs of increased stress lately. This is likely due to the ongoing quantitative tightening program by the Fed which is draining bank reserves. Should these stresses increase, it could spill over into equities. Third, our earnings revision breadth metric is rolling over now after its historic rise since April. This could continue into earnings season as it's normal to see some retracement from such a high level and tariffs start to flow through from inventories to the income statement. Trade tensions might also weigh on company guidance in the short term. Bottom line, I believe a new bull market began in April with a new rolling economic and earnings recovery that is now quite nascent. However, even new bull markets have corrections along the way, and certain conditions argue we are at risk for the first tradable one since April. Keep your powder dry in the near term for what should be a great buying opportunity, if it arrives. 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!

Our U.S. Public Policy Strategist Ariana Salvatore unpacks how China's announced rare earth export controls and signals of sweeping U.S. tariffs could impact global supply chains, markets and economic growth.Read more insights from Morgan Stanley.----- Transcript ----- Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public Policy Strategist. Today I'll talk about a development keeping markets and investors on alert: a re-escalation of U.S. China trade tensions. It's Friday, October 17th at 10am in New York. Since April, the U.S. and China have been in what we've been calling a very delicate detente. Remember, President Trump paused the additional reciprocal tariffs after Liberation Day. Since then, we've been consistently skeptical that the pause was durable enough to actually allow the U.S. and China to come up with a full-fledged trade agreement. But now we're equally as skeptical that the current escalation will lead to a material disruption in the bilateral relationship. So, what happened last week? China announced stricter export controls on rare earths, which are really critical for manufacturing everything from electric vehicles to defense equipment and advanced electronics. So, in response, the Trump administration on Friday announced a proposed 100 percent tariff, said to go into effect November 1st across all Chinese exports to the U.S. That date matters because that's around the same time that Presidents Trump and Xi were scheduled to meet at the upcoming APEC Summit in South Korea. When we think about this most recent escalation, it's pretty significant because China accounts for about 70 percent of global rare earth mining, and 90 percent of processing and refining. A lot of countries around the world – the U.S. Japan, Korea, and Germany – all rely heavily on these imports from China. And so potential new export controls mean that every economy may have to start negotiating bilaterally with China to secure supplies, which raises the risk of supply chain disruption across Asia, Europe, and the U.S. Looking ahead, we're thinking about four potential scenarios for how the current U.S.-China trade tensions could play out. The most likely outcome, which is our base case, is a return to the recent status quo following a period of rhetorical escalation and likely a reset of expectations heading into this APEC meeting. That's because we think both the U.S. and China would prefer to maintain the existing equilibrium to an abrupt supply chain decoupling. That equilibrium is effectively chips for rare earths. So, the U.S. receives China's rare earths, and then in return the U.S. exports some of its chips to China. But that equilibrium doesn't necessarily mean that the temporary implementation of trade barriers like higher tariffs or more export controls are off the table. The broader trajectory we think will continue to point toward competitive confrontation, which is a bipartisan strategy that encompasses both these traditional trade tactics as well as unilateral domestic investment – either vis-a-vis direct federal spending, or the government taking more stakes in companies involved in these critical industries. So, think things like the IRA, the CHIPS Act, and other bipartisan pieces of legislation. So, in the near and medium term, expect to see these trade barriers persisting and a bipartisan push toward U.S. industrial policy, as the U.S. attempts to undergo selective de-risking from China. Our base case scenario anticipates further short-term tensions, but ultimately a limited agreement that avoids deep structural changes. We've also thought through some alternate scenarios. So, in one downside case, you could see temporary escalation past November 1st. Both sides could fully implement their proposed policies, but after doing so, come back to the status quo once the economic costs become apparent. A more severe downside scenario involves durable escalation. So, in this case, we would see both countries maintain trade barriers for an extended period. That outcome would see both the U.S. and China decide to change calculus on that equilibrium, so that no longer holds. And in that case, we could see a push toward decoupling and a significant strain on supply chains. Finally, our last scenario reflects a quick de-escalation in which heightened rhetoric actually acts as a catalyst for renewed negotiations and a potential framework agreement that could result in some tariffs, but most likely at lower levels than initially proposed. So, what does this all mean? In the base case, our economists expect China's GDP growth to slow to below 4.5 percent in the second half of 2025, with exports supported by robust non-U.S. shipments. Our equity strategists in this outcome see the volatility actually providing a dip buying opportunity, given that they see a rolling recovery that began earlier this year. However, a more durable escalation could possibly prolong China's deflation and necessitate further policy adjustments. Similarly, that outcome could negate the early cycle rolling recovery thesis here in the U.S. 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.

With Morgan Stanley's European Leveraged Finance Conference underway, our Head of Corporate Credit Research Andrew Sheets joins Chief Fixed Income Strategist Vishy Tirupattur to discuss private credit, M&A activity and AI infrastructure.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 StanleyVishy Tirupattur: And I'm Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist.Andrew Sheets: Today, as we're hosting the Morgan Stanley European Leveraged Finance Conference, a discussion of three of the biggest topics on the minds of credit investors worldwide.It's Thursday, October 16th at 4pm in London.Vishy, it's so great to catch up with you here in London. I know you've been running around the world, quite literally, talking to investors about some of the biggest debates in credit – and that's exactly what we wanted to talk. We're here at Morgan Stanley's European Leveraged Finance Conference. We're talking with investors about the biggest debates, the biggest developments in credit markets, and there are really kind of three topics that stand out.There's what's going on with private credit? What's going on with the merger and acquisition, the M&A cycle? And how are we going to fund all of this AI infrastructure?And so maybe I'll throw the first question to you. We hear a lot about private credit, and so maybe just for the listener who's looking at a lot of different things. First, how do you define it? What are we really talking about when we're talking about private credit?Vishy Tirupattur: So, Andrew, when we talk about private credit, the most common understanding of private credit is lending by non-banks to small and medium sized companies. And we probably will discuss a bit later that this definition is actually expanding much beyond this narrow definition. So, when you think about private credit and spend time understanding what is the credit in private credit, what it boils down to is on average, on a leveraged basis, the credit in private credit is comparable to, say CCC to B - on a coverage basis to the public markets.So, the credits in the private credit market are weaker. But on the other hand, the quality of covenants in these deals is significantly better compared to the public credit markets. So, that's the credit in private credit.Andrew Sheets: So, Vishy, with that in mind then, what is the concern in this market? Or conversely, where do people see the opportunity?Vishy Tirupattur: So, the concern in this market comes from the opaqueness in these deals. Many of these private credit borrowers are not public filers. So not much is well known about what the underlying details are. But in a sense, a good part of the public markets, whether it's in high yield bonds or in the public, broadly syndicated leveraged loans are also not public filers. So, there is information asymmetry in those markets as well.So, the issue is not the opaqueness of private markets, but opaqueness in credit in general. But that said, when you look at the metrics of leverage, coverage, cash on balance sheet…Andrew Sheets: Because we can get some kind of high-level sense of what is in these portfolios...Vishy Tirupattur: Yeah. And we look at all those metrics, and we look at a wide range of metrics. We don't get to the conclusion that we are at a precipice of some systemic risk exposure in credit. On the other hand, there are idiosyncratic issues. And these idiosyncratic issues have always been there and will remain there. And we would expect that the default rates are sticky around these levels, which are slightly above the long-term average levels, and we expect that to remain.Andrew Sheets: So, you may see more dispersion within these portfolios. These are weaker, more cyclical, more levered companies. But overall, this is not something that we think at the moment is going to interrupt the credit cycle or the broader markets dynamic.Vishy Tirupattur: Absolutely. That is exactly where we come down to.So, Andrew, let me throw another question back at you. There's a lot of talk of growing M&A, growing LBO activity. And that could potentially lead to some challenges on the credit front. How do you look at it?Andrew Sheets: So, I'd like to actually build upon your answer from private credit, right? Because I think a lot of the questions that we're getting from investors are around this question of how far along in this always, kind of, cyclical process; ebb and flow of lending aggressiveness are we? And, you know, this is a cycle that goes back a hundred years – of lenders becoming more conservative and tighter with lending. And then as times get good, they become somewhat looser. And initially that's fine. And then eventually something, something happens.And so, I think we've seen the development of new markets like private credit that have opened up new lending opportunities and then also new questions. And I think we've also seen this question come up around M&A and corporate activity.And as we start to see headlines of very large leveraged buyouts or LBOs, as we start to see more merger and acquisition – M&A – activity coming back; something we've at Morgan Stanley been believers in. Are we really starting to see the things that we saw in the year 2000, or in the year 2007, when you saw very active capital markets actually coinciding with kind of near the peak of equity markets near the top of major market cycles.And in short, we do not think we're there yet. If we look at the actual volumes that we're seeing, we're actually a little bit below average in terms of corporate activity. There's really been a dearth of corporate activity after COVID. We're still catching up. Secondly, the big transactions that we're seeing are still more conservatively structured, which isn't usually what you see right at the end. And so, I think between these two things with still a lot of supportive factors for more corporate activity, we think we have further to go.Vishy Tirupattur: On that point, Andrew, I think if you look at the LBOs that are happening today versus the LBOs that happened in the 2007 era, the equity contribution is dramatically different. You know, equity to debt, these LBOs that are happening today [are] of a substantially higher amount of equity contribution compared to the LBOs we saw pre-Financial Crisis…Andrew Sheets: That's such a great point. And the listener may not know this, but Vishy and I were working together at Morgan Stanley prior to the Financial Crisis, and we were working in credit research when a lot of these LBOs were happening, and…Vishy Tirupattur: And I used to be tall and good looking.Andrew Sheets: (laughs) And they were just very different. We're still not there. If you go back and pull the numbers, you're looking at transactions still that are far more conservative than what we saw then. So, you know, this activity is cyclical, and I think we do have to watch deregulation, right? You saw a lot of regulations come in after the Financial Crisis that led to more conservative lending. If those regulations get rolled back, we could really move back towards more aggressive lending. But we haven't quite seen that yet.Vishy Tirupattur: Absolutely not.Andrew Sheets: And Vishy, maybe the third question that comes up a lot. We've covered private credit, which is very topical. We've covered kind of corporate aggressiveness. But maybe the icing on the cake. The biggest question is AI – and is AI spending?And it just feels like every day you come into the office and there's another headline on CNBC or Bloomberg about another mega AI funding deal. And the question is, okay, where's all that money going to come from?And maybe some of it comes from these companies themselves. They're very profitable, but credit might have to fill in some of the gaps. And you and some of our colleagues have done a lot of work on this. Where do you think kind of the lending story and the borrowing story fits into this broader AI theme?Vishy Tirupattur: Our estimate of simply data center related CapEx requirements are close to $3 trillion. You add the power required for the data centers and add another $300-400 billion. So, a lot of this CapEx will come from – roughly about half might come from the operating cash flows of the hyperscalers. But the rest, so [$]1.5 trillion plus, has to come through various channels of credit.So, unsecured corporate credit, we think will play a fairly small role in this. Of that [$]1.5 trillion plus, maybe [$]200 billion to come from unsecured credit issuance by these hyperscalers, and perhaps some of the securitized markets, such as ABS and CMBS that rely on stabilized cash flows may be another 1[$]50 billion. But a different version of private credit, what we will call ABF or asset based finance, will play a very big role. So north of [$]800 billion we think will come from that kind of a private credit version of investment grade, or a private credit markets developing. So, this market is very much in the developmental mode.So, one way or the other, for AI to go from where it is today to substantially improving productivity and the earnings of companies that has to go through CapEx; and that CapEx needs to go through credit markets.Andrew Sheets: And I think that is so fascinating because, right Vishy, so much of the spending is still ahead of us. It hasn't even really started, if you look at the numbers.Vishy Tirupattur: Absolutely. We are in the early stages of this CapEx cycle. We should expect to see a lot more CapEx and that CapEx train has to run through credit markets.Andrew Sheets: So, Vishy, there's obviously a lot of history in financial markets of larger CapEx booms, and some of them work out well, and some of them don't. I mean, if you are trying to think about some of the dynamics of this funding for AI and data centers more broadly versus some of these other CapEx cycles that investors might be familiar with. Are there some similar dynamics and some key differences that you try to keep in mind?Vishy Tirupattur: So, in terms of similarities, you know, they're big numbers, whichever way you cut it, these numbers are going to be big dollar numbers.But there are substantial differences between the most recent CapEx boom that we saw towards the end of the late 90s, early 2000s; we saw a massive telecom boom, telecom related CapEx. The big difference is that spending was done by – predominantly by companies that had put debt on their balance sheet. They were already very leveraged. They were just barely investment grade or some below investment grade companies with not much cash on their balance sheet.And you contrast that with today's world, much of this is being done by highly rated companies; the hyperscalers or between, you know, A+ to AAA rated companies, with a lot of cash on their balance sheets and with very little outstanding debt on their part.On top of that, the kind of channels that exist today, you know, data center, ABS and CMBS, asset-based finance, joint venture kind of financing. All of these channels were simply not available back then. And the fact that they all are available today means that this risk of CapEx is actually much more widely distributed.So that makes me feel a lot better about the evolution of this CapEx cycle compared to the most recent one we saw.Andrew Sheets: Private credit, a rise in M&A and a very active funding market for AI. Three big topics that are defining the credit debate today. Vishy, thanks for taking the time to talk.Vishy Tirupattur: Andrew, always fun to hang with youAndrew Sheets: And thank you for listening. If you enjoy Thoughts on the Market, please leave us review wherever you listen and tell a friend or colleague about us today.

Read more insights from Morgan Stanley.----- Transcript ----- Political developments in Japan and France have brought more volatility to sovereign debt markets. Our Global Economist Arunima Sinha highlights the risks investors need to watch out for.Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha, from Morgan Stanley's Global and U.S. Economics teams.Today, I'm going to talk about sovereign debt outlooks and elections around the world.It's Wednesday, October 15th at 10am in New York.Last week we wrote about the deterioration of sovereign debt and fiscal outlooks; and right on cue, real life served up a scenario. Elections in Japan and another political upheaval in France drove a reaction in long-end interest rates with fiscal outlooks becoming part of the political narrative. Though markets have largely stabilized now, the volatility should keep the topic of debt and fiscal outlooks on stage.In Japan, the ruling Liberal Democratic Party, the LDP, elected Sanae Takaichi as its new leader in something of a surprise to markets. Takaichi's election sets the stage for the first female prime minister of Japan since the cabinet system was established in 1885.That outcome is not assured, however. And recent news suggests that the final decision is a few weeks away. The landmark movement in Japanese post-war politics, in some ways further solidifies the changing tides in the Japanese political economy. Markets have positioned for Takaichi to further the reflation trade in Japan and further support the nominal growth revival.The Japanese curve twists steepened sharply as Tokyo markets reopened with the long-end selling off by 14 basis points amid intensifying fiscal concerns and the unwinding of pre-election flattener positions. Specifically, expectations appear to be aligning for a more activist fiscal agenda – relief measures against inflation, bolstered investment in economic security and supply chains, and stepped-up commitments to food security.Our strategists expect that sectors poised to benefit will include high tech exporters, defense and security names, and infrastructure and energy firms, as capital is likely to rotate towards these areas. Though, as our economists cautioned, the lack of a clear legislative maturity may hamper efforts for outright reorientation of fiscal policy.Meanwhile, we expect the implications for monetary policy to be limited. Our reading is that Taikaichi Sanae is not strongly opposed to Bank of Japan Governor Ueda's cautious stance reducing expectations for near term hikes. But we also reiterate that a hike late this year remains a possibility, particularly as the yen weakens.Economically, our baseline call has been supported by the election outcome given we did not expect the BoJ to raise rates in the near future. Indeed, market expectations of an increase in interest rates have been priced out for the next meeting.France is the other economy that saw long-end rates react to political shifts since we published our debt sustainability analysis. PM Lecornu's resignation was far quicker than markets expected, especially given the fact that he was only in office for a matter of weeks.A clear majority in the current parliament remains elusive pointing to continued gridlock, and ultimately snap elections remain a possibility for the next weeks or months. At the heart of the political uncertainty is division about how to proceed with fiscal consolidation against a moving target of widening deficits.The lack of fiscal consolidation in France has been a topic for many years. Though the ECB provides an implicit backstop against disruptive widening of OAT spreads through the TPI, our Europe economists view the activation of TPI as unlikely. As the spread widening has been driven by concerns around France's fiscal sustainability, a factor that is likely seen as reflecting fundamentals.In our rather mechanical projections on debt, we highlighted markets would ultimately determine what is and is not sustainable. These political events are the type of catalyst to watch for.So far, the risks have been contained, but we have a clear message that complacency could become costly at any time. With the deterioration in debt and fiscal fundamentals, we suspect there will be more risks ahead.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.

Our Chief Asia Economist Chetan Ahya discusses how youth unemployment will impact future growth and stability across China, India, and Indonesia.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Today – Asia's young workforce is facing a significant challenge. How a soft labor market will shape everything from consumer demand to social stability and long-term growth. It's Tuesday, October 14th, at 2pm in Hong Kong. Across Asia, a concerning trend is emerging. The region's younger generations face mounting challenges in the job market. Asia's youth unemployment averages 16 percent, which is much higher than the U.S. rate of 10.5 percent. Youth unemployment rates are running two to three times higher than headline unemployment rates. The underlying situation is even weaker than what is represented by [the] unemployment rate. And within Asia, the challenge is most acute in China, India, and Indonesia, the three most populous economies. Youth unemployment rates for these three economies are running close to double, as compared to other economies in Asia. Now let's take a closer look at China. The urban youth unemployment rate, i.e. for 16–24-year-olds, has steadily increased since 2019. What's driving this rise in unemployment? A mismatch in labor demand and supply. The number of university graduates surged 40 percent over the last five years to close to 12 million. But economy-wide employment has declined by 20 million over the same period. Entry-level wages are sluggish, and automation plus subdued services growth mean fewer opportunities for newer entrants. Turning to India, their unemployment rate is the highest in the region at 17.6 percent. Employment creation has been subdued. And on top of it, India also faces another issue: underemployment. Post-COVID, primary sector – i.e. farming and mining – employment rose by 50 million, reaching a 17-year high. Note that these jobs are relatively low productivity jobs. And this is explained by the fact that [the] primary sector now accounts for less than 20 percent of GDP but it employs about 40 percent of the workforce. That's a sign of COVID-induced underemployment. How fast must growth be to tackle the unemployment challenge? In our base case, India's GDP will grow at an average of 6.5 percent over the coming decade – and this will mean that India will be one of the fastest-growing economies globally. But this pace of growth will not be sufficient to generate enough jobs. To keep [the] unemployment rate stable, India needs an average GDP growth of close to 7.5 percent; and to address underemployment, the required run rate in GDP growth must be even higher at 12 percent. Shifting to Indonesia, its youth unemployment rate is the second highest in the region. Moreover, close to 60 percent of jobs are in the informal sector. And many of these jobs pay below minimum wage. Similar to India, both these trends signal underemployment. The key reason behind this challenge is weak investment growth. Indonesia's investment-to-GDP ratio has dropped meaningfully over the last five years. So, what's the way forward? For China, shifting towards consumption and services could reduce labor market mismatches. And for India and Indonesia, boosting investment is key. India in particular needs much stronger growth in its industrial and exports sectors. If reforms fall short, policy makers may need to fall back on increasing social welfare spending to manage social stability risks. 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.

Morgan Stanley analysts Betsy Graseck and Michael Cyprys discuss what's driving unprecedented consolidation for asset and wealth management firms.Read more insights from Morgan Stanley.----- Transcript ----- Betsy Graseck: Welcome to Thoughts on the Market. I'm Betsy Graseck, Morgan Stanley's U.S. Large Cap Banks Analyst and Global Head of Banks and Diversified Finance Research.Michael Cyprys: And I'm Mike Cyprys, Head of U.S. Brokers, Asset Managers and Exchanges Research.Betsy Graseck: The asset management and wealth management industries are on the cusp of major consolidation. We're going to unpack today what's driving the race for scale and what it means for investors and the industries at large.It's Monday, October 13th at 4pm in New York.Mike, before we dive into the setup for M&A, I did want to get out here on the table. What's your outlook for the asset management industry?Michael Cyprys: Sure. So, asset management today is, call it, $135 trillion industry, in terms of assets under management that are managed for a fee. We expect it to grow at about an 8 percent clip annually over the next five years. And that's driven by faster growth in private markets, solutions and passive strategies, while we expect to see slower growth in the core active arena.Two key drivers of growth there. First private markets. We expect to see rising investor allocations from both institutional investors, but also more importantly from retail investors that remain early days in accessing the asset class. So, as we look out in the coming years, we do expect this democratization of private markets to play out, and we see that being helped by product innovation, investor education and technology advances that are all helping unlock access.Second growth driver is solutions. And I think you're looking at me a little dazed on what's solutions. And by that we really mean products and strategies that are addressing demographic challenges around aging populations. So, think about that as solutions that provide for retirement income, as well as those that offer tax efficient solutions. So, think about that as model portfolios, as well as sub-advisory mandates. We also expect to see growth in outsourced Chief Investment Officer, OCIO mandates and broadly retirement focused products.So that's the asset management industry in terms of our outlook. Betsy, what's your outlook for the growth in the wealth management industry?Betsy Graseck: Well, somewhat similar, but a little bit slower – off of a larger base. What does that mean? So, we are looking for global growth in wealth management of 5.5 percent CAGR, and that is off of a base of [$]301 trillion, which is intriguing, right? Because that's larger than the [$]135 trillion you mentioned for asset management.So, in wealth, we were expecting [$]301 trillion in 2024 grows to [$]393 trillion in 2029. And within the wealth industry, what we see as the driver for incremental opportunities here is both in the ultra high net worth segment as well as the affluent segments, as client needs evolve and technology delivers improving efficiencies.And I think one of the interesting things here – as we think about the look forward from industry perspective – is the fact that both asset management and wealth management industries have been very fragmented for a very long time, especially relative to other financial industries. I think one reason is that they need less capital to operate successfully.But Mike, back to the asset management industry, specifically – deal activity seems to be inching up. What are you attributing this increase in M&A to?Michael Cyprys: Yeah, so we do see M&A picking up, and we expect that to continue over the next couple of years. A number of reasons for that. First growth is becoming a bit more scarce, with clients working with fewer partners. And over the next five years, we expect the number of available slots to continue to decline upwards of a third, which concentrates growth opportunities.Betsy Graseck: Wait, wait, wait. Upwards of a third. And number of slots. When you say number of slots, you're talking about it from the asset manager client perspective…Michael Cyprys: Correct. From the asset owner standpoint or intermediary standpoint.Betsy Graseck: They're looking to consolidate their providers?Michael Cyprys: Correct.Betsy Graseck: Okay.Michael Cyprys: They're looking to work with fewer asset managers.Betsy Graseck: Mm-hmm.Michael Cyprys: At the same time, the winners are taking more share, right? So, our work shows that the largest firms are disproportionately capturing a larger share of net new money as they leveraged their scale to reinvest in capabilities as well as in relationships.And also, I'd point to the fact that we have seen a pickup in deal activity already. And we think that's going to lead more firms to consider strategic activity themselves, as they think and rethink what constitutes scale. And we think that that bar is rising…Betsy Graseck: Mm. Michael Cyprys: And firms are thinking about how to compete effectively as the landscape evolves. And look, this is all in the context of already a lot of challenges and changes happening as you think about evolving client needs. The rising cost of doing business, whether it's investing for growth or even harnessing AI, and that's all pressuring profitability. We think this is particularly a challenge for those mid-size money managers that are multi-asset, multi-liquid and global. Those with, call it, [$]0.5 trillion to [$]2 trillion in size, making them more likely to pursue consolidation, opportunities to bolster their capabilities and scale while also generating cost efficiencies.Betsy Graseck: So now looking forward, what type of deals do you expect and how does it differ from past years?Michael Cyprys: Sure. So, a few things are different than past years. First is that the deal activity is encompassing many forms of partnership. And we think that this experimentation around partnership will only accelerate. That allows, for example, for private market managers to access retail distribution without owning the end infrastructure and the last mile to the customer. It also allows traditional managers to provide their retail customers with access to high quality private market strategies from well-known and branded firms.Second is we see a broadening out of the types of acquisitions themselves when we talk about M&A, right? So, three types of deals. First are deals within the same vertical or intersector. So, think about this as an asset manager buying another asset manager to acquire capabilities, to gain cost synergies or bolster distribution.Second type of deals that we're seeing are ones that expand beyond one's own vertical. So intersector deals. So, asset management combining with wealth or insurance, for example, where firms would seek to own a larger, greater portion of the overall value chain. And so, these firms are getting closer to that end client. For example, an asset manager getting closer to that end customer. And the third type being financial sponsor deals where a sponsor is investing either as an in an asset or a wealth manager.Now you didn't ask me around the historical outcomes of M&A. But I would say that the historical outcomes have been mixed in the asset management space. But here we think that the opportunity ahead is so bright that we think firms will find ways to navigate and pursue strategic activity. But it does require addressing some of the culture and integration challenges that have plagued some of the deals in the past.Betsy Graseck: Okay.Michael Cyprys: So, Betsy, what do you see as the key drivers of consolidation in wealth management?Betsy Graseck: There's several. From the wealth manager side, number one is an aging population of advisor and advisor-owners, and the need to address succession and how to best serve their clients when passing on their book of business. So, we've got succession issues as the number one driver. But additionally, the need for scale is clearly getting higher and higher – given the costs of IT infrastructure rising, the needs to be able to leverage AI effectively and to manage your cyber risk effectively. These are just some of the drivers of desire to merge from the wealth manager perspective.Second. We have an increasing buying pool. If you just look at the large cap banks, for example. Significant amount of excess capital. Could we see some of that excess capital be put to work in the wealth management industry? To me, that would make sense. Why? Because wealth management is one of the best, if not the best financial institution service for shareholders. It is a high ROE business. It also is a business that commands a high multiple in the stock market.So, we would not be surprised to see activity there over the course of the next several years. So, Mike, thanks for joining me on the show today.Michael Cyprys: Thanks, Betsy. Always a pleasure.Betsy Graseck: And to our listeners, 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.

Our 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.

Diving into the history of Morgan Stanley's first bond deal, our Head of Corporate Credit Research Andrew Sheets explains the value of high-quality corporate bonds.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 the first bond that Morgan Stanley helped issue 90 years ago and what it might tell us about market uncertainty. It's Thursday, October 9th at 4pm in London. In times of uncertainty, it's common to turn to history. And this we think also applies to financial markets. The Great Depression began roughly 95 years ago. Of its many causes, one was that the same banks that were shepherding customer deposits were also involved in much riskier and more volatile financial market activity. And so, when the stock market crashed, falling over 40 percent in 1929, and ultimately 86 percent from a peak to a trough in 1932, unsuspecting depositors often found their banks overwhelmed by this market maelstrom. The Roosevelt administration took office in March of 1933 and set about trying to pick up the pieces. Many core aspects that we associate with modern financial life from FDIC insurance to social security to the somewhat unique American 30-year mortgage rose directly out of policies from this administration and the financial ashes of this period. There was also quite understandably, a desire to make banking safer. And so the Glass Steagall Act mandated that banks had a choice. They could either do the traditional deposit taking and lending, or they could be active in financial market trading and underwriting. In response to these new separations, Morgan Stanley was founded 90 years ago in 1935 to do the latter. It was a very uncertain time. The U.S. economy was starting to recover under President Roosevelt's New Deal policies, but unemployment was still over 17 percent. Europe's economy was struggling, and the start of the Second World War would be only four years away. The S&P Composite Equity Index, which currently sits at a level of around 6,700, was at 12. It was into this world that Morgan Stanley brought its first bond deal, a 30-year corporate bond for a AA rated U.S. utility. And so, listeners, what do you think that that sort of bond yielded all those years ago? Luckily for us, the good people at the Federal Reserve Bank of St. Louis digitized a vast array of old financial newspapers. And so, we can see what the original bond yielded in the announcement. The first bond, Morgan Stanley helped issue with a 30-year maturity and a AA rating had a yield of just 3.55 percent. That was just 70 basis points over what a comparable U.S. treasury bond offered at the time. Anniversaries are nice to celebrate, but we think this example has some lessons for the modern day. Above anything, it's a clear data point that even in very uncertain economic times, high quality corporate bonds can trade at very low spreads – much lower than one might intuitively expect. Indeed, the extra spread over government bonds that investors required for a 30-year AA rated utility bond 90 years ago, in the immediate aftermath of the Great Depression is almost exactly the same as today. It's one more reason why we think we have to be quite judicious about turning too negative on corporate credit too early, even if the headline spreads look low. 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, please tell a friend or colleague about us today.

An extended U.S. government shutdown raises the risk for weaker growth potential. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas suggests key checkpoints that investors should keep in mind.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Today: Three checkpoints we're watching for as the U.S. government shutdown continues. It's Wednesday, October 8th at 10:30am in New York. The federal government shutdown in the United States has crossed the one week mark. But if you're watching the markets, you might be surprised at how calm everything seems. Stocks are steady. Bond yields haven't moved much, and volatility's low. It's more or less the scenario my colleague Ariana and I had talked about in anticipation of the impasse in Washington. We'd noted the potential for uncertainty for investors and market reaction depending on how long the shutdown would last. So that raises a big question: what, if anything, about this government shutdown could shake investor confidence and start moving markets? The question is worth considering. Prediction markets now suggest the most likely outcome is that the government shutdown will not end for at least another week. And as we've seen in past shutdowns, the longer it drags on, the more likely it is to matter. That's because risks to the economic outlook start to accumulate, and investors eventually have to start pricing in a weaker growth outlook. There's a few checkpoints we're watching for – for when investors might start feeling this way. First, the missed paycheck for furloughed federal workers. The first instance of this comes in a few days. Less pay naturally means less spending. Studies suggest that spending among affected workers can drop by two to four percent during a shutdown. That's not huge for GDP at first; but it's a sign the shutdown is having effects beyond Washington, DC. Second, this time might be different because of potential layoffs. The administration has hinted that agencies could move to permanently cut staff — something we haven't seen before. Unions have already said they'd challenge that in court. But if those actions start, or even if legal uncertainty grows around them, it could raise the economic stakes. Third, we're watching for real disruptions to economic activity resulting from the shutdown. The last shutdown ended when air traffic in New York was curtailed due to a shortage of air traffic controllers. We're already seeing substantial air traffic delays across the country. More substantial delays or ground halts obviously impede economic activity related to travel. And if such actions don't coincide with signals from DC of progress in negotiating a bill to reopen the government, investors' concern could grow. So here's the bottom line: markets may be right to stay calm — for now. But the longer this shutdown lasts, the more likely one of these pressure points pushes investors to rethink their optimism. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen.