Thoughts on the Market

Online crime is accelerating, making cybersecurity a fast-growing and resilient investment opportunity. Our Cybersecurity and Network and Equipment analyst Meta Marshall discusses the key trends driving this market shift.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Meta Marshall, Morgan Stanley's Cybersecurity and Network and Equipment Analyst. Today – the future of digital defense against cybercrime. It's Friday, September 12th, at 10am in New York.Imagine waking up to find your bank account drained, your business operations frozen, or your personal data exposed – all because of a cyberattack. Today, cybersecurity isn't an esoteric tech issue. It impacts all of us, both as consumers and investors. As the digital landscape grows increasingly complex, the scale and severity of cybercrime expand in tandem. This means that even as companies spend more, the risks are multiplying even faster. For investors, this is both a warning and an opportunity.Cybersecurity is now a $270 billion market. And we expect it to grow at 12 percent per year through 2028. That's one of the fastest growth rates across software. And here's another number worth noting: Chief Information Officers we surveyed expect cybersecurity spending to grow 50 percent faster than software spending as a whole. This makes cybersecurity the most defensive area of IT budgets—meaning it's least likely to be cut, even in tough times.This hasn't been lost on investors. Security software has outperformed the broader market, and over the past three years, security stocks have delivered a 58 percent return, compared to just 22 percent for software overall and 79 percent for the NASDAQ. We expect this outperformance against software to continue as AI expands the number of ways hackers can get in and the ways those threats are evolving.Looking ahead, we see a handful of interconnected mega themes driving investment opportunities in cybersecurity. One of the biggest is platformization – consolidating security tools into a unified platform. Today, major companies juggle on average 130 different cyber security tools. This approach often creates complexity, not clarity, and can leave dangerous gaps in protection particularly as the rise of connected devices like robots and drones is making unified security platforms more important than ever.And something else to keep in mind: right now, security investments make up only 1 percent of overall AI spending, compared to 6 percent of total IT budgets—so there's a lot of room to grow as AI becomes ever more central to business operations. In today's cybersecurity race, it's not enough to simply pile on more tools or chase the latest buzzwords. We think some of the biggest potential winners are cybersecurity providers who can turn chaos into clarity. In addition to growing revenue and free cash flow, these businesses are weaving together fragmented defenses into unified, easy-to-manage platforms. They want to get smarter, faster, and more resilient – not just bigger. They understand that it's key to cut through the noise, make systems work seamlessly together, and adapt on a dime as new threats emerge. In cybersecurity, complexity is the enemy—and simplicity is the new superpower. 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 the evolving trade relationship between India and China could redefine global supply chains and unlock new investment opportunities.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist. Today – one of the most important economic relationships of our time: India and China. And what the future may hold. It's Thursday, September 11th at 2 pm in Hong Kong.Trade dynamics between India and China are evolving rapidly. They are not just shaping their own futures. They are influencing global supply chains and investment flows. India's trade with China has nearly doubled in the last decade. India's bilateral trade deficit with China is its largest—currently at U.S. $120 billion. On the flip side, China's trade surplus with India is the biggest among all Asian economies. We expect this trade relationship to deepen given economic imperatives. India needs support on tech know-how, capital goods and critical inputs; and China needs to capitalize on growth opportunities in the second largest and fastest growing EM. Let's explore these issues in turn. India needs to integrate itself into the global value chain. And to do that, India needs Foreign Direct Investment from China, much like how China's rise was fueled by Foreign Direct Investment from the U.S., Europe, Japan, and Korea, which brought the technology and expertise. For India, easing restrictions on Chinese FDI could be a game-changer, enabling the transfer of tech know-how and boosting manufacturing competitiveness. Now, China is the world's manufacturing powerhouse. It accounts for more than 40 percent of the global value chain—far ahead of the U.S. at 13 percent and India at just 4 percent. The global goods trade is increasingly focused on products higher up the value chain—think semiconductors, EVs, EV batteries, and solar panels. And China is the top global exporter in six of eight key manufacturing sectors. To put it quite simply, any economy that is looking to increase its participation in global value chains will have to increase its trade with China. For India, this means that it must rely on Chinese imports to meet its increasing demand for capital goods as well as critical inputs that are necessary for its industrialization. In fact, this is already happening. More than half of India's imports from China and Hong Kong are capital goods—i.e. machinery and equipment needed for manufacturing and infrastructure investment. Industrial supplies make [up] another third of the imports, highlighting India's dependence on China for critical inputs. From China's perspective, India is the second largest and fastest-growing emerging market. And with U.S.-China trade tensions persisting, China is diversifying its exports markets, and India represents a significant opportunity. One way Chinese companies can capture this growth opportunity is to invest in and serve the domestic market. Chinese mobile phone companies have already been doing this and whether this can broaden to other sectors will depend on the opening up of India's markets. To sum up, India can leverage on China's strengths in manufacturing and technology while China can utilize India's vast market for exports and investment.However, there's a caveat: geopolitics. While economic imperatives point to deeper trade and investment ties, political developments could slow progress. Investors should watch this space closely and we will keep you updated on key developments. Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Metals & Mining Commodity Strategist Amy Gower discusses her bullish outlook for gold and what the metal's rally in 2025 says about inflation, central banks, and global risk.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Amy Gower, Morgan Stanley's Metals & Mining Commodity Strategist. Today, we're talking about gold, a metal that's more than just a safe haven for investors, and what it tells us about the global economy and markets right now.It's Wednesday, September 10th, at 3pm in London. Gold has always been the go-to asset in times of uncertainty. But in 2025, its role is evolving. Investors are watching gold not just as a hedge against inflation, but as a barometer for everything from central bank policy to geopolitical risk. When gold prices move, it's often a sign that something big is happening beneath the surface.Gold and silver have both already clocked up hefty year-to-date gains of 39 and 42 percent respectively. So, what's been driving this rally? Well, several factors stand out. For one, central banks are on track for another year of strong buying, with gold now representing a bigger share of central bank reserves than treasuries for the first time since 1996. This is a strong vote of confidence in gold's long-term value. Also, gold-backed Exchange-Traded Funds, or ETFs, saw inflows of $5 billion in August alone, with the year-to-date inflows the highest on record outside of 2020, signaling renewed interest from institutional investors too. With inflation still above target in many major economies, gold's appeal has been surprisingly resilient despite being a non-yielding asset. And investors are betting that central banks may soon have to cut rates, which could further boost gold prices. In fact, from here we see around 5 percent further upside to gold by year end to $3800/oz which would be a new all-time high. But there is one important wrinkle to consider. Keep in mind that while precious metals, especially gold, are primarily seen as a hedge and safe haven in times of macro uncertainty, jewelry is a big chunk of the overall precious metals market. It accounts for 40 percent of gold demand and 34 percent of silver demand. And right now how jewelry demand will evolve remains an unknown. In fact, jewelry demand is already showing signs of weakness. Second-quarter gold jewelry demand was the worst since the third quarter of 2020 as consumers reacted to high prices. Nonetheless, gold was able to hold onto its January-April gains, and silver continued to grind higher, supported by strong demand from the solar industry as well. However, until recently, the two metals were lacking catalysts for further gains. Now though this is changing, with both gold and silver poised to benefit from expected Fed rate cuts. Our economists expect the Fed to cut rates at the September meeting, for the first time since December 2024. And if we look back to the 1990s, on average gold and silver prices have risen 6 and 4 percent respectively in the 60 days following the start of a Fed rate-cutting cycle as lower yields make it easier for non-yielding assets to compete. Our FX strategists also expect further dollar weakness, which should ease some of the price pressures for holders of non-USD currencies, while India's imports of gold and silver already showed signs of improvement in July. The country is looking also to reform its Goods and Services tax, which could free up purchasing power for gold and silver ahead of festival and wedding season. Gold does tend to outperform after Fed rate cuts, and we would keep the preference for gold over silver, but our outlook for both metals remains positive. Of course, precious metals are not risk-free. Prices can be volatile, and if central banks surprise the market with higher interest rates, gold in particular could lose some of its luster. But for now, both gold and silver should continue to shine. 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.

Many Americans struggle with the rising cost of healthcare. Analysts Terence Flynn and Erin Wright explain how AI might bend the cost curve, from Morgan Stanley's 23rd annual Global Healthcare Conference in New York.Read more insights from Morgan Stanley.----- Transcript -----Terence Flynn: Welcome to Thoughts on the Market. I'm Terence Flynn, Morgan Stanley's U.S. Biopharma Analyst.Erin Wright: And I'm Erin Wright, U.S. Healthcare Services Analyst.Terence Flynn: Thanks for joining us. We're actually in the midst of the second day of Morgan Stanley's annual Global Healthcare Conference, where we hosted over 400 companies. And there are a number of important themes that we discussed, including healthcare policy and capital allocation.Now, today on the show, we're going to discuss one of these themes, healthcare spending, which is one of the most pressing challenges facing the U.S. economy today.It is Tuesday, September 9th at 8am in New York.Imagine getting a bill for a routine doctor's visit and seeing a number that makes you do a double take. Maybe it's $300 for a quick checkup or thousands of dollars for a simple procedure.For many Americans, those moments of sticker shock aren't rare. They are the reality.Now with healthcare costs in the U.S. higher than many other peer countries on a percentage of GDP basis, it's no wonder that everyone – not just investors – is asking; not just, ‘Why is this happening?' But ‘How can we fix it?' And that's why we're talking about AI today. Could it be the breakthrough needed to help rein in those costs and reshape how care is delivered?Now I'm going to go over to you, Erin. Why is U.S. healthcare spending growing so rapidly compared to peer countries?Erin Wright: Clearly, the aging population in the U.S. and rising chronic disease burden here are clearly driving up demand for healthcare. We're seeing escalating demand across the senior population, for instance. It's coinciding with greater utilization of more sophisticated therapeutics and services. Overall, it's straining the healthcare system.We are seeing burnout in labor constraints at hospitals and broader health systems overall. Net-net, the U.S. spent 18 percent of GDP on healthcare in 2023, and that's compared to only 11 percent for peer countries. And it's projected to reach 25 to 30 percent of GDP by 2050. So, the costs are clearly escalating here.Terence Flynn: Thanks, Erin. That's a great way to frame the problem. Now, as we think about AI, where does that come in to help potentially bend the cost curve?Erin Wright: We think AI can drive meaningful efficiencies across healthcare delivery, with estimated savings of about [$]300 to [$]900 billion by 2050.So, the focus areas include here: staffing, supply chain, scheduling, adherence. These are where AI tools can really address some of these inefficiencies in care and ultimately drive health outcomes. There are implementation costs and risks for hospitals, but we do think the savings here can be substantial.Terence Flynn: Great. Well, let's unpack that a little bit more now. So, if you think about the biggest cost buckets in hospitals, where can AI help out?Erin Wright: The biggest cost bucket for a hospital today clearly is labor. It represents about half of spend for a hospital. AI can optimize staffing, reduce burnout with a new scribe and some of these scribe technologies that are out there, and more efficient healthcare record keeping. I mean, this can really help to drive meaningful cost savings.Just to add another discouraging data point for you, there's estimated to be a shortage of about 10,000 critical healthcare workers in 2028. So, AI can help to address that. AI tools can be used across administrative functions as well. That accounts for about 15 to 20 percent of spend for a hospital. So, we see substantial savings as well across drugs, supplies, lab testing, where AI can reduce waste and improve adherence overall.Terence Flynn: Great. Maybe we'll pivot over to the managed care and value-based care side now. How is AI being used in these verticals, Erin?Erin Wright: For a healthcare insurer – and they're facing many challenges right now as well – AI can help personalize care plans. And they can support better predictive analytics and ultimately help to optimize utilization trends. And it can also help to facilitate value-based care arrangements, which can ultimately drive better health outcomes and bend the cost curve. And ultimately that's the key theme that we're trying to focus on here.So, I'll turn it over to you, Terence, now. While hospitals and payers could see notable benefits from AI, the biopharma side of the equation is just as critical here. Especially when it comes to long-term cost containment. You've been closely tracking how AI is transforming drug development. What exactly are you seeing?Terence Flynn: Yeah, a number of key constituents are leaning in here on AI in a number of different ways. I'd say the most meaningful way that could help bend the cost curve is on R&D productivity. As many people probably know, it can take a very long time for a drug to reach the market anywhere from eight to 10 years. And if AI can be used to improve that cycle time or boost the probability of success, the probability of a drug reaching the market – that could have a meaningful benefit on costs. And so, we think AI has the potential to increase drug approvals by 10 to 40 percent. And if that happens, you can ultimately drive cost savings of anywhere from [$]100 billion to [$]600 billion by 2050.Erin Wright: Yeah, that sounds meaningful. How do you think additional drug approvals lead to meaningful cost savings in the healthcare system?Terence Flynn: Look, I mean, high level medicines at their best cure disease or prevent people from being admitted to a hospital or seeking care to doctor's office. Equally important medicines can get people out of the hospital quicker and back to contributing or participating in society. And there's data out there in the literature showing that new drugs can reduce hospital stays by anywhere from 11 to 16 percent.And so, if you think about keeping people out of hospitals or physician offices or reducing hospital stays, that really can result in meaningful savings. And that would be the result of more or better drugs reaching the market over the next decades.Erin Wright: And how is the FDA now supporting or even helping to endorse AI driven drug development?Terence Flynn: If companies are applying for more drug approvals here as a result of AI discovery capabilities without modernization, the FDA could actually become the bottleneck and limit the number of drugs approved each year.And so, in June, the agency rolled out an AI tool called Elsa that's looking to improve the drug review timelines. Now, Elsa has the potential to accelerate these timelines for new therapies. It can take anywhere from six to 10 months for the FDA to actually approve a drug. And so, these AI tools could potentially help decrease those timelines.Erin Wright: And are you actually seeing some of these biopharma companies actually investing in AI talent?Terence Flynn: Yes, definitely. I mean, AI related job postings in our sector have doubled since 2021. Companies are increasingly hiring across the board for a number of different, parts of their workflow, including discovery, which we just talked about. But also, clinical trials, marketing, regulatory – a whole host of different job descriptions.Erin Wright: So, whether it's optimizing hospital operations or accelerating drug discovery, AI is emerging as a powerful lever here – to bend the healthcare cost curve.Terence Flynn: Exactly. The challenge is adoption, but the potential is transformative. Erin, thanks so much for taking the time to talk with us.Erin Wright: Great speaking with you, Terence.Terence Flynn: And thanks everyone 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.

Morgan Stanley's CIO and Chief U.S. Equity Strategist Mike Wilson discusses the outlook for U.S. stocks after Friday's nonfarm payroll data reinforced the thesis of a transition from a rolling recession to a rolling recovery.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 Friday's Payroll report and what it means for equities. It's Monday, Sept 8th at 11:30am in New York. So let's get after it. The heavily anticipated nonfarm payroll report on Friday supports our view that the labor market is weak. However, this is old news to the equity market as we have been discussing for months. First, the labor market data is perhaps the most backward-looking of all the economic series. Second, it's particularly prone to major revisions that tend to make the current data unreliable in real time, which is why the National Bureau of Economic Research typically declares a recession started at a time when most were unaware we were in one. Furthermore, history suggests these revisions are pro-cyclical, meaning they get more negative going into a recession and then more positive once the recovery's begun. It appears this time is no different. Indeed, Friday's revisions were better than last month's by a wide margin suggesting the labor market bottomed in the second quarter. This insight adds support to our primary thesis on the economy and markets that I have been maintaining for the past several years. More specifically, I believe a rolling recession began in 2022 and finally bottomed in April with the tariff announcements made on “Liberation Day.” After the initial phase of this rolling recession, that was led by a payback in Covid pull-forward demand in tech and consumer goods, other sectors of the economy went through their own individual recessions at different times. This is a key reason why we never saw the typical spike in the metrics used to define a traditional recession, although the revisions data is now revealing it more clearly. The historically significant rise in immigration post-covid and subsequent enforcement this year have also led to further distortions in many of these labor market measures. While we have written about these topics extensively over the past several years, Friday's weak labor report provides further evidence of our thesis that we are now transitioning from a rolling recession to a rolling recovery. In short, we're entering a new cycle environment and the Fed cutting interest rates will be key to the next leg of the new bull market that began in April. Central to our view is the notion that the economy has been much weaker for many companies and consumers over the past 3 years than what the headline economic statistics like nominal GDP or employment suggest. We think a better way to measure the health of the economy is earnings growth, and breadth; as well as consumer and corporate confidence surveys. Perhaps the simplest way to determine if an economy is doing well or not is to ask: is it delivering prosperity broadly? On that score, we think the answer is “no” given the fact that earnings growth has been negative for most companies over the past 3 years. The good news is that growth has finally entered positive territory the past 2 quarters. This coincides with the v-shaped recovery in earnings revisions breadth we have been highlighting for months. We think this supports the notion that the worst of the rolling recession is behind us and likely troughed in April. As usual, equity markets got this right and bottomed then, too. Now, we think a proper rate cutting cycle is likely and necessary for the next leg of this new bull market. Given the risk that the Fed may still be focused on inflation more than the weakness in the lagging labor market data, rate cuts may materialize more slowly than what equity investors want. Combined with some signs that liquidity may be drying up a bit as both corporate and Treasury issuance increases, it would not surprise me if equity markets go through some consolidation or even a correction during the seasonally weak time of the year. Should that happen, we would be buyers of that dip and likely even consider moving down the quality curve in anticipation of a more dovish Fed and coordinated action with the Treasury. Bottom line, a new bull market for equities began with the trough in the rolling recession that began in 2022. It's still early days for this new bull which means dips should be bought. 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 G10 FX Market Strategist Andrew Watrous challenges the prevailing market view on the U.S. dollar, reaffirming the relevance of Morgan Stanley's "dollar smile" framework. Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Watrous, G10 FX Strategist at Morgan Stanley. Today – a look at how the US dollar behaves under different global growth circumstances. And why – contrary to the views of some observers – we think the dollar still smiles.It's Friday, September 5, at 10 AM in New York.We've been talking a good amount on this show about the US dollar – not just as a currency, but as the cornerstone of the global financial system. As the world's reserve currency, its movements ripple across markets everywhere. The trajectory of the dollar affects everything from your portfolio's performance to the cost of your next international vacation.Let's start with the “dollar smile,” which is a framework Morgan Stanley FX strategists developed back in 2001, to explain how the dollar behaves under different global growth scenarios.Picture a smile-shaped curve: On the lefthand side, the dollar rises, goes up, when global growth is concerningly weak as nervous investors flock to US assets as a safe haven. On the right side of the smile, when US growth outperforms growth in the rest of the world, capital flows into the US, boosting the dollar. In the middle of the curve – which is the bottom of the smile – the dollar weakens, goes down, when growth is robust around the world and synchronized globally. In that environment - middle of the smile - investors seek riskier assets which weighs on the dollar - in part because they could borrow in dollars and invest outside the US.It's kind of a simple framework, right? But here's the twist: some investors argue that the left side of the smile might be broken. In other words, they say that the dollar no longer rises if people are really worried about global growth.They say that if the US itself is the source of the growth shock -- whether it's political uncertainty or trade wars -- the dollar shouldn't benefit. Or that the rise in US interest rates, which makes it more expensive to borrow in the US and invest abroad, or changes in the structure of global asset holdings, might mean that growth scares won't lead to an inflow to the US and a dollar bid.We disagree with those challenges to the dollar smile framework.To quantify the dollar smile, in order to test whether it still works, we started by using Economic Surprise Indices. These indices measure how actual economic data compares to forecasts.We found that when growth in the US and outside the US are both surprisingly weak - in other words they're much weaker than forecasted - the dollar rises on average about 0.8% per month over the past 20 years. Then on the right side of the dollar smile, when US growth really outperforms expectations, but growth outside the US underperforms expectations, the dollar goes up even more—about 1.1% on average per month. And in the middle of the dollar smile, during synchronized global growth, the dollar tends to decline on average a little bit, about 0.1% on average per month.The question is, does that framework, does that pattern still hold up today?We think it does for a few different reasons. In 2018 and 2019, despite trade tensions and US policy uncertainty playing a big role in driving global growth concerns, the dollar strengthened during periods of poor global growth. In other words, the lefthand side of the dollar smile worked back then, even though the concerns were driven by US factors.And in June 2025, when geopolitical tensions spiked between Israel and Iran, and growth concerns became elevated - the dollar surged. Investors fled to safety, and the dollar delivered.It's true that in April 2025, the dollar dipped initially after the first tariff announcements. But then it fell even more after those tariff hikes were paused, despite a rebound in stocks. Growth concerns were mitigated and the dollar went down. So this episode I think wasn't really a breakdown of the smile. What weighed on the dollar this spring was policy unpredictability in the US, which led investors to reduce their exposure to US assets, rather than concerns about global growth.So these episodes, I think, show that the dollar can still act as a safe haven, despite changing patterns of global asset ownership, the rise in US interest rates, and even when the US itself is the source of global concerns.Now, setting aside the framework, it's important to note that the US dollar dropped about 11% against other currencies in the first half of this year. This was the biggest decline in more than 50 years and it ended a 15-year bull cycle for the US dollar. Moreover, we think that the dollar will continue to weaken through 2026 as the Fed cuts interest rates and policy uncertainty remains elevated.Still, even with all that, we think our framework holds. When markets wobble, remember this: the dollar will probably greet volatility with a smile.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 discusses the scenarios markets may face in September and for the rest of the year, as the Federal Reserve weighs interest rate cuts amidst slowing job growth and persistent inflation. Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley.Today, the narrow economic path the markets face as we come back from summer.It's Thursday, September 4th at 2:00 PM in London.September is a month of change and one of my favorite times of the year. The weather gets just a little crisper. Kids go back to school. Football, both kinds, are back on tv. And financial markets return from the summer in earnest, quickly ramping back up to full speed. This year, September brings a number of robust debates that we'll be covering on this podcast, but chief among these might be exactly how strong or not investors actually want the economy to be.You see, at the moment, the Federal Reserve is set to lower interest rates, and they're set to do that even though inflation in the US is still well above target and it's moving higher. That's unusual and it's made even more unusual in the context of financial conditions being very easy and the US government borrowing a historically large amount of money.The Fed's reason to lower interest rates despite strong markets, elevated inflation and high budget deficits, is the concern that the US labor market is weakening. And this fear is not unfounded. US job growth has recently slowed sharply. In 2023 and 2024, the US was adding on average about 200,000 jobs every month. But this year job growth has been less than half that amount, just 85,000 per month. And the most recent data's even worse. Tomorrow brings another important update. But here's the rub: the Fed, in theory, is lowering rates because the labor market is weaker. Markets would like those lower rates, but investors would not like a significantly weaker economy.And this logic is born out pretty starkly in history. When the Fed is lowering interest rates as growth holds up, that represents some of the best ever market environments, including the mid 1990s. But when the Fed lowers rates as the economy weakens, well, that represents some of the worst. So as the leaves start to turn and the air gets a little chilly, this is the fine line that markets face coming back into September. Weaker data for the labor market would make it easier to justify Fed cuts, but would make the broader backdrop more historically challenging. Stronger data could make the Fed look offsides, committing to lower interest rates despite high and rising inflation, easy financial conditions, and what would be a still resilient economy. And that could unleash even more aggressiveness and animal spirits.Stock markets might like that aggressiveness, but neither outcome is great for credit. And so by process of elimination, our market is hoping for something moderate, belt high, and over the middle of the plate. Our economists forecast for this Friday's jobs report for about 70,000 jobs, and a stable unemployment rate would fit that moderate bill. But for this month and now for the rest of the year, we'll be walking a narrow economic path.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 tell a friend or colleague about us today.

Fed Chair Jay Powell's speech at Jackson Hole underscored the central bank's new focus on managing downside growth risks. Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, talks about how that shift could impact markets heading into 2026. 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: What a subtle shift in the Fed's reaction function could mean for markets into year-end.It's Wednesday, September 3rd at 11am in New York.Last week, our U.S. economics team flagged a subtle but important shift in U.S. monetary policy. Chair Jay Powell's speech at Jackson Hole underscored that the Fed looks more focused on managing downside growth risks and, consequently, a bit more tolerant on inflation.As you heard Michael Gapen and Matthew Hornbach discuss last week – our colleagues expect this brings forward another Fed cut into September, kicking off a quarterly pace of 25 basis-point moves. But while this is a meaningful change in the timing of Fed rate cuts, this path would only result in slightly lower policy rates than those implied by the futures market, a proxy for the consensus of investors.So what does it mean for our views across asset classes? In short, our central case is for mostly positive returns across fixed income and equities into year-end. But the Fed's increased tolerance for inflation is a new wrinkle that means investors are likely to experience more volatility along the way.Consider U.S. government bonds. A slower economy and falling policy rates argue for lower Treasury yields. But if investors grow more convinced that the Fed will tolerate firmer inflation, the curve could steepen further, with the risk of longer maturity yields falling less, or potentially even rising.Or consider corporate bonds. Our economic growth view is “slower but still expanding,” which generally bodes well for corporate balance sheets and, thus, the pricing of credit risk. That combined with lower front-end rates suggests a solid total return outlook for corporate credit, keeping us constructive on the asset class. But of course, if long end yields are moving higher, it would certainly cut against overall returns potential.Finally, consider the stock market. The base case is still constructive into year-end as U.S. earnings hold firm, and recent tax cuts should further help corporate cash flows. However, if long bonds sell off, this could put the rally at risk – at least temporarily, as my colleague Mike Wilson has highlighted; given that higher long-end yields are a challenge to the valuation of growth stocks.The risk? A repeat of the early-April dynamic where a long-end sell-off pressures valuations.Could we count on a shift in monetary policy to curb these risks? Or another public policy shift such as easing tariffs or Treasury adjusting its bond issuance plans? Possibly. But investors should understand this would be a reaction to market conditions, not a proactive or preventative shift. So bottom line, we still see many core markets set up to perform well, but the sailing should be less smooth than it has been in recent months.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 Co-Heads of Securitized Products Research Jay Bacow and James Egan explain why the macro backdrop could be changing in favor of agency mortgages after the Fed's annual meeting in Jackson Hole. Read more insights from Morgan Stanley.----- Transcript -----Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, Co-Head of Securitized Products Research at Morgan Stanley. James Egan: And I'm Jim Egan, the other Co-Head of Securitized Products Research at Morgan Stanley. Jay Bacow: Today we're here to talk about why mortgages offer value after Jackson Hole. It's Tuesday, September 2nd at 2pm in New York. James Egan: So, Jay, let's start with the big picture after Jackson Hole, the Fed seems like it's leaning towards cutting rates in a steady, almost programmatic fashion. And in prior episodes of Thoughts on the Market, you've heard different strategists at Morgan Stanley talk about the potential implications there.But for mortgages, what does this mean? Jay Bacow: Well, it takes a lot of the uncertainty out of the market, and that's a big deal. One of the worst-case scenario[s] for agency mortgages – that the investors are buying not mortgages that homeowners have – would've been the Fed staying on hold for much longer than expected. With that risk receding, the backdrop for investors owning agency mortgages feels a lot more supportive. And when we look at high quality assets, we think mortgages look like the cheapest option. Jim, you mentioned some of the previous strategists that come on Thoughts on the Market. Our Global Head of Corporate Credit Strategy, Andrew Sheets had highlighted recently how credit spreads are trading at basically the tights of the past 20 years. Mortgages are basically at the average level of the past 20 years. It seems attractive to us. James Egan: And that relative value really does matter. Investors are looking for places to earn yield without taking on too much credit risk. Mortgages, particularly agency mortgages with government guarantee there, they offer that balance. Jay Bacow: Right. And it's not just that balance, but when we think about what goes into the asset pricing, the supply and demand picture makes a big difference. And that we think is changing. One of the reasons that mortgages have underperformed corporate credit is that when you look at the composition of the buyers, the two largest holders of mortgages are the Fed and domestic banks. The Fed's obviously going to continue to run their portfolio down, but domestic banks have also been on the sidelines. And that's meant that money managers, and to a lesser extent overseas, have had to be the largest buyers. But we think that could change. James Egan: Right, with more clarity on Fed policy, banks in particular may get more comfortable adding mortgages to their balance sheets, though the exact timing depends on regulatory developments. REITs might also find this more compelling? Jay Bacow: Right. If the Fed's cutting rates, the front end is going to be lower, and that's going to mean that the incentive to move out of cash should be higher, and that's going to help both banks and likely REITs. But then there's also the supply side.Net issuance of conventional mortgage has been negative this year. That's obviously good. And some of the other technicals are improving as well. Vols are trading better, and all of this just contributes to a healthier landscape. James Egan: Right. And another thing that we've talked about when discussing mortgage valuations is the importance of volatility. If you're buying mortgages, you're inherently short rate volatility – and volatility has come down meaningfully since last year, even if it's still above pre-COVID norms. Lower volatility supported for mortgage valuations, especially when paired with a Fed that's cutting rates steadily. Though Jay, some of that already in the price? Jay Bacow: Yeah, look. We didn't say mortgages were cheap. We just said mortgages are trading at the long-term averages. But in an environment where stocks are near the all time high and credits near the tights of the past 20 years, we do see that value. And the Fed cutting rates, as we said, should incentivize investors to move out of cash and into securities. Now, there are risks when valuations and other asset classes are as tight or as high as they are. You could see risk assets broadly underperform and mortgages are a risk asset. So, if credit widens, mortgages would not be immune. James Egan: And timing is important here too, right? Especially we think about banks coming back if they wait for full clarity on Basel III proposals – that could be delayed. On top of that, there's prepayment risk… Jay Bacow: Yeah, if rates rally, then speeds could pick up and investors are going to demand more compensation. But summing it up. Mortgages look wide to alternative asset classes. The demand picture we think is going to improve, and more clarity around the Fed's path is going to be supportive as well. All of that we think makes us feel confident this is an environment that mortgages should do well. It's not about a snap tighter and spread, it's more about getting paid carry in an environment where spreads can grind in over time. But Jim, we like mortgages. It's been a pleasure talking to you. James Egan: Pleasure talking to you too, Jay, and to all of you regularly hearing us out. Thank you for listening to another episode of Thoughts on the Market. Please leave a review or a like wherever you get this podcast and share Thoughts on the Market with a friend or colleague today. Jay Bacow: Go smash that subscribe button.

In the second of a two-part episode, our Chief U.S. Economist Michael Gapen and Global Head of Macro Strategy Matthew Hornbach talk about how Treasury yields and the U.S. dollar could react to the possible Fed rate path.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. Yesterday we talked about Michael's reaction to the Jackson Hole meeting last week, and our assessment of the Fed's potential policy pivot. Today my reaction to the price action that followed Chair Powell's speech and what it means for our outlook for the interest rate markets and the U.S. dollar. It's Friday, August 29th at 10am in New York, Michael Gapen: Okay, Matt. Yesterday you were in the driver's seat asking me questions about how Chair Powell's comments at Jackson Hole influenced our views around the outlook for monetary policy. I'd like to turn it back to you, if I may. What did you make of the price action that followed the meeting? Matthew Hornbach: Well, I think it's safe to say that a lot of investors were surprised just as you were by what Chair Powell delivered in his opening remarks. We saw a fairly dramatic decline in short-term interest rates, taking the two-year Treasury yield down quite a bit. And at the same time, we also saw the yield curve steepen, which means that the two-year yield fell much more than the 10-year yield and the 30-year bond yield fell. And I think what investors were thinking with this surprise in mind is just what you mentioned earlier – that perhaps this is a Fed that does have slightly more tolerance for above target inflation. And so, you can imagine a world in which, if the Fed does in fact cut rates, as you're forecasting, or more aggressively than you're forecasting, amidst an environment where inflation continues to run above target. Then you could see that investors would gravitate towards shorter maturity treasuries because the Fed is cutting interest rates and typically shorter-term Treasury yields follow the Fed funds rate up or down. But at the same time reconsider their love of duration and taking duration risk. Because when you move out the yield curve in your investments and you're buying a 10-year bond or a 30-year bond, you are inherently taking the view that the Fed does care about inflation and keeping it low and moving it back to target. And if this Fed still cares about that, but perhaps on the margin slightly less than it did before, then perhaps investors might demand more compensation for owning that duration risk in the long end of the yield curve. Which would then make it more difficult for those long-term yields to fall. And so, I think what we saw on Friday was a pretty classic response to a Federal Reserve speech in this case from the Chair that was much more dovish than investors had anticipated going in. The final thing I'd say in this regard is the following Monday, when we looked at the market price action, there wasn't very much follow through. In other words, the Treasury market didn't continue to rally, yields didn't continue to fall. And I think what that is telling you is that investors are still relatively optimistic about the economy at this point. Investors aren't worried that the Fed knows something that they don't. And so, as a result, we didn't really see much follow through in the U.S. Treasury market on the following Monday. So, I do think that investors are going to be watching the data much like yourself, and the Fed. And if we do end up getting worse data, the Treasury market will likely continue to perform very well. If the data rebounds, as you suggested in one of your alternative scenarios, then perhaps the Treasury rally that we've seen year-to-date will take a pause. Michael Gapen: And if I can follow up and ask you about your views on the trough of any cutting cycle. We have generally been projecting an end to the easing cycle that's below where markets are pricing. So, in general, a deeper cutting cycle. Could some of that – the market viewpoint of greater tolerance for inflation be driving market prices vis-a-vis what we're thinking? Or how do you assess where the market prices, the trough of any cutting cycle, versus what we're thinking at any point in time? Matthew Hornbach: So, once you move beyond the forecastable horizon, which you tell me… Michael Gapen: About three days … Matthew Hornbach: Probably about three days. But, you know, within the next couple of months, let's say. The way that the market would price a central bank's likely policy path, or average policy path, is going to depend on how investors are thinking about the reaction function of the central bank. And so, to the extent that it becomes clear that the central bank, the Fed, is increasingly tolerant of above target inflation in order to ensure that the balance of risks don't become unbalanced, let's say. Then I think you would expect to see that show up in a lower market price for the policy rate at which the Fed eventually stops the easing cycle, which would presumably be lower than what investors might have been thinking earlier. As we kind of make our way from here, closer to that trough policy rate, of course, the data will be in the driver's seat. So, if we saw a scenario in which the economic activity data rebounded, then I would say that the way that the market is pricing the trough policy rate should also rebound. Alternatively, if we are trending towards a much weaker labor market, then of course the market would continue to price lower and lower trough policy rates. Michael Gapen: So, Matt, with our new baseline path for Fed policy with quarterly rate cuts starting in September through the end of 2026, how has your view changed on the likely direction and path for Treasury yields and the U.S. dollar? Matthew Hornbach: So, when we put together our quarterly projections for Treasury yields, of course we link them very closely with your forecast for Fed policy, activity in the U.S. economy, as well as inflation. So, we will likely have to modify slightly the exact way in which we get down to a 4 percent 10-year yield by the end of this year, which is our current forecast, and very likely to remain our forecast going forward. I don't see a need at this point to adjust our year-end forecast for 10-year Treasury yields. When we move into 2026, again here we would also likely make some tweaks to our quarterly path for 10-year Treasury yields. But at this point, I'm not inclined to change the year end target for 2026. Of course, the end of 2026 is a lifetime away it seems from the current moment, given that we're going to have so much to do and deal with in 2026. For example, we're going to have a midterm election towards the end of the year, we will have a new chair of the Federal Reserve, and there's going to be a lot for us to deal with. So, in thinking about where are 10-year yield is going to end 2026, it's not just about the path of the Fed funds rate between now and then. It's also the events that occur, that are much more difficult to forecast than let's say the 10-year Treasury yield itself is – which is also very difficult to forecast. But it's also about by the time we get to the end of 2026, what are investors going to be thinking about 2027? You know, that is really the trick to forecasting. So, at this point, we're not inclined to change the levels to which we think Treasury yields will get to. But we are inclined to tweak the exact quarterly path. Michael Gapen: And the U.S. dollar? Matthew Hornbach: , We have been U.S. Dollar bears since the beginning of the year, and the U.S. dollar has in fact lost about 10 percent of its value relative to its broad set of trading partners. We do think that the dollar will continue to lose value over the course of the next 12 to 18 months. The exact quarterly path, we may have to tweak somewhat because also the dollar is not just about the Fed path. It's also about the path for the ECB, and the path for the Bank of England, and the path for the Bank of Japan, etcetera. But in terms of the big picture? The big picture is that the dollar should de continue to depreciate in our view. And that's what we'll be telling our investors.So, Mike, thanks for taking the time to talk. Michael Gapen: Great speaking with you, Matt. Matthew Hornbach: And thanks for listening. We look forward to bringing you another episode around the time of the September FOMC meeting where we will update our views once again. 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.

In the first of a two- part episode, our Chief U.S. Economist Michael Gapen and Global Head of Macro Strategy Matthew Hornbach discuss the outcome of the Jackson Hole meeting and the outlook for the U.S. economy and the Fed rate path during the rest of the year. 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: Last Friday, the Jackson Hole meeting delivered a big surprise to markets. Both stocks and bonds reacted decisively.Today, the first of a two-part episode. We'll discuss Michael's reaction to Chair Powell's Jackson Hole comments and what they mean for his view on the outlook for monetary policy. Tomorrow, the outlook for interest rate markets and the US dollar. It's Thursday, August 28th at 10am in New York. So, Mike, here we are after Jackson Hole. The mood this year felt a lot more hawkish, or at least patient than what we saw last week. And Chair Powell really caught my attention when he said, “with policy and restrictive territory, the baseline outlook for the shifting balance of risks may warrant adjusting our policy stance.” That line has been on my mind ever since. So, let's dig into it. What's your gut reaction?Michael Gapen: Yeah, Matt, it was a surprise to me, and I think I would highlight three aspects of his Jackson Hole comments that were important to me. So, I think what happened here, of course, is the Fed became much more worried about downside risk to the labor market after the July employment report, right? So, at the July FOMC meeting, which came before that report, Powell had said, ‘Well, you know, slow payroll growth is fine as long as the unemployment rate stays low.' And that's very much in line with our view. But sometimes these things are easier said than done. And I think the July employment report told them perhaps there's more weakness in the labor market now than they thought.So, I think the messaging here is about a shift towards risk management mode. Maybe we need to put in a couple policy rate cuts to shore up the labor market. And I think that was the big change and I think that's what drove the overall message in the statement. But there were two other parts of it that I think were interesting, you know. From the economist's point of view, when the chair explicitly writes in a speech that ‘the economy now may warrant adjustments in our policy stance,' right? I mean, that's a big deal. It suggests that the decision has been largely made, and I think anytime the Fed is taking a change of direction, either easing or tightening, they're not just going to do one move. So, they're signaling that they're likely prepared to do a series of moves, and we can debate about what that means. And the third thing that struck me is right before the line that you mentioned he did qualify the need to adjust rates by saying, well, whatever we do, we should, “Proceed cautiously.” So, a year ago, as you recall, the Fed opened up with a big 50 basis point rate cut, which was a surprise. And cut at three successive meetings. So, a hundred basis points of cuts over three meetings, starting with a 50 basis point cut. I think the phraseology ‘proceeds carefully' is a signal to markets that, ‘Hey, don't expect that this time around.' The world's different. This is a risk management discussion. And so, we think, two rate cuts before year end would be most likely. Maybe you get three. But I don't think we should expect a large 50 basis point cut at the September meeting. So those would be my thoughts. Downside risk to the labor market – putting this into words says something important to me. And the ‘proceed cautiously' language I think is something markets also need to take into account.Matthew Hornbach: So how do you translate that into a forecasted path for the Fed? I mean, in terms of your baseline outlook, how many rate cuts are you forecasting this year? And what about in 2026?Michael Gapen: Right. So, we previously; we thought what the Fed was doing was leaning against risks that inflation would be persistent. They moved into that camp because of how fast tariffs were going up and the overall level of the effective tariff rate. So, we thought they would stay on hold for longer and when they move, move more rapidly. What they're saying now in a risk management sense, right; they still think risk to inflation is to the upside, but the unemployment rate is also to the upside. And they're looking at both of those as about equally weighted. So, in a baseline outlook where the Fed's not assuming a recession and neither are we, you get a maybe a dip in growth and a rise in inflation. But growth recovers and inflation comes down next year. In that world, and with the idea that you're proceeding cautiously, they're kind of moving and evaluating, moving and evaluating.So, I think the translation here is: a path of quarterly rate cuts between now and the end of 2026. So, six rate cuts, but moving quarterly, like September and December this year; March, June, September, and December next year; which would take us to a terminal target range of 2.75 to 3. So rather than moving later and more rapidly, you move earlier, but more gradually. That's how we're thinking about it now.Matthew Hornbach: And that's about a 25 basis point upward adjustment to the trough policy rate that you were forecasting previously…Michael Gapen: That's right. So, the prior thought was a Fed that moves later may have to cut more, right? Because you're – by holding policy tighter for longer – you're putting more downward weight on the economy from a cyclical perspective. So, you may end up cutting more to essentially reverse that in 2026. So, by moving earlier, maybe a Fed that moves a little earlier, cuts a little less.Matthew Hornbach: In terms of the alternative outcomes. Obviously, in any given forecast, things can go not as expected. And so, if the path turns out to be something other than what you're forecasting today, what would be some of the more likely outcomes in your mind?Michael Gapen: Yeah, as we like to say in economics, we forecast so we know where we're wrong. So, you're right, the world can evolve very differently. So just a couple thoughts. You know, one, now that we're thinking the Fed does cut in September, what gets them not to cut? You'd need a – I think, a really strong August employment report; something around 225,000 jobs, which would bring the three-month moving average back to around 150, right. That would be a signal that the May-June downdraft was just a post Liberation Day pothole and not trend deterioration in the labor market. So that, you know, would be one potential alternative. Another is – although we've projected quarterly paths in this kind of nice gradual pace of cuts, we could get a repeat of last year where the Fed cuts 50 to 75 basis points by year end but realizes the labor market has not rolled over. And then we get some tariff pass through into inflation. And maybe residual seasonality and inflation in Q1. And then the Fed goes on hold again, then cuts could resume later in the year. And I also think in the backdrop here, when the Fed is saying we are easing in a risk management sense and we're easing maybe earlier than we otherwise would – that suggests the Fed has greater tolerance for inflation. So, understanding how much tolerance this Fed or the next one has for above target inflation, I think could influence how many rate cuts you eventually get in in 2026. So, we could even see a deeper trough through greater inflation tolerance. And finally, of course, we're not out of the woods with respect to recession risk. We could be wrong. Maybe the labor market is trend weakening and we're about to find that out. Growth is slowing. Growth was about 1.3 percent in the first half of the year. Final sales is softer. Of course, in a recession alternative scenario, the Fed's probably cutting much deeper, maybe down to 1 50 to 175 on the funds rate.So, I mean, Matt, you make a good point. There's still many different ways the economy can evolve and many different ways that the Fed's path for policy rates can evolve.Matthew Hornbach: Well, that's a good place to bring this Part 1 episode to an end. Tune in tomorrow, for my reaction to the market price action that followed Chair Powell's speech -- and what it means for our outlook for interest rate markets and the U.S. dollar.Mike, 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.

Our Head of Corporate Credit Research Andrew Sheets discusses why a potential start of monetary easing by the Federal Reserve might be a cause for concern 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 – could interest rate cuts by the Fed unleash more corporate aggressiveness? It's Wednesday, August 27th at 2pm in London. Last week, the Fed chair, Jerome Powell hinted strongly that the Central Bank was set to cut interest rates at next month's meeting. While this outcome was the market's expectation, it was by no means a given.The Fed is tasked with keeping unemployment and inflation low. The US unemployment rate is low, but inflation is not only above the Fed's target, it's recently been trending in the wrong direction. And to bring inflation down the Fed would typically raise interest rates, not lower them. But that is not what the Fed appears likely to do; based importantly on a belief that these inflationary pressures are more temporary, while the job market may soon weaken. It is a tricky, unusual position for the Fed to be in, made even more unusual by what is going on around them. You see, the Fed tries to keep the economy in balance; neither too hot or too cold. And in this regard, its interest rate acts a bit like taps on a faucet. But there are other things besides this rate that also affect the temperature of the economic water. How easy is it to borrow money? Is the currency stronger or weaker? Are energy prices high or low? Is the equity market rising or falling? Collectively these measures are often referred to as financial conditions. And so, while it is unusual for the Federal Reserve to be lowering interest rates while inflation is above its target and moving higher, it's probably even more unusual for them to do so while these other governors of economic activity, these financial conditions are so accommodative. Equity valuations are high. Credit spreads are tight. Energy prices are low. The US dollar is weak. Bond yields have been going down, and the US government is running a large deficit. These are all dynamics that tend to heat the economy up. They are more hot water in our proverbial sink. Lowering interest rates could now raise that temperature further. For credit, this is mildly concerning, for two rather specific reasons. Credit is currently sitting with an outstanding year. And part of this good year has been because companies have generally been quite conservative, with merger activity modest and companies borrowing less than the governments against which they are commonly measured. All this moderation is a great thing for credit. But the backdrop I just described would appear to offer less moderation. If the Fed is going to add more accommodation into an already easy set of financial conditions, how long will companies really be able to resist the temptation to let the good times roll? Recently merger activity has started to pick up. And historically, this higher level of corporate aggressiveness can be good for shareholders. But it's often more challenging to lenders. But it's also possible that the Fed's caution is correct. That the US job market really is set to weaken further despite all of these other supportive tailwinds. And if this is the case, well, that also looks like less moderation. When the Fed has been cutting interest rates as the labor market weakens, these have often been some of the most challenging periods for credit, given the risk to the overall economy. So much now rests on the data what the Fed does and how even new Fed leadership next year could tip the balance. But after significant outperformance and with signs pointing to less moderation ahead, credit may now be set to lag its fixed income peers. Thank you as always for listening. If you find Thoughts to 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 Adam Jonas and Alex Straton discuss how tech-savvy young professionals are influencing retail, brand loyalty, mobility trends, and the broader technology landscape through their evolving consumer choices. Read more insights from Morgan Stanley.----- Transcript -----Adam Jonas: Welcome to Thoughts on the Market. I'm Adam Jonas, Morgan Stanley's Embodied AI and Humanoid Robotics Analyst. Alex Straton: And I'm Alex Straton, Morgan Stanley's U.S. Softlines Retail and Brands Analyst. Adam Jonas: Today we're unpacking our annual summer intern survey, a snapshot of how emerging professionals view fashion retail, brands, and mobility – amid all the AI advances.It is Tuesday, August 26th at 9am in New York.They may not manage billions of dollars yet, but Morgan Stanley's summer interns certainly shape sentiment on the street, including Wall Street. From sock heights to sneaker trends, Gen Z has thoughts. So, for the seventh year, we ran a survey of our summer interns in the U.S. and Europe. The survey involved more than 500 interns based in the U.S., and about 150 based in Europe. So, Alex, let's start with what these interns think about fashion and athletic footwear. What was your biggest takeaway from the intern survey? Alex Straton: So, across the three categories we track in the survey – that's apparel, athletic footwear, and handbags – there was one clear theme, and that's market fragmentation. So, for each category specifically, we observed share of the top three to five brands falling over time. And what that means is these once dominant brands, as consumer mind share is falling – and it likely makes them lower growth margin and multiple businesses over time. At the same time, you have smaller brands being able to captivate consumer attention more effectively, and they have staying power in a way that they haven't necessarily historically. I think one other piece I would just add; the rise of e-commerce and social media against a low barrier to entry space like apparel and footwear means it's easier to build a brand than it has been in the past. And the intern survey shows us this likely continues as this generation is increasingly inclined to shop online. Their social media usage is heavy, and they heavily rely on AI to inform, you know, their purchases.So, the big takeaway for me here isn't that the big are getting bigger in my space. It's actually that the big are probably getting smaller as new players have easier avenues to exist. Adam Jonas: Net apparel spending intentions rose versus the last survey, despite some concern around deteriorating demand for this category into the back half. What do you make of that result? Alex Straton: I think there were a bit conflicting takes from the survey when I look at all the answers together. So yes, apparel spending intentions are higher year-over-year, but at the same time, clothing and footwear also ranked as the second most category that interns would pull back on should prices go up. So let me break this down. On the higher spending intentions, I think timing played a huge role and a huge factor in the results. So, we ran this in July when spending in our space clearly accelerated. That to me was a function of better weather, pent up demand from earlier in the quarter, a potential tariff pull forward as headlines were intensifying, and then also typical back to school spending. So, in short, I think intention data is always very heavily tethered to the moment that it's collected and think that these factors mean, you know, it would've been better no matter what we've seen it in our space. I think on the second piece, which is interns pulling back spend should prices go up. That to me speaks to the high elasticity in this category, some of the highest in all of consumer discretionary. And that's one of the few drivers informing our cautious demand view on this space as we head into the back half. So, in summary on that piece, we think prices going higher will become more apparent this month onwards, which in tandem with high inventory and a competitive setup means sales could falter in the group. So, we still maintain this cautious demand view as we head into the back half, though our interns were pretty rosy in the survey. Adam Jonas: Interesting. So, interns continue to invest in tech ecosystems with more than 90 percent owning multiple devices. What does this interconnectedness mean for companies in your space? Alex Straton: This somewhat connects to the fragmentation theme I mentioned where I think digital shopping has somewhat functioned as a great equalizer in the space and big picture. I interpret device reliance as a leading indicator that this market diversification likely continues as brands fight to capture mobile mind share. The second read I'd have on this development is that it means brands must evolve to have an omnichannel presence. So that's both in store and online, and preferably one that's experiential focus such that this generation can create content around it. That's really the holy grail. And then maybe lastly, the third takeaway on this is that it's going to come at a cost. You, you can't keep eyeballs without spend. And historical brick and mortar retailers spend maybe 5 to 10 percent of sales on marketing, with digital requiring more than physical. So now I think what's interesting is that brands in my space with momentum seem to have to spend more than 10 percent of sales on marketing just to maintain popularity. So that's a cost pressure. We're not sure where these businesses will necessarily recoup if all of them end up getting the joke and continuing to invest just to drive mind share. Adam, turning to a topic that's been very hot this year in your area of expertise. That's humanoid robots. Interns were optimistic here with more than 60 percent believing they'll have many viable use cases and about the same number thinking they'll replace many human jobs. Yet fewer expect wide scale adoption within five years. What do you think explains this cautious enthusiasm? Adam Jonas: Well actually Alex, I think it's pretty smart. There is room to be optimistic. But there's definitely room to be cautious in terms of the scale of adoption, particularly over five years. And we're talking about humanoid robots. We're talking about a new species that's being created, right? This is bigger than just – will it replace our job? I mean, I don't think it's an exaggeration to ask what does this do to the concept of being human? You know, how does this affect our children and future generations? This is major generational planetary technology that I think is very much comparable to electricity, the internet. Some people say the wheel, fire, I don't know. We're going to see it happen and start to propagate over the next few years, where even if we don't have widespread adoption in terms of dealing with it on average hour of a day or an average day throughout the planet, you're going to see the technology go from zero to one as these machines learn by watching human behavior. Going from teleoperated instruction to then fully autonomous instruction, as the simulation stack and the compute gets more and more advanced. We're now seeing some industry leaders say that robots are able to learn by watching videos. And so, this is all happening right now, and it's happening at the pace of geopolitical rivalry, Sino-U.S. rivalry and terra cap, you know, big, big corporate competitive rivalry as well, for capital in the human brain. So, we are entering an unprecedented – maybe precedented in the last century – perhaps unprecedented era of technological and scientific discovery that I think you got to go back to the European and American Enlightenment or the Italian Renaissance to have any real comparisons to what we're about to see. Alex Straton: So, keeping with this same theme, interns showed strong interest in household robots with 61 percent expressing some interest and 24 percent saying they're very or extremely interested. I'm going to take you back to your prior coverage here, Adam. Could this translate into demand for AI driven mobility or smart infrastructure? Adam Jonas: Well, Alex, you were part of my prior coverage once upon a time. We were blessed with having you on our team for a year, and then you left me… Alex Straton: My golden era. Adam Jonas: But you came back, you came back. And you've done pretty well. So, so look, imagine it's 1903, the Wright Brothers just achieved first flight over the sands at Kitty Hawk. And then I were to tell you, ‘Oh yeah, in a few years we're going to have these planes used in World War I. And then in 1914, we'd have the first airline going between Tampa and St. Petersburg.' You'd say, ‘You're crazy,' right? The beauty of the intern survey is it gives the Morgan Stanley research department and our clients an opportunity to engage that surface area with that arising – not just the business leader – but that arising tech adopter. These are the people, these are the men and women that are going to kind of really adopt this much, much faster. And then, you know, our generation will get dragged into it eventually. So, I think it says; I think 61 percent expressing even some interest. And then 24 [percent], I guess, you know… The vast majority, three quarters saying, ‘Yeah, this is happening.' That's a sign I think, to our clients and capital market providers and regulators to say, ‘This won't be stopped. And if we don't do it, someone else will.' Alex Straton: So, another topic, Generative AI. It should come as no surprise really, that 95 percent of interns use that tool monthly, far ahead of the general population. How do you see this shaping future expectations for mobility and automation? Adam Jonas: So, this is what's interesting is people have asked kinda, ‘What's that Gen AI moment,' if you will, for mobility? Well, it really is Gen AI. Large Language Models and the technologies that develop the Large Language Models and that recursive learning, don't just affect the knowledge economy, right. Or writing or research report generation or intelligence search. It actually also turns video clips and physical information into tokens that can then create and take what would be a normal suburban city street and beautiful weather with smiling faces or whatever, and turn it into a chaotic scene of, you know, traffic and weather and all sorts of infrastructure issues and potholes. And that can be done in this digital twin, in an omniverse. A CEO recently told me when you drive a car with advanced, you know, Level 2+ autonomy, like full self-driving, you're not just driving in three-dimensional space. You're also playing a video game training a robot in a digital avatar. So again, I think that there is quite a lot of overlap between Gen AI and the fact that our interns are so much further down that curve of adoption than the broader public – is probably a hint to us is we got to keep listening to them, when we move into the physical realm of AI too. Alex Straton: So, no more driving tests for the 16-year-olds of the future... Adam Jonas: If you want to. Like, I tell my kids, if you want to drive, that's cool. Manual transmission, Italian sports cars, that's great. People still ride horses too. But it's just for the privileged few that can kind of keep these things in stables. Alex Straton: So, let me turn this into implications for companies here. Gen Z is tech fluent, open to disruption? How should autos and shared mobility providers rethink their engagement strategies with this generation? Adam Jonas: Well, that's a huge question. And think of the irony here. As we bring in this world of fake humans and humanoid robots, the scarcest resource is the human brain, right? So, this battle for the human mind is – it's incredible. And we haven't seen this really since like the Sputnik era or real height of the Cold War. We're seeing it now play out and our clients can read about some of these signing bonuses for these top AI and robotics talent being paid by many companies. It kind of makes, you know, your eyes water, even if you're used to the world of sports and soccer, . I think we're going to keep seeing more of that for the next few years because we need more brains, we need more stem. I think it's going to do; it has the potential to do a lot for our education system in the United States and in the West broadly. Alex Straton: So, we've covered a lot around what the next generation is interested in and, and their opinion. I know we do this every year, so it'll be exciting to see how this evolves over time. And how they adapt. It's been great speaking with you today, Adam. Adam Jonas: Absolutely. Alex, thanks for your insights. And to our listeners, stay curious, stay disruptive, and we'll catch you next time. 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.

Opinions by market pundits have been flying since Fed Chair Powell's remarks at Jackson Hole last week, leaving the door open for interest rate cuts as soon as in September. Our CIO and Chief U.S. Equity Strategist Mike Wilson explains his continued call for a bullish outlook on U.S. stocks.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief U.S. Equity Strategist. Today on the podcast I'll be discussing the Fed's new signaling on policy and what it means for stocks. It's Monday, August 25th at 11:30am in New York. So, let's get after it. Over the past few months, the markets started to anticipate a Fed pivot to a more dovish stance this fall. More specifically, the bond market started to price in a very high likelihood for the Fed to start cutting interest rates again in September. Equities have taken their cues from this signaling in the bond market by trading higher through most of the summer – despite lingering concerns about tariffs, international conflicts and valuation. I have remained bullish throughout this period given our focus on historically strong earnings revisions and the view that the Fed's next move would be to cut rates even if the timing remained uncertain. Last week, the Fed held its annual symposium in Jackson Hole where they typically discuss near term policy intentions as well as larger considerations for their strategic policy framework. We learned two key things. First, the Fed seems closer to cutting rates in September than the last time Chair Powell spoke publicly. This change also comes after a week in which the markets were left wondering if he would remain more hawkish until inflation data confirmed what markets have already figured out. Clearly, Powell leaned more dovish. And with markets a bit nervous going into his speech on Friday morning, equities rallied sharply the rest of the day. Second, the Fed also indicated that it will no longer target average inflation at 2 percent. Instead, it will make 2 percent the target at all times. This means the Fed will not tolerate inflation above or below target to manage the average like it did in 2021-22. It also suggests a more hawkish Fed should the economy recover more strongly than is currently expected or inflation reaccelerates. From my standpoint, this is bullish for stocks over the next few weeks and markets can now fully anticipate Fed cuts in September. However, I see a few risks for September and October worth thinking about as the S&P 500 approaches our longstanding 6500 target. The first risk is the Fed decides to not cut after all because either growth is better or inflation is higher than expected. That would be worth a small correction in stocks given the high likelihood of a cut that is now priced in. The second risk is the Fed cuts but the bond market decides it's being too carefree about inflation and longer term bonds sell off. A sharp rise in 10-year Treasury yields would likely elicit a bigger correction in stocks until the Treasury and Fed regain control. Here's the important message I want to leave you with. A major bear market ended in April, and a new bull market began. It's rare for new bull markets to last only four months and more likely they last one-to-two years, at a minimum. What that means is that any dips we get this fall are likely to be buying opportunities for longer term investors. What gives us even more confidence in that statement is that earnings revisions continue to move sharply higher. The Fed uses economic data to make its decisions and that data is generally backward looking. Equity investors look at company data and guidance which is forward looking. This fact alone explains the wide divergence between equity prices and Fed decisions, which tend to be late and after equity markets have already figured out what's going to happen rather than what's in the past. Bottom line, I remain bullish on the next 12 months given what companies and equity markets are telling us. 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!

Credit spreads are at the lowest levels in more than two decades, indicating health of the corporate sector. However, our Head of Corporate Credit Research Andrew Sheets highlights two forces investors should monitor moving forward.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 – what to make of credit spreads as they hit some of their lowest levels in over 20 years? And what could change that? It's Friday, August 22nd at 2pm in London. The credit spread is the difference between the higher yield an investor gets for lending to a company relative to the government. This difference in yield is a reflection of perceived differences in risk. And bond investors spend a lot of time thinking, debating, and trading what they think it should be. It increases as the rating of a company falls and usually increases for bonds with longer maturities relative to shorter ones. The reason one invests in credit is to hopefully pick up some extra yield relative to buying a government bond and do so without taking too much additional risk. The challenge today is that these spreads are very low – or tight, in market parlance. In the U.S. corporate bonds with Investment Grade ratings only pay about three-quarters of a percent more than U.S. government bonds of the same maturity. It's a similar difference between the yield on companies in Europe and the yield on German debt, the safest benchmark in Europe. And so, in the U.S. these are the lowest spread levels since 1998, and in Europe, they're the lowest levels since 2007. The relevant question would seem to be, well, what changes this? One way of thinking about valuations in investing – and spreads are certainly a measure of valuation – is whether levels are so extreme that there's not really any precedent for them being sustained for an extended period of time. But for credit, this is a tricky argument. Spreads have been lower than their current levels. They were that way in the mid 1990s in the U.S., and they were that way in the mid 2000s in Europe, and they stayed that way for several years. And if we go back even further in time to the 1950s? Well, it looks like U.S. spreads were lower still. Another way to think about risk premiums – and spreads are also certainly a measure of risk premium – is: does it compensate you for the extra risk? And again, even with spreads quite low, this is tricky. Only making an extra three-quarters of a percent to invest in corporate bonds feels like a pretty miserly amount to both the casual observer and yours truly, a seasoned credit professional. But when we run the numbers, the extra losses that you've actually experienced for investing in Investment Grade bonds over time relative to governments, it's actually been about half of that. And that holds up over a relatively long period of time. And so, while spreads are very low by historical standards, extreme valuations don't always correct quickly. They often need another force to impact them. With credit currently benefiting from strong investor demand, good overall yields, and a better borrowing trajectory than governments, we'd be watching two dynamics for this to change. First weaker growth than we have at the moment would argue strongly that the risk premium and corporate debt needs to be higher. While the levels have varied, credit spreads have always been significantly wider than current levels in a U.S. recession; and that's looking out over a century of data. And so, if the odds of a recession were to go up, credit, we think, would have to take notice. Second, the fiscal trajectory for governments is currently worse than corporates, which argues for a tighter than normal corporate spread. And the recent U.S. budget bill only further reinforced this by increasing long-term borrowing for the U.S. government, while extending corporate tax cuts to the private sector. But the risk would be that companies start to take these benefits and throw caution to the wind and start to borrow more again – to invest or buy other companies. We haven't seen this type of animal spirit yet. But history would suggest that if growth holds up, it's usually just a matter of time. Thank you as always for listening. If you find Thoughts on the Market useful, please let us know by leaving a review wherever you found us. And also tell a friend or colleague about us today.

From China's rapid electric vehicle adoption to the rise of robotaxis, humanoids, and flying vehicles, our analysts Adam Jonas and Tim Hsiao discuss how AI is revolutionizing the global auto industry.Read more insights from Morgan Stanley.----- Transcript -----Adam Jonas: Welcome to Thoughts on the Market. I'm Adam Jonas. I lead Morgan Stanley's Research Department's efforts on embodied AI and humanoid robots. Tim Hsiao: And I'm Tim Hsiao, Greater China Auto Analyst. Adam Jonas: Today – how the global auto industry is evolving from horsepower to brainpower with the help of AI. It's Thursday, August 21st at 9am in New York. Tim Hsiao: And 9pm in Hong Kong. Adam Jonas: From Detroit to Stuttgart to Shanghai, automakers are making big investments in AI. In fact, AI is the engine behind what we think will be a $200 billion self-driving vehicle market by 2030. Tim, you believe that nearly 30 percent of vehicles sold globally by 2030 will be equipped with Level 2+ smart driving features that can control steering, acceleration, braking, and even some hands-off driving. We expect China to account for 60 percent of these vehicles by 2030. What's driving this rapid adoption in China and how does it compare to the rest of the world? Tim Hsiao: China has the largest EV market globally, and the country's EV sales are not only making up over 50 percent of the new car sales locally in China but also accounting for over 50 percent of the global EV sales. As a result, the market is experiencing intense competition. And the car makers are keen to differentiate with the technological innovation, to which smart driving serve[s] as the most effective means. This together with the AI breakthrough enables China to aggressively roll out Level 2+ urban navigation on autopilot. In the meantime, Chinese government support, and cost competitive supply chains also helps. So, we are looking for China's the adoption of Level 2+ smart driving on passenger vehicle to reach 25 percent by end of this year, and 60 percent by 2030 versus 6 percent and 17 percent for the rest of the world during the same period. Adam Jonas: How is China balancing an aggressive rollout with safety and compliance, especially as it moves towards even greater vehicle automation going forward? Tim Hsiao: Right. That's a great and a relevant question because over the years, China has made significant strides in developing a comprehensive regulatory framework for autonomous vehicles. For example, China was already implementing its strategies for innovation and the development of autonomous vehicles in 2022 and had proved several auto OEM to roll out Level 3 pilot programs in 2023. Although China has been implementing stricter requirements since early this year; for example, banning terms like autonomous driving in advertisement and requiring stricter testing, we still believe more detailed industry standard and regulatory measures will facilitate development and adoption of Level 2+ Smart driving. And this is important to prevent, you know, the bad money from driving out goods. Adam Jonas: One way people might encounter this technology is through robotaxis. Now, robotaxis are gaining traction in China's major cities, as you've been reporting. What's the outlook for Level 4 adoption and how would this reshape urban mobility? Tim Hsiao: The size of Level 4+ robotaxi fleet stays small at the moment in China, with less than 1 percent penetration rate. But we've started seeing accelerating roll out of robotaxi operation in major cities since early this year. So, by 2030, we are looking for Level 4+ robotaxis to account for 8 percent of China's total taxi and ride sharing fleet size by 2030. So, this adoption is facilitated by robust regulatory frameworks, including designated test zones and the clear safety guidance. We believe the proliferation of a Level 4 robotaxi will eventually reshape the urban mobility by meaningfully reducing transportation costs, alleviating traffic congestion through optimized routing and potentially reducing accidents. So, Adam, that's the outlook for China. But looking at the global trends beyond China, what are the biggest global revenue opportunities in your view? Is that going to be hardware, software, or something else? Adam Jonas: We are entering a new scientific era where the AI world, the software world is coming into far greater mental contact, and physical contact, with the hardware world and the physical world of manufacturing. And it's being driven by corporate rivalry amongst not just the terra cap, you know, super large cap companies, but also between public and private companies and competition. And then it's being also fueled by geopolitical rivalry and social issues as well, on a global scale. So, we're actually creating an entirely new species. This robotic species that yes, is expressed in many ways on our roads in China and globally – but it's just the beginning. In terms of whether it's hardware, software, or something else – it's all the above. What we've done with a across 40 sectors at Morgan Stanley is to divide the robot, whether it flies, drives, walks, crawls, whatever – we divide it into the brain and the body. And the brain can be divided into sensors and memory and compute and foundational models and simulation. The body can be broken up into actuators, the kind of motor neuron capability, the connective tissue, the batteries. And then there's integrators, that kind of do it all – the hardware, the software, the integration, the training, the data, the compute, the energy, the infrastructure. And so, what's so exciting about this opportunity for our clients is there's no one way to do it. There's no one region to do it. So, stick with us folks. There's a lot of – not just revenue opportunities – but alpha-generating opportunities as well. Tim Hsiao: We are seeing OEMs pivot from cars to humanoids and the electric vertical takeoff in the landing vehicles or EVOTL. Our listeners may have seen videos of these vehicles, which are like helicopters and are designed for urban air mobility. How realistic is this transition and what's the timeline for commercialization in your view? Adam Jonas: Anything that can be electrified will be electrified. Anything that can be automated will be automated. And the advancement of the state of the art in robotaxis and Level 2, Level 3, Level 4+ autonomy is directly transferrable to aviation. There's obviously different regulatory and safety aspects of aviation, the air traffic control and the FAA and the equivalent regulatory bodies in Europe and in China that we will have to navigate, pun intended. But we will get there. We will get there ultimately because taking these technologies of automation and electronic and software defined technology into the low altitude economy will be a superior experience and a vastly cheaper experience. Point to point, on a per person, per passenger, per ton, per mile basis. So the Wright brothers can finally get excited that their invention from 1903, quite a long time ago, could finally, really change how humans live and move around the surface of the earth; even beyond, few tens of thousands of commercial and private aircraft that exist today. Tim Hsiao: The other key questions or key focus for investors is about the business model. So, until now, the auto industry has centered on the car ownership model. But with this new technology, we've been hearing a new model, as you just mentioned, the shared mobility and the autonomous driving fleet. Experts say it could be major disruptor in this sector. So, what's your take on how this will evolve in developed and emerging markets? Adam Jonas: Well, we think when you take autonomous and shared and electric mobility all the way – that transportation starts to resemble a utility like electricity or water or telecom; where the incremental mile traveled is maybe not quite free, but very, very, very low cost. Maybe only; the marginal cost of the mile traveled may only just be the energy required to deliver that mile, whether it's a renewable or non-renewable energy source. And the relationship with a car will change a lot. Individual vehicle ownership may go the way of horse ownership. There will be some, but it'll be seen as a nostalgic privilege, if you will, to own our own car. Others would say, I don't want to own my own car. This is crazy. Why would anyone want to do that? So, it's going to really transform the business model. It will, I think, change the structure of the industry in terms of the number of participants and what they do. Not everybody will win. Some of the existing players can win. But they might have to make some uncomfortable trade-offs for survival. And for others, the car – let's say terrestrial vehicle modality may just be a small part of a broader robotics and then physical embodiment of AI that they're propagating; where auto will just be a really, really just one tendril of many, many dozens of different tendrils. So again, it's beginning now. This process will take decades to play out. But investors with even, you know, two-to-three or three-to-five-year view can take steps today to adjust their portfolios and position themselves. Tim Hsiao: The other key focus of the investor over the market would definitely be the geopolitical dynamics. So, Morgan Stanley expects to see a lot of what you call coopetition between global OEMs and the Chinese suppliers. What do you mean by coopetition and how do you see this dynamic playing out, especially in terms of the tech deflation? Adam Jonas: In order to reduce the United States dependency on China, we need to work with China. So, there's the irony here. Look, in my former life of being an auto analyst, every auto CEO I speak to does not believe that tariffs will limit Chinese involvement in the global auto industry, including onshore in the United States. Many are actively seeking to work with the Chinese through various structures to give them an on-ramp to move onshore to produce their, in many cases, superior products, but in U.S. factories on U.S. shores with American workers. That might lead to some, again, trade-offs. But our view within Morgan Stanley and working with you is we do think that there are on-ramps for Chinese hardware, Chinese knowhow, and Chinese electrical vehicle architecture, but while still being sensitive to the dual-purpose AI sensitivities around software and the AI networks that, for national security reasons, nations want to have more control over. And I actually am hopeful and seeing some signs already that that's going to happen and play out over the next six to 12 months. Tim Hsiao: I would say it's clear that the road ahead isn't just smarter; it's faster, more connected, and increasingly autonomous. Adam Jonas: That's correct, Tim. I could not agree more. Thanks for joining me on the show today. Tim Hsiao: Thanks, Adam. Always a pleasure. Adam Jonas: And to our listeners, thanks for listening. Until next time, stay human and keep driving forward. 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.

Markets have already priced in a Fed cut, given the mixed economic data in the July labor and CPI prints. Our Global Economist Arunima Sinha makes the case for why we're standing by our baseline call for a higher bar for a rate cut. Read more insights from Morgan Stanley.----- Transcript ----- Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha, Global Economist at Morgan Stanley. Today – our evaluation of the Fed's policy path following the July CPI print, and the broader implications for other central banks. It's Wednesday, August 20th at 2pm in New York. Our baseline call has been that the Fed will remain on hold this year, and last week's CPI print has not changed that view. As we have noted, average tariff rates are still ramping up given the implementation delays, and so their cumulative effect on prices could be more lagged. Within the CPI print, tariff exposed goods other than apparel and autos continued to be firm. The surprise came in services inflation, which showed a reversal led by the uptick in airfares and hotel prices, which had been running in deflationary territory for much of this year. Some of the pushback against our view on inflation stepping up over the summer due to tariffs was that services disinflation could compensate. But as this print showed, that is unlikely to be the case. While we expect services inflation to continue to moderate, we think that services disinflation in the first half of [20]25 was exaggerated by weakness and volatile competence; and both core CPI and core PCE inflation are still at their pace from last year. So further acceleration in goods inflation from tariff effects over the summer would still see inflation remaining well above the Fed's target. After the July U.S. employment and CPI reports, the bar for the Fed to stay on hold in September is clearly higher. So, what are the risks to our call? The road goes back to how the data and the Fed's reaction function will evolve over ahead of the September meeting. The August jobs report will be important. If it is a solid employment report, with a sequential acceleration in payrolls and the unemployment rate around 4.2 to 4.3 percent, then the Fed could likely look through the weakness in the May and June prints – attributing the slowdown to the uncertainty following Liberation Day and not representative of the underlying trend. If, however, there were to be a sharp drop off in the hiring pace, which is currently not being indicated by other job market indicators such as jolts or claims, then the Fed could take the view that the labor market is much weaker than anticipated and restart easing. There is also the possibility of a cut from a risk management perspective. Even with inflation running well above target, the Fed could take the July employment report as a clear signal of downside risk to the labor market and start the easing cycle. Messaging from Fed officials has so far been mixed, with some taking signal from the jobs data and others remaining less worried with the unemployment rate remaining low. Outside the U.S., central bank trajectories remain tightly linked to both the Fed's path and the evolving U.S. growth outlook. Recent labor market data have introduced downside risks to our ECB and BoJ calls. In Europe, if Euro strength persists and U.S. recession risks rise, our euro area economists see a reduced risk to their September easing baseline. In Japan, the Bank of Japan remains cautious. Stronger U.S. data could tilt the balance toward a rate hike later this year – though October remains a high hurdle, making December or beyond more plausible. That said, if the U.S. economy slows in line with our forecast, the likelihood of further BoJ tightening diminishes reinforcing our base case – the BoJ staying on hold through end of 2026. 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 Fixed Income Strategist Vishy Tirupattur brings in Vishwas Patkar, Head of U.S. Credit Strategy, and Carolyn Campbell, Head of Consumer and Commercial ABS Research, to explain our high conviction on the role of credit markets in data center financing. 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. Vishwas Patkar: I'm Vishwas Patkar, Head of U.S. Credit Strategy. Carolyn Campbell: And I'm Carolyn Campbell, Head of Consumer and Commercial ABS Research. Vishy Tirupattur: Today we'll talk about the feedback – and pushback – we've received on the data center financing note we wrote a few weeks ago. It's Tuesday, August 19th at 10am In New York. In the week since we published a report on bridging the data center financing gap, we were met with a wide range of investors to discuss the key takeaways from our report. We projected that meeting the data center demand requires something like $3 trillion of capital expenditure by 2028. And we projected that about half of this funding will come from hyperscaler cash flows, but the rest financed through different channels of the credit markets. So, Vishwas, some of the skeptics invoke comparisons to prior CapEx cycles, particularly the late 1990s telecom boom that did not quite end well. How would you respond to that skepticism? Vishwas Patkar: The 1990s telecom CapEx cycle certainly came up in a lot of our meetings. It was the last time we arguably saw CapEx cycle of this magnitude. I think the counter to this is that there are some very important differences versus what we saw then versus what we expect. Most importantly, the CapEx cycle back then was largely financed on corporate balance sheets, and we saw pretty significant uptake in debt issuance and leverage. Also, through the 1990s, the names, the companies that were spending were mid- to low-credit quality and not cash rich. That's very different from the hyperscalers that are in the center of the AI spending. And these companies are very cash rich, and their credit ratings range all the way from AAA to high A. So very much at the top end of the spectrum. In addition, we are quite optimistic about AI monetization, both the timeline and the magnitude. Some of this has also already been validated through second quarter earnings. We also think financing will be done through multiple channels going forward and it won't largely flow through to corporate debt. In fact, corporate debt issuance is actually a pretty small number of how we think this [$]3 trillion number will be met. And you know, the private credit piece, that we have talked about a lot in this report; we think it's likely to be skewed towards IG ratings, in many cases backed by contractual cash flows from credit worthy tenants. So, the risk, in some ways, could come from the sub investment grade non-hyperscaler type tenants. And that's an important theme to be watching. But by and large, this cycle is very different in our view from the late 1990s. Vishy Tirupattur: So, Carolyn, another pushback, is that the market will be overbuilt and won't be able to refinance in say, five years… Carolyn Campbell: Yeah, Vishy. This is a really big concern, particularly for securitized credit investors. We're starting to see some of the ABS and CMBS deals look to refinance even this year, and that will pick up as time goes on and these deals hit their five-year maturities. However, the biggest challenge to building new data centers in the U.S. today is access to power. Our equity research colleagues have identified a 45-gigawatt power bottleneck in the U.S., and we think this should keep the market structurally undersupplied of power and slow down the pace of construction, really limiting that overbuild risk. Thus, we expect that the churn and the vacancy rates will actually remain quite low in the medium term. And so, while it's a concern that in the long run that these data centers will decline in value; for now we don't see that to be a primary concern. Vishy Tirupattur: Carolyn, another concern we heard is that the investor demand will not keep pace with the supply, particularly in securitized credit. We also heard about the tenant quality, that tenant quality is a major concern in underwriting these deals. So how would you respond to those two points? Carolyn Campbell: Right. I mean, within ABS and CMBS, we don't think supply is really the limiting factor. We think it will come on the demand side for why we think that this market will grow to about [$]150 billion by 2028.However, our discussions with investors and the data that we've seen suggest that while there are a few big accounts that have been active in the ABS and CMBS space so far, many have yet to allocate meaningfully – preferring perhaps even other esoterics so far. And so, we think that as the supply grows, so too will the number of accounts and the size within which they're participating. That being said, the market is already starting to price in a higher risk of tenant weakness. We started to see deals with a lower proportion of IG or greater exposure to AI names price meaningfully wider than those deals that are almost entirely IG and are more for collocation and enterprise. Ultimately there will be winners and losers in this new AI industry. And so, the diversification across region and across tenant type, exposure to residual cloud and enterprise businesses, and the proportion of IG and non-AI tenants in these deals will be very important as we assess the risks of ABS and CMBS deals. Vishy Tirupattur: Vishwas, any way we cut it, the scale of investment here is pretty large. Would this scale of investment divert capital away from public credit? Vishwas Patkar: I certainly think that's a possibility, and maybe even a risk over time – but probably skewed towards the back half of our forecast horizon, which goes through 2028. I think with the public credit market, the next few quarters' supply should be largely manageable, and demand has been and should stay quite strong. But if you look a few quarters out, insurance demand has been very critical to what's supporting credit markets right now. If interest rates go lower, some of these insurance inflows could slow down. And we've also talked about insurance allocations that are shifting towards private and securitized credit at the expense of corporate credit. So, slowly, you could say supply needs rise. You know, we have about [$]800 billion of financing that needs to be met by private credit while inflow slow down. So, I wouldn't view this as a fundamental risk for public credit, but certainly a reason why credit spreads may not stay as tight as they are, over a period of time. Vishy Tirupattur: So ultimately, our projections are based on the transformative potential for AI and the role of data center financing to enable that. This is a high conviction view. As we have said elsewhere, we are not too wedded to the specific size estimates in the broad constellation of financing channels. The point we want to drive home here is that credit markets will play a major role in enabling AI driven technology fusion. As always, they will be winners and losers, but data center financing as a theme for credit investors is here to stay.Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our analysts Tim Chan and Mayank Maheshwari discuss how nuclear power and natural gas are reshaping Asia's evolving energy mix, and what these trends mean for sustainability and the future of energy. Read more insights from Morgan Stanley.----- Transcript -----Tim Chan: Welcome to Thoughts on the Market. I'm Tim Chan, Morgan Stanley's Head of Asia Sustainability Research.Mayank Maheshwari: And I am Mayank Maheshwari, the Energy Analyst for India and Southeast Asia.Tim Chan: Today – a major shift in global energy. We are talking about nuclear power, gas adoption, and what the future holds.It's Monday, August 18th at 8am in Hong Kong.Mayank Maheshwari: And it's 8am in Singapore.Tim Chan: Nuclear power is no longer niche; it's a megatrend. It was once seen as controversial and capital intensive. But now nuclear power is stepping into the spotlight—not just for decarbonization, but for energy security. Global investment projections in this sector are now topping more than $2 trillion by 2050. This is fueled by a growing appetite from major tech companies for clean, reliable 24/7 energy. More specifically, Asia is emerging as the epicenter of capacity growth, and that's where your coverage comes in, Mayank.With the rising consumption of electricity, how does nuclear energy adoption stack up in your universe?Mayank Maheshwari: Tim, it's a fascinating world on power right now that we are seeing. Now the tight global power markets perspective is key on why there is so much investor and policymaker attention to nuclear power.Nuclear fuels accounted for about a tenth of the power units produced globally. However, they are almost a fifth of the global clean power generation. Now, power consumption is at another tripping point, and this is after tripling since 1980s. To give you a perspective, Tim, 25 trillion units of power were consumed worldwide last year, and we see this growing rapidly at a 25 percent pace in the next five years or so. And if you look at consumption growth outside of China, it's even faster at 2.5x for the rest of the decade when compared to the last decade.Now policy makers need energy security and hence, nuclear is getting a lot more attention. In Asia, while China, Korea, and Japan have been using nuclear energy to power the economy, the rest of Asia, it has been more an ambition – with India being the only country making progress last decade. Southeast Asia still has a lot more coal, and nuclear remains an ambition as technology acceptance by public and regulatory framework remains a key handicap. We do, however, see policy makers in Singapore, Vietnam, and Malaysia looking at nuclear fuels more seriously now, with SMRs also being discussed.Tim Chan: That is a really interesting perspective, Mayank. So, you have been bullish on the Asia gas adoption story. So, how do you think gas and nuclear will intersect in this region?Mayank Maheshwari: I think nuclear and natural gas, like all of the fuel stem, will complement each other. However, the long gestation to put nuclear capacity makes gas a viable alternative for energy security. As I was telling you earlier, policy makers are definitely focusing on it. As you know, the last big increase in focus in nuclear fuels also happened in the 1970s oil shock, again when energy security came into play.Global natural gas consumption has more than doubled in the last three decades, and it's set to surprise again with AsiaPac's consumption pretty much set to rise at twice the pace versus what right now expectations are by the street. In this age of electrification and AI adoption, natural gas is definitely emerging as a dependable and an affordable fuel of the future to power everything from automobiles to humanoids, biogenetics, to AI data centers, and even semiconductor production, which is getting so much focus nowadays.We expect global consumption to rise again after not growing this decade for natural gas. As Asia's natural gas adoption rises and grows at 5 percent CAGR 2024-2030; with consumption for gas surprising in China, India, and Japan. So, all the large economies are seeing this big increases, especially versus expectations.The region will consume 70 percent of the globally traded natural gas by 2030. So that's how important Asia will be for the world. And while global gas glut is well flagged, especially coming out of the U.S., Asia's ability to absorb this glut is not very well appreciated.Tim, having said that, nuclear energy is clearly getting more interest globally and is often debated in sustainability circles. How do you see its role evolving in sustainability frameworks as well as green taxonomies?Tim Chan: On sustainability, one thing to talk about is exclusion. That is really important for many sustainable sustainability investors. And when it comes to exclusion for nuclear power, only 2.3 percent of global AUM now exclude nuclear power. And then, that percentage is lower than alcohol, military contracting and gambling. And the exclusion rate is also different dependent on the region. Right now, European investors have the highest exclusion rate but have reduced the nuclear exclusion from 10.9 percent to 8.4 percent as of December last year. And North American and Asian exclusion rates are very, very low. Just 0.3 percent and 0.6 percent respectively.So, this exclusion in North America and Asia are minimal. The World Bank has also lifted, its decades long ban on financing nuclear project, which is important because World Bank can provide capital to fund the early stage of nuclear plant project or construction.And finally, on green finance. The EU, China and Japan have incorporated the nuclear power into their green taxonomies. So that means in some circumstances, nuclear project can be considered as green.Mayank Maheshwari: Now we have talked about AI and its need for power on this show. Nuclear power has a significant role to play in that equation, with hyperscalers paying premium for nuclear power. How does this support the investment case for nuclear utilities?Tim Chan: Yeah, so that depends on the region; and then different region we have different dilemmas. So, let's talk about U.S. first. In the U.S. we are seeing nuclear power is commanding a premium of approximately around $30-$50 per megawatt hour – above the market rate. So, when it comes to this price premium, we do think that will support the nuclear utilities in the U.S. And then in the report we highlighted a few names that we believe the current stock price haven't really priced in this premium in the market.And then for other regions, it depends on the region as well. So, Mayank, you have talked about Southeast Asia. Southeast Asia right now, given the lack of nuclear pipeline and then also the favorable economies of gas, we are not seeing that sort of premium yet in the Southeast Asia. We are also not seeing that premium in the Europe and in China as well, given that right now this sort of premium is mainly a U.S. exclusive situation. So dependent on the region, we are seeing different opportunities for nuclear utilities when it comes to the price premium.Mayank Maheshwari: Definitely Tim, I think the price premiums are dependent on how tight these power markets in each of the geographies are. But like, how does nuclear fit into broader energy mix alongside renewables and natural gas for you?Tim Chan: So, all these are really important. For nuclear power, investors really appreciate the clean and reliable, and for the 24x7 nature of the energy supply to support their operations and sustainability goals. And then nuclear is also important to bring the power additionality, which means nuclear is bringing truly new energy generation rather than simply utilizing a system or already planned capacity. We are seeing that sort of additionality in the new nuclear project and also the SMR in future as well.So, for natural gas, that is also important. As Mayank you have mentioned, natural gas money adds as a bridge field to provide flexibility to the grid. And then in the U.S., it is currently the primary near-term solution for powering AI and data center to increase the electricity supply due to its speed to the market and reliability. And natural gas is suspected to meet immediate demand, while longer term solutions like nuclear projects and also SMR are developed.And finally, renewable energy is also important. It represents the fastest growing and increasingly cost competitive energy source. They also dominate the new capacity additions as well. But for renewable energy, it also requires complimentary technology such as battery ESS to adjust intermittency issues.So, Mayank we have talked so much about nuclear, and back to you on natural gas. You are really bullish on natural gas. So how and where do you think are the best way to play it?Mayank Maheshwari: As you were kind of talking about the intersection and diffusion between nuclear, natural gas and the renewable markets, what you're seeing is that our bullishness on consumption of natural gas is basically all about how this diffusion plays out. Consumption on natural gas will rise much quicker than most fuels for the rest of the decade, if you think about numbers – making it more than just a transition fuel.Hence, Morgan Stanley research has a list of 75 equities globally to play the thematic of this diffusion, and it is happening in the power markets. These equities are part of the natural gas adoption and the powering AI thematic as well. So, these include the equipment producers on power, the gas pipeline players who are basically supporting the supply of natural gas to some of these pipelines. Hybrid power generation companies which have a good mix of renewables, natural gas, a bit of nuclear sometimes. And infrastructure providers for energy security.So, all these 75 stocks are effective playing at the intersection of all these three thematics that we are talking about as Morgan Stanley research. It is clear that nuclear renaissance, Tim, isn't just about reactors. It's about rethinking energy systems, sustainability, and geopolitics.Tim Chan: Yes, and the last decade will be defined by how we balance ambition with execution. Nuclear together with gas and renewables will be central to Asia's energy future. Mayank, thanks for taking the time to talk,Mayank Maheshwari: Great speaking to you, Tim.Tim Chan: 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.

Original Release Date: July 11, 2025As U.S. retailers manage the impacts of increased tariffs, they have taken a number of approaches to avoid raising prices for customers. Our Head of Corporate Strategy Andrew Sheets and our Head of U.S. Consumer Retail and Credit Research Jenna Giannelli discuss whether they can continue to do so.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.Jenna Giannelli: And I'm Jenna Giannelli, Head of U.S. Consumer and Retail Credit Research.Andrew Sheets: And today on the podcast, we're going to dig into one of the biggest conundrums in the market today. Where and when are tariffs going to show up in prices and margins?It's Friday, July 11th at 10am in New York.Jenna, it's great to catch up with you today because I think you can really bring some unique perspective into one of the biggest puzzles that we're facing in the market today. Even with all of these various pauses and delays, the U.S. has imposed historically large tariffs on imports. And we're seeing a rapid acceleration in the amount of money collected from those tariffs by U.S. customs. These are real hard dollars that importers – or somebody else – are paying. Yet we haven't seen these tariffs show up to a significant degree in official data on prices – with recent inflation data relatively modest. And overall stock and credit markets remain pretty strong and pretty resilient, suggesting less effect.So, are these tariffs just less impactful than expected, or is there something else going on here with timing and severity? And given your coverage of the consumer and retail sectors, which is really at the center of this tariff debate – what do you think is going on?Jenna Giannelli: So yes, this is a key question and one that is dominating a lot of our client conversations. At a high level, I'd point to a few things. First, there's a timing issue here. So, when tariffs were first announced, retailers were already sitting on three to four months worth of inventory, just due to natural industry lead times. And they were able to draw down on this product.This is mostly what they sold in 1Q and likely into 2Q, which is why you haven't seen much margin or pricing impact thus far. Companies – we also saw them start to stock up heavily on inventory before the tariffs and at the lower pause rate tariffs, which is the product you referenced that we're seeing coming in now. This is really going to help mitigate margin pressure in the second quarter that you still have this lower cost inventory flowing through.On top of this timing consideration, retailers – we've just seen utilizing a range of mitigation measures, right? So, whether it's canceled or pause shipments from China, a shifting production mix or sourcing exposure in the short run, particularly before the pause rate on China. And then really leaning into just whether it's product mix shifts, cost savings elsewhere in the PNL, and vendor negotiations, right? They're really leaning into everything in their toolbox that they can.Pricing too has been talked about as something that is an option, but the option of last resort. We have heard it will be utilized, but very tactically and very surgically, as we think about the back half of the year. When you put this all together, how much impact is it having? On average from retailers that we heard from in the first quarter, they thought they would be able to mitigate about half of the expected tariff headwind, which is actually a bit better than we were expecting.Finally, I'll just comment on your comment regarding market performance. While you're right in that the overall equity and credit markets have held up well, year-to-date, retail equities and credit have fared worse than their respective indices. What's interesting, actually, is that credit though has significantly outperformed retail equities, which is a relationship we think should converge or correct as we move throughout the balance of the year.Andrew Sheets: So, Jenna, retailers saw this coming. They've been pulling various levers to mitigate the impact. You mentioned kind of the last lever that they want to pull is prices, raising prices, which is the macro thing that we care about. The thing that would actually show up in inflation.How close are we though to kind of running out of other options for these guys? That is, the only thing left is they can start raising prices?Jenna Giannelli: So closer is what I would say. We're likely not going to see a huge impact in 2Q, more likely as we head into 3Q and more heavily into the all-important fourth quarter holiday season. This is really when those higher cost goods are going to be flowing through the PNL and retailers need to offset this as they've utilized a lot of their other mitigation strategies. They've moved what they could move. They've negotiated where they could, they've cut where they could cut. And again, as this last step, it will be to try and raise price.So, who's going to have the most and least success? In our universe, we think it's going to be more difficult to pass along price in some of the more historically deflationary categories like apparel and footwear. Outside of what is a really strong brand presence, which in our universe, historically hasn't been the case.Also, in some of the higher ticket or more durable goods categories like home goods, sporting goods, furniture, we think it'll be challenging as well here to pass along higher costs. Where it's going to be less of an issue is in our Staples universe, where what we'd put is less discretionary categories like Beauty, Personal Care, which is part of the reason why we've been cautious on retail, and neutral and consumer products when we think about sector allocation.Andrew Sheets: And when do you think this will show up? Is it a third quarter story? A fourth quarter story?Jenna Giannelli: I think this is going to really start to show up in the third quarter, and more heavily into the fourth quarter, the all-important holiday season.Andrew Sheets: Yeah, and I think that's what's really interesting about the impact of this backup to the macro. Again, returning to the big picture is I think one of the most important calls that Morgan Stanley economists have is that inflation, which has been coming down somewhat so far this year is going to pick back up in August and September and October. And because it's going to pick back up, the Federal Reserve is not going to cut interest rates anymore this year because of that inflation dynamic.So, this is a big debate in the market. Many investors disagree. But I think what you're talking about in terms of there are some very understandable reasons, maybe why prices haven't changed so far. But that those price hikes could be coming have real macroeconomic implications.So, you know, maybe though, something to just close on – is to bring this to the latest headlines. You know, we're now back it seems, in a market where every day we log onto our screens, and we see a new headline of some new tariff being announced or suggested towards countries. Where do you think those announcements, so far are relative to what retailers are expecting – kind of what you think is in guidance?Jenna Giannelli: Sure. So, look what we've seen of late; the recent tariff headlines are certainly higher or worse, I think, than what investors in management teams were expecting. For Vietnam, less so; I'd say it was more in line. But for most elsewhere, in Asia, particularly Southeast Asia, the rates that are set to go in effect on August 1st, as we now understand them, are higher or worse than management teams were expecting.Recall that while guidance did show up in many flavors in the first quarter, so whether withdrawn guidance or lowered guidance. For those that did factor in tariffs to their guide, most were factoring in either pause rate tariffs or tariff rates that were at least lower than what was proposed on Liberation Day, right?So, what's the punchline here? I think despite some of the revisions we've already seen, there are more to come. To put some numbers around this, if we look at our group of retail consumer cohort, credits, consensus expectations for calling for EBITDA in our universe to be down around 5 percent year-over-year. If we apply tariff rates as we know them today for a half-year headwind starting August 1st, this number should be down around 15 percent year-over-year on a gross basis…Andrew Sheets: So, three times as much.Jenna Giannelli: Pretty significant. Exactly. And so, while there might be mitigation efforts, there might be some pricing passed along, this is still a pretty significant delta between where consensus is right now and what we know tariff rates to be today – could imply for earnings in the second half.Andrew Sheets: Jenna, thanks for taking the time to talk.Jenna Giannelli: My pleasure. Thank you.Andrew Sheets: And thank you as always for your time. If you find Thoughts to the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

The market thinks the Fed is likely to cut rates come September. Morgan Stanley economists disagree. Our Head of Corporate Credit Research Andrew Sheets explains our viewpoint and presents three scenarios for corporate credit. 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 big difference between our view and the market on what the Fed will do next month; and how that impacts our credit view. It's Thursday, August 14th at 2pm in London. As of this recording, the market is pricing in a roughly 97 percent chance that the Federal Reserve lowers interest rates at its meeting next month. But our economists think it remains more likely that they will leave this rate unchanged. It's a big divergence on a very important market debate. But what may seem like a radical difference in view is actually, in my opinion, a pretty straightforward premise. The Federal Reserve has a so-called dual mandate tasked with keeping both inflation and unemployment low. The unemployment rate is low, but the inflation rate – importantly – is not. In order to ensure that that inflation rate goes lower, absent a major weakening of the economy, we think it would be reasonable for the Fed to keep interest rates somewhat higher for somewhat longer. Hence, we forecast that the Fed will end up staying put at its September meeting. Indeed, while the market rallied on this week's latest inflation numbers, they still leave the Fed with some pretty big questions. Core inflation in the US is above the Fed's target. It's been stuck near these levels now for more than a year. And based on this week's latest data, it started to actually tick up again, a trend that we think could continue over the next several readings as tariff impacts gradually come through.And so, for credit, this presents three scenarios. One good, and two that are more troubling. The good scenario is that our forecasts for inflation are simply too high. Inflation ends up falling faster than we expect even as the economy holds up. That would allow the Fed to lower interest rates sooner and faster than we're forecasting. And this would be a good scenario for credit, even at currently low rich spreads, and would likely drive good total returns. Scenario two sees inflation elevated in line with our near-term forecast, but the Fed lowers rates anyway. But wouldn't this be good? Wouldn't the credit market like lower rates? Well, lowering rates stimulates the economy and tends to push inflation higher, all else equal. And so, with inflation still above where the Fed wants it to be, it raises the odds of a hot economy with faster growth, but higher prices. That sort of mix might be welcomed by the equity market, which can do better in those booming times. But that same environment tends to be much tougher for credit. And if inflation doesn't end up falling as the Fed cuts rates, well, the Fed may be forced to do fewer rate cuts overall over the next one or two years. Or, even worse, may even have to reverse course and resume hikes – more volatile paths that we don't think the credit market would like. A third scenario is that a forecast at Morgan Stanley for growth, inflation, and the Fed are all correct. The central bank doesn't lower interest rates next month despite currently widespread expectation that they do so. That scenario could still be reasonable for the credit market over the medium term, but it would represent a very big surprise – not too far away, relative to market expectations. For now, markets may very well return to a late August slumber. But we're mindful that we're expecting something quite different than others when that summer ends. 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.

Although tariff negotiations continue, deals are being made, shifting investor focus on assessing the fallout. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas and Chief U.S. Economist Michael Gapen consider the ripple effects on inflation and the bond market. Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy. Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist. Michael Zezas: Today, how are tariffs impacting the economy and what it means for bond markets? It's Wednesday, August 13th at 10:30am in New York. Michael, we've been talking about how the near-term uncertainty around tariff levels has come down. Tariff deals are, of course, still pending with some major U.S. trading partners like China; but agreements are starting to come together. And though there's lots of ways they could break over time, in the near-term, deals like the one with Europe signal that the U.S. might be happy for several months with what's been arranged. And so, the range of outcomes has shrunk. The U.S.' current effective tariff rate of 16 percent is about where we thought we'd be at year end. But that's substantially higher than the roughly 3 percent we started the year with. So, not as bad as it looked like it could have been after tariffs were announced on April 2nd, but still substantially higher. Now's the time when investors should stay away from chasing tariff headlines and guessing what the President might do next; and instead focus on assessing the impact of what's been done. With that as the backdrop, we got some relevant data yesterday, the Consumer Price Index for July. You were expecting that this would show some clear signs of tariffs pushing prices higher. Why was that? Michael Gapen: Well, we did analysis on the 2018-2019 tariff episode. So, in looking at the input-output tables, which give you an idea of how prices move through certain sectors of the economy, and applying that to the 2018 episode of tariffs – we got the result that you should see some tariff inflation in June, and then sequentially more as we move into the late summer and the early fall. So, the short answer, Mike, is a model based plus history-based exercise – that said yes, we should start seeing the effects of tariffs on those categories, where the direct effect is high. So that'd be most of your goods categories. Over time, as we move into later this year or early next year, it'll be more important to think about indirect effects, if any. Michael Zezas: Got it. So, the July CPI data that came out yesterday, then did it corroborate this view? Michael Gapen: Yes and no. So, I'm an economist, so I have to do a two-handed view on this. So yes… Michael Zezas: Always fair. Michael Gapen: Always, yes. So, yes, core goods prices rose by two-tenths on the month, in June they also rose by two-tenths. Prior to this goods' prices were largely flat with some of the big durables, items like autos being negative, right? So, we had all the give back following COVID. So, the prior trend was flat to negative. The last two months, they've shown two-tenths increases. And we've seen upward pressure on things like household furnishings, apparel. We saw a strong used car print this month, motor vehicle and repairs. So, all of that suggests that tariffs are starting to flow through. Now, we didn't – on the other hand – is we didn't get as much as we thought. New car prices were flat and maybe those price increases will be delayed until models – the 2026 models start hitting the lot. That would be September or later. And we didn't actually; I said apparel. Apparel was up stronger last month. It really wasn't up all that much this month. So, the CPI data for July corroborated the view that the inflation pass through is happening. Where I think it didn't answer the question is how much of it are we going to get and should we expect a lot of it to be front loaded? Or is this going to be a longer process? Michael Zezas: Got it. And then, does that mean that tariffs aren't having the sort of aggregate impact on the economy that many thought they would? Or is maybe the composition of that impact different? So, maybe prices aren't going up so much, but companies are managing those costs in other ways. How would you break that down? Michael Gapen: We would say, and our view is that, yes, you know, we have written down a forecast. And we used our modeling in the 2018-20 19 episode to tell us what's a reasonable forecast for how quickly and to what degree these tariffs should show up in inflation. But obviously, this has been a substantial move in tariffs. They didn't start all at once. They've come in different phases and there's a lot of lags here. So, I just think there's a wide range of potential outcomes here. So, I wouldn't conclude that tariffs are not having the effect we thought they would. I think it's way too early and would be incorrect to conclude, just [be]cause we've had relatively modest tariff pressures in June and July, inflation that we can be sanguine and say it's not a big deal and we should just move on.Michael Zezas: And even so, is it fair to say that there's still plenty of evidence that this is weighing on growth in the way you anticipated? Michael Gapen: I think so. I mean, it's clear the economy has moderated. If we kind of strip out the volatility and trade and inventories, final sales to domestic purchasers 1.5 in the first quarter. It was 1.1 in the second quarter, and a lot of that slowdown was related to spending by the consumer. And a slowdown in business spending. So that that could be a little more, maybe about policy uncertainty and not knowing exactly what to do and how to plan. But it also we think is reflected in a slowdown, in the pace of hiring. So, I would say, you got the policy uncertainty shock first. That also came through the effect of the April 2nd Liberation Day tariffs, which probably caused a freeze in hiring and spending activity for a bit. And now I would say we're moving into the part of the world where the actual increase in tariffs are going to happen. So, we'll know whether or not firms can pass these prices along or not. If they can't, we'll probably get a weaker labor market. If they can, we'll continue to see it in inflation.But Mike, let me ask you a question now. You've had all the fun. Let me turn the table. Michael Zezas: Fair enough. Michael Gapen: How much does it matter for you or your team, whether or not these tariffs are pushing prices higher? And/or delaying cuts from the Fed. How do you think about that on your side? Michael Zezas: Yeah, so this question of composition and lags is really interesting. I think though that if the end state here is as you forecast – that we'll end up with weaker growth, and as a consequence, the Fed will embark on a substantial rate cutting program. Then the direction of travel for bond yields from here is still lower. So, if that's the case, then obviously this would be a favorable backdrop for owners of U.S. treasury bonds. It's probably also good news for owners of corporate credit, but the story's a bit trickier here. If yields move lower on weaker growth, but we ultimately avoid a recession, this might be the sweet spot for corporate credit. You've got fundamental strength holding that limits credit risk, and so you get performance from all in yields declining – both the yield expressed by the risk-free rate, as well as the credit spread. But if we tipped into recession, then naturally we'd expect there to be a repricing of all risk in the market. You'd expect there to be some expression of fundamental weakness and credit spreads would widen. So, government bonds would've been a better product to own in that environment.But, of course, Michael, we have to consider alternative outcomes where yields go higher, and this would turn into a bad environment for bond returns that would appear to be most likely in the scenario where U.S. growth actually ticks higher, resetting expectations for monetary policy in a more hawkish direction.So, what do you think investors should watch for that would lead to that outcome? Is it something like an AI productivity boom or maybe something else that's not on our radar? Michael Gapen: Yeah, so I think that is something investors do have to think about; and let me frame one way to think about that – where ex-post any easing by the Fed as early as September might be retroactively viewed as a policy mistake, right? So, we can say, yes, tariffs should slow down growth and maybe that happens in the second half of this year. The Fed maybe eases rates as a pre-emptive measure or risk management approach to avoid too much weakness in the labor market. So even though the Fed is seeing firming inflation now, which it is. It could ease in September, maybe again in December [be]cause it's worried about the labor market. So maybe that's what dominates 2025. And, and like you said, perhaps in the very near term, continues to pull bond prices lower. But what if we get into 2026 and the tariff effect or the tariff drag on growth fades, and the consumer begins to accelerate. So, we don't have a recession, we just get a bit of a divot in growth and then the economy recovers. Then fiscal policy kicks in, right? We don't think the One Big, Beautiful Bill act will provide a lot of stimulus, but we could be wrong. It could kickstart animal spirits and bring forward a lot of business spending. And then maybe AI, as you said; that could be a combining factor and financial conditions would be very easy in that world, in part – given that the Fed has eased, right? So that that could be a world where, you know, growth is modest, but it's firming. Inflation that's moved up to about 3 percent or maybe a little bit higher later this year kind of stays there. And then retroactively, the problem is the Fed eased financial conditions into that and inflation's kind of stuck around 3 percent. Bond yields – at least the long end – would probably react negatively in that world. Michael Zezas: Yeah, that makes perfect sense to us. Well, Michael, thanks for taking the time to talk with me. Michael Gapen: Thanks for having me on, Mike. 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.

Can a central bank simply announce an inflation target and get everyone to believe it? Our Global Economist Arunima Sinha looks at the cases of South Africa and Brazil to explain why it's a subject of decades-long debate. Read more insights from Morgan Stanley.----- Transcript -----Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha, Global Economist at Morgan Stanley. Today I'm going to talk about how inflation targets of central banks matter for market participants and economic activity.It's Tuesday, August 12th at 10am in New York. Tariff driven inflation is at the center of financial market debates right now. The received wisdom is that a central bank should look through one-off increases in prices if – and it is an important if – inflation expectations are anchored low enough. Inflation targets, inflation expectations, and central bank credibility have been debated for decades. The Fed's much criticized view that COVID inflation would be transitory was based on the assumption that anchored inflation expectations would pull inflation down. The Fed is more cautious now after four years of above target inflation. Can a central bank simply announce an inflation target and get everyone to believe it? Far away from the U.S., the South Africa Reserve Bank, SARB, is providing a real time experiment. The SARB's inflation target was originally a range of 3 to 6 per cent, with an intention to shift to 2 to 4 percent over time. At its last meeting, the SARB announced that it was going to target the bottom end of the range, de facto shifting to a 3 percent target. A decision by the Ministry of Finance in the coming months is likely necessary to formalise the outcome, but the SARB has succeeded in pulling inflation down. It has established credibility, but we suspect that more work is needed to anchor inflation expectations firmly at 3 percent. Key to the SARS challenge, as the Fed's – the central bank cannot control all the drivers of inflation in the short run. For South Africa, fiscal targets and exchange rate movements are prime examples. The experience in Brazil offers insight for South Africa. The BCB adopted an inflation target in 1999 following the end of the currency peg that helps the transition away from hyperinflation. The target was initially set at 8 percent, lowered to 4.5 percent in 2005, and then lowered again to 3 percent in 2024.Fiscal outcomes, market expectations, and currency volatility have been hard to contain. The lessons apply to South Africa and also the Fed. Successful inflation targeting relies on a clear framework, but also on institutional strength and political consensus. For South Africa, as inflation falls ex-ante real interest rates will rise. That outcome will be necessary to restrain the economy enough to make sure that the path to 3 percent is achieved. For an open EM economy, there likely needs to be consistency by both monetary and fiscal authorities with regard to short-term pressures, both internal and external. While we ultimately expect the SARB to be able to anchor inflation expectations, the journey may not be a quick one; and that journey will likely depend on keeping real interest rates on the higher side to ensure the convergence.We take the experiences of South Africa and Brazil to be informative globally. Simply announcing an inflation target likely does not solve the problem. The Fed, for example, spent much of the 2010s hoping to get inflation up to target – while now ironically, inflation in the US has run above target for almost half a decade. Whether the lingering effects of the COVID inflation has affected the price setting mechanism is unclear, as is whether tariff driven inflation will exacerbate the situation. Our read of the evidence is that inflation expectations and central bank credibility come from hitting the target, not from announcing it. 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 Research looks at how changes in demographics, ownership, and distribution can boost tech adoption to revolutionize the global sports industry. Read more insights from Morgan Stanley.----- Transcript -----Cesar Medina: Welcome to Thoughts on the Market. I'm Cesar Medina, Morgan Stanley's Latin America Technology, Media, and Telecom Analyst. Today – we discuss what's driving the digital revolution in global sports. And what it means for fans as well as investors. It's Monday, August 11th, at 10am in New York.These days, watching a sporting event at home usually means streaming the big game on a large 4K HDR screen. Maybe even 8K for premium events. You might access real time stats from a supporting app or social media on a secondary device. Maybe even have a group chat with friends. But imagine a game with real-time personalized stats. Immersive alternate camera angles. Or even experiencing the match from a player's perspective—all powered by AI. These innovations are already being tested and rolled out in select leagues. Global sports generates half a trillion dollars in annual revenues. Despite all that cash, until very recently the industry was slow to embrace digital technology, lagging behind movies and music. Now that's changing – and fast.So, what's driving this transformation? Three powerful forces are closing this digital gap. One – younger, tech-savvy audiences demanding more immersive and personalized experiences. Two – new distribution models, with digital platforms stepping into the arena. And three – institutional investment, bringing capital and a push for modernization. You might ask – what does this all mean for fans, investors, and the future of entertainment? Let's start with fans. Today's sports fans aren't just watching—they're interacting, betting, gaming, and sharing. And younger fans are leading the charge. They are spending more time online and expect hyper-personalized content. They're more interested in individual athletes than teams, and they engage through social media, fantasy sports, and interactive platforms. Surveys show that fans under 35 are significantly more likely to spend money on sports if the experience is digital-first. Some leagues have seen viewership jump by 40 percent after introducing interactive features. Others are using AI to personalize content, boosting engagement and revenue. Digital transformation isn't just about watching games though—it's about reimagining the entire ecosystem. When it comes to live events, smart venues are using AI to adjust ticket prices based on weather, opposing team, and demand. Some are even using facial recognition for faster entry and purchases. Streaming platforms are making broadcasts more interactive, while combating piracy with predictive tech. As for engagement, fantasy sports, esports, and betting are booming. AI-driven platforms are helping fans make smarter picks—and spend more. Altogether, these innovations could boost global sports revenues by over 25 percent, adding more than $130 billion in value. While North America leads in monetization, Emerging Markets are catching up fast. In India, Brazil, and the Middle East, for example, sports franchises are seeing double-digit growth in value—sometimes outpacing traditional media. And here's the kicker: many of these regions have younger populations and faster-growing digital adoption. That's a recipe for serious growth. Meanwhile, niche sports and women's leagues are also gaining global traction, expanding the definition of mainstream entertainment. Of course, this transformation of the sports industry faces real hurdles—technical expertise, budget constraints, and cultural resistance among coaches and athletes. But the incentives are clear. And as more capital flows into sports—from private equity to sovereign wealth funds—digital transformation is becoming a strategic priority. So, what's the biggest takeaway? Global sports is no longer just about what happens on the field. It's about how fans experience it—on their phones, in their homes, and in the stadiums of the future. So whether you're an investor, a fan, or just someone who loves a good underdog story, this is a game worth watching. 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 U.S. Thematic and Equity Strategist Michelle Weaver discusses what back-to-school spending trends reveal about consumer sentiment and the U.S. economy.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 here at Morgan Stanley.Today -- we're going back to school! A look at the second biggest shopping season in the U.S.. And what it can tell us about the broader market.It's Friday, August 8th, at 10am in New York.It's that time of the year again. With parents, caregivers and students making shopping lists for back-to-school supplies. And it's not just limited to school supplies and backpacks. It probably also includes laptops or tablets, smart phones and, of course, the latest clothes. For investors, understanding how consumers are feeling—and spending—right now is critical. Why? Because back-to-school spending tells us a lot about consumer sentiment. And this month's data has been sending some mixed but meaningful signals.Let's start with the mood on Main Street. According to our latest proprietary consumer survey, confidence in the economy is sliding. Just under one-third of consumers think the economy will improve over the next six months—which is down from 37 percent last month and 44 percent in January. And that's a pretty big drop from the start of the year. Meanwhile, half of all consumers expect the economy to get worse.Household finances are also feeling the squeeze. While around 40 percent expect their financial situation to improve, closer to 30 percent expect it to worsen. The net score is still positive, but down from last month and even more so from January.The takeaway? Consumers are feeling the pinch—and inflation remains their number one concern.We did see a bit of a brighter picture though around tariff fears. And tariffs are definitely still a worry, but we're past that point of peak fear. This month, over a third of consumers said they're “very concerned” about tariffs—down from 43 percent in April, post Liberation Day. And fewer people are planning to cut back on spending because of them: that number is just 30 percent now, compared to over 40 percent a few months ago.In fact, almost 30 percent of consumers actually plan to spend more despite tariffs. That's a sign of resilience—and perhaps necessity—as families prepare for the school year.And that brings us back to back-to-school shopping, which is a relative bright spot.Nearly half of U.S. consumers have already shopped or are planning to shop for the school year—right in line with what we saw in previous years. Among those shoppers, 47 percent are spending more than last year, while only 14 percent plan to spend less. That's a significant net positive at 34 percent.What's in the cart? More than 90 percent of shoppers are buying apparel, footwear, and school supplies. Apparel leads, followed by footwear, followed by supplies.If we look beyond the classroom at other things people are spending on, travel is still a priority. Around 60 percent of consumers plan to travel over the next six months, with visiting friends and family as the top reason. That's consistent with where we were a year ago and shows that experiences still matter—even in uncertain times.The big takeaway from all this data: Consumer sentiment is cooling, but spending—especially spending for seasonal needs—is holding up. Back-to-school categories like apparel and footwear are outperforming, making them potential bright spots for retailers.As we head into fall, keep your eyes on U.S. consumers. They're not just shopping for school—they're also signaling where the market could be headed next.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.

So far, markets have shown resilience, despite the volatility. However, our Head of Corporate Credit Research Andrew Sheets points out that economic data might tell a different story over the next few months, with a likely impact on yields.Read more insights from Morgan Stanley.----- Transcript ----- Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.Today – how a tricky two months could feel a lot like stagflation, and a lot different from what we've had so far this year.It's Thursday, August 7th, at 2pm in London. For all the sound and fury around tariffs in 2025, financial markets have been resilient. Stocks are higher, bond yields are lower, credit spreads are near 20-year tights, and market volatility last month plummeted.Indeed, we sense increasing comfort with the idea that markets were tested by tariffs – after all we've been talking about them since February – and weathered the storm. So far this year, growth has generally held up, inflation has generally come down, and corporate earnings have generally been fine.Yet we think this might be a bit like a wide receiver celebrating on the 5-yard line. The tricky impact of tariffs? Well, it might be starting to show up in the data right now, with more to come over the next several months.When thinking about the supposed risk from tariffs, it's always been two fold: higher prices and then also less activity, given more uncertainty for businesses, and thus weaker growth.And what did we see last week? Well, so-called core-PCE inflation, the Fed's preferred inflation measure, showed that prices were once again rising and at a faster rate. A key report on the health of the U.S. jobs market showed weak jobs growth. And key surveys from the Institute of Supply Management, which are followed because the respondents are real people in the middle of real supply chains, cited lower levels of new orders, and higher prices being paid.In short, higher prices and slower growth. An unpleasant combo often summarized as stagflation.Now, maybe this was just one bad week. But it matters because it is coming right about the time that Morgan Stanley economists think we'll see more data like it. On their forecasts, U.S. growth will look a lot slower in the second half of the year than the first. And specifically, it is in the next three months, which should show higher rates of month-over-month inflation, while also seeing slower activity.This would be a different pattern of data that we've seen so far this year. And so if these forecasts are correct, it's not that markets have already passed the test. It's that the teacher is only now handing it out. For credit, we think this could make the next several months uncomfortable and drive some modest spread widening. Credit still has many things going for it, including attractive yields and generally good corporate performance. But this mix of slower growth and higher inflation, well, it's new. It's coming during an August/September period, which is often somewhat more challenging for credit. And all this leads us to think that a strong market will take a breather.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.

Until now, the AI buildout has largely been self-funded. Our Chief Fixed Income Strategist Vishy Tirupattur and our Head of U.S. Credit Strategy Vishwas Patkar explain the role of credit markets to fund a potential financing gap of $1.5 trillion as spending on data centers and hardware keeps ramping up.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.Vishwas Patkar: And I'm Vishwas Patkar, Head of U.S. Credit Strategy at Morgan Stanley.Vishy Tirupattur: Today we want to talk about the opportunities and challenges in the credit markets, in the context of AI and data center financing.It's Wednesday, August 6th at 3pm in New York.Vishy Tirupattur: So, Vishwas spending on AI and data centers is really not new. It's been going on for a while. How has this CapEx been financed so far predominantly? What has changed now? And why do we need greater involvement of credit markets of different stripes?Vishwas Patkar: You're right, Vishy. So, CapEx on AI is certainly not new. So last year the hyperscalers alone spent more than $200 billion on AI related CapEx. What changes from here on, to your question, is the numbers just ramp up sharply. So, if you look at Morgan Stanley's estimates leveraging work done by our colleague Stephen Byrd over the next four years, there's about [$]2.9 trillion of CapEx that needs to be spent across hardware and data center bills.So what changes is, while CapEx so far has been largely self-funded by hyperscalers, we think that will not be the case going forward. So, when we leverage the work that has been done by our equity research colleagues around how much the hyperscalers can spend, we've identified a [$]1.5 trillion financing gap that has to be met by external capital. And we think credit would play a big role in that.Vishy Tirupattur: A financing gap of [$]1.5 trillion. Wow. That's a big number, by any measure. You talked about multiple credit channels that would need to be involved. Can you talk about rough sizing of these channels?Vishwas Patkar: Yep. So, we looked at four broad channels in the report that went out a few weeks ago. So, that [$]1.5 trillion gap breaks out into roughly [$]800 billion across private credit, which we think will be led by asset-based finance. Another [$]200 billion we think will come from Investment Grade rated bond issuance from the large tech names. Another [$]150 billion comes through securitized credit issuance via data center ABS and CMBS. And then finally there is a [$]350 billion plug that we've used. It's a catchall term for all other forms of financing that can cover sovereign spend, PE (private equity), VC among others,Vishy Tirupattur: The technology sector is fairly small within the context of corporate grade markets. You are estimating something like [$]200 billion of financing to come from this channel. Why not more?Vishwas Patkar: So, I think it comes down to really willingness versus ability. And, you know, you raise a good point. Tech names certainly have a lot of capacity to issue debt. And when I look at some of the work done by my colleague Lindsay Tyler in this report, the big four hyperscalers alone could issue over [$]600 billion of incremental debt without hurting their credit ratings.That said, our assumption is that early in the CapEx cycle, companies will be a little hesitant to do significantly debt funded investments as that might be seen as a suboptimal outcome for shareholder returns. And that's why we have reduced the magnitude of how much debt issuance could be vis-a-vis the actual capacity some of these companies have.So, Vishy, I talked about private credit meeting about half of the investment gap that we've identified and within that asset-based finance being a very important channel. So, what is ABF and why do you expect it to play such a big role in financing AI and data centers?Vishy Tirupattur: So, ABF is a very broad term for financing arrangements within the context of private credit. These are financing arrangements that are secured by loans and contractual cash flows such as leases – either with hard assets or without hard assets. So, the underlying concept itself is pretty widely used in securitizations.So, the difference between ABF structures and ABS structures is that the ABF structures are highly bespoke. They enable lots of customization to fit the specific needs of the investors and issuers in terms of risk tolerance, ratings, returns, duration, term, et cetera.So, ABS structures, on the other hand, are pretty standardized structures, you know, driven mainly by rating agencies – often requiring fairly stabilized cash flows with very strict requirements of lessee characteristics and sometimes residual value guarantees, in cases where hard assets are actually part of the collateral package.So, ABF opens up a wider range of possible structures and financing options to include assets that are on different stages of development. Remember, this is a very nascent industry. So, there are data centers that are fully stabilized cash flows, and there are data centers that are in very early stages of building with just land, or land and power access just being established.So, ABF structures can really do it in the form of a single asset or single facility financing or could include a portfolio of multiple assets and facilities that are in different stages of development.So, put all these things together, the nascent nature and the bespoke needs of data center financing call for a solution like ABF.Vishwas Patkar: And then taking a step back. So, as you said, the [$]1.5 trillion financing gap; I mean, that's a big number. That's larger than the size of the high yield market and the leveraged loan market.So, the question is, who are the investors in these structures, and where do you think the money ultimately comes from?Vishy Tirupattur: So, there is really a favorable alignment here of significant and substantial dry powder across different credit markets. And they're looking for attractive yields with appeal to a sticky investor base. This end investor base consists of investors such as insurance companies, sovereign wealth funds, pension funds, endowments, and high net worth retail individuals.Vishy Tirupattur: These are looking for scalable high quality asset exposures that can provide diversification benefits. And what we are talking about in terms of AI and data center financing precisely fall into that kind of investment. And we think this alignment of the need for capital and need for investments, that bridges this gap for [$]1.5 trillion that we're talking about here.So, my final question to you, Vishwas, is this. Where could we be wrong in our assessment of the financing through the various credit market channels?Vishwas Patkar: With the caveat that there are a lot of assumptions and moving parts in the framework that we build, I would flag really two risks. One macro, one micro.The macro one I would talk about in the context of credit market capacity. A lot of the favorable dynamics that you talked about come from where the level of rates are. So, if the economy slows and yields were to drop sharply, then I think the demand that credit markets are seeing could come into question, could see a slowdown over the coming years.The more micro risks, I think really come from how quickly or how slowly AI gets monetized by the big tech names. So, while we are quite optimistic about revenue generation a few years out, if in reality revenues are stronger than expected, then you could see more reliance on the public markets.So, for instance, the 200 billion of corporate bond issuance is likely going to be skewed higher in a more optimistic scenario. On the flip side, if there is mmuch ore uncertainty around the path to revenue generation, and if you see hyperscalers pulling back a bit on CapEx – then at the margin that could push more financing to the way of credit markets. In which case the overall [$]1.5 trillion number could also be biased higher.So those are the two big risks in my view.Vishy Tirupattur: So, Vishwas, any way you look at it, these numbers are big. And whether you are involved in AI or whether you're thinking about credit markets, these are numbers and developments that you cannot ignore.So, Vishwas, thanks so much for joining.Vishwas Patkar: Thank you for having me on Vishy.Vishy Tirupattur: And 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.

There's a dichotomy between the pace of job growth and the unemployment rate. Our Chief U.S. Economist Michael Gapen and Global Head of Macro Strategy Matthew Hornbach analyze how the Fed might address this paradox.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: Today – a look back at last week's meeting of the Federal Open Market Committee or FOMC, and the path for rates from here.It's Tuesday, August 5th at 10am in New York.Mike, last week the Fed met for the fifth time this year. The committee didn't provide a summary of their economic projections, but they did update their official policy statement. And of course, Chair Powell spoke at the press conference. How would you characterize the tone of both?Michael Gapen: Yeah, at first the statement I thought took on a slightly dovish tone for two reasons. One, unexpected; the other expected. So, the committee did revise down their assessment of growth and economic activity. They had previously described the economy as growing at a quote, ‘solid pace,' and now they said, you know, the incoming data suggests that growth and economic activity moderated.So that's true. That's actually our view as well. We think the data points to that. The second reason the statement looked a little dovish, and this was expected is the Fed received two dissents. So, Governors Bowman and Waller both dissented in favor of a 25 basis point rate cut at the July meeting.But then the press conference started. And I would characterize that as Powell having at least some renewed concerns around persistence of inflation. So, he did recognize or acknowledge that the June inflation data showed a tariff impulse. But I'd say the more hawkish overtones really came in his description of the labor market, which I know were going to get into.And we've been kind of wondering and, you know, asking implicitly – is the Fed ever going to take a stand on what constitutes a healthy and/or weak labor market? And Powell, I think put down a lot of markers in the direction; that said, it's not so much about employment growth, it's about a low unemployment rate. And he kept describing the labor market as solid, and in healthy condition, and at full employment. So, the combination of that suggests it's a higher bar, in our mind, for the Fed to cut in September.Matthew Hornbach: And on the labor market, if we could dig a little bit deeper on that point. It did seem to me certainly that Powell was channeling your views on the labor market.Michael Gapen: Well, I wish I had that power but thank you.Matthew Hornbach: Well. I'd like to now channel your views – and of course his views – to our listeners. Can you just go a little bit deeper into this dichotomy that you've been highlighting between the pace of job growth and the unemployment rate itself?Michael Gapen: Yeah. Our thesis and what we've laid out coming into the year, and we think the data supports, is the idea that immigration controls have really slowed growth in the labor force. And what that means is the break-even rate of employment has come down.So even as economic growth has slowed and demand for labor has slowed, and therefore employment growth has slowed – the unemployment rate has stayed low, and there's some paradox in that. Normally when employment growth weakens, we think the economy's rolling over; the Fed should be easing.But in an environment of a very slow growing labor force, the two can coincide. And there's tension in that, we recognize. But our view is – the more the administration pushes in the direction of restraining immigration, the more likely it is you'll see the combination of low employment growth, but a low unemployment rate. And our view is that still means the labor market is tight.Matthew Hornbach: Indeed, indeed. Just one last question from me. How are you thinking about the Fed's policy path from here? In particular, how are you looking at the remaining data that could get the Fed to cut rates in September?Michael Gapen: Yeah, I think that there's no magic sauce here, if you will; or secret sauce. Powell, you know, essentially is laying out a case where it's more likely than not inflation will be deviating from the 2 percent target as tariffs get passed through to consumer prices. And the flag that he planted on the labor market suggests maybe they're leaning in the direction of thinking the unemployment rates is likely to stay low.So, we just need more revelations on this front. And the gap between the July and the September FOMC meetings is the longest on the Fed's calendar. So, they will see two inflation reports and two labor market reports. And again, it just to provide context and color, right? What I think Powell was doing was positioning his view against the two dissents that he received. So where, for example, Governor Waller laid out a case where weaker employment growth could justify cuts, Powell was reflecting the view of the rest of the committee that said, ‘Well, it's not really employment growth, it's about that unemployment rate.'So, when these data arrive, we'll be kind of weighing both of those components. What does employment growth look like going forward? How weak is it? And what's happening to that unemployment rate?So, if the Fed's doing its job, this shouldn't be magic. If the labor market's obviously rolling over, you'll get cuts later this year. If not, we think our view will play out and the Fed will be on the sideline through, you know, early 2026 before it moves to rate cuts then.So Matt, what I'd like to do is kind of turn from the economics over to the rates views. How did the rates market respond to the meeting, to the statement, to the press conference? How are you thinking about the market pricing of the policy path into your end?Matthew Hornbach: So initially when the statement was released, as you noted, it had a dovish flavor to it. And so, we had a small repricing in the interest rate market, putting a little bit of a higher probability, on the idea that the Fed would lower rates in September. But then as Chair Powell began the press conference and started to articulate his views around both inflation and the labor market we saw the market take out some probability that the Fed would lower rates in September.And where it ended up at the end of that particular day was putting about a 50 percent probability on a rate cut and as a result of 50 percent probability of no rate cut; leaving the data to really dictate where the pricing of that meeting would go from there.That to me speaks to this data dependence of the Fed, as you've discussed. And I think that in the coming weeks we get more of this data that you talked about, both on the inflation side of the mandate and on the labor market side of the mandate. And ultimately, if they end up, going in September, I would've expected the market to have priced most of that in, ahead of the meeting. And if they end up not cutting rates in September, then naturally the market will have moved in that direction ahead of time.And again, I think what ends up happening in September will be critical for how the market ends up pricing the evolution of policy in November and December. But to me, what I think is more interesting is your view on 2026. And in that regard, the market is still some distance away from your view, that the Fed goes about 175 basis points in 2026.Michael Gapen: Yeah, I mean, we're still thinking the lagged effects of tariffs and immigration will slow the economy enough to get more Fed cuts than the market's thinking. But, you know, we'll see if that happens. And maybe that's a topic we can turn back to in upcoming Thoughts on the Market.But what I'd like to do is ask you this. I've been reading some of your recent work on term premiums. And in my view, had this really interesting analysis about how the market prices Fed policy and how U.S. Treasury yields then adjust and move.You highlighted that Treasury yields built in a term premium after April 2nd. What's happening with that term premium today?Matthew Hornbach: Yeah. The April 2nd Liberation Day event catalyzed an expansion of term premia in the Treasury market. And ultimately what that means is that Treasury yields went up relative to what people were thinking about the path of Fed policy, And of course, the risks that they were thinking about in the month of April were risks related to trade policy. Those risks have diminished somewhat, I would argue in the subsequent months as the administration has been announcing deals with some of our trading partners. And then the market's focus turned to supply and what was going to happen with U.S. Treasury supply. And then, of course, the reaction of investors to that coming supply.And I would say, given what the Treasury announced last week, which was – it had no intention of raising supply, in the next several quarters. In our view is that the U.S. Treasury will not have to raise supply until the early part of 2027. So way off in the distance. So, investors are becoming more comfortable taking on duration risk in their portfolios because some of that uncertainty that opened up after April 2nd has been put away.Michael Gapen: Yeah, I can see how the substantial tariff revenue we're bringing in could affect that story. So, for example, I think if you annualize the run rates on tariffs, you'll get something over $300 billion in a 12-month period. And that certainly will have an impact on Treasury supply.Matthew Hornbach: Indeed. And so, as we make our way through the month of August, we'll get an update to those tariff revenues. And also, towards the end of August, we will have the economic symposium in Jackson Hole, where Chair Powell will give us his updated thoughts on what is the outlook for the economy and for monetary policy. And Mike, I look forward to catching up with you after that.Thanks for taking the time to talk today.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.

Economic data looks backward while equity markets are looking ahead. Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why this delays the Federal Reserve in both cutting and hiking rates – and why this is a feature of monetary policy, not a bug.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 economic data can be counterintuitive for how stocks trade. It's Monday, August 4th at 11:30am in New York. So, let's get after it. Since the lows in April, the rally in stocks has been relentless with no tradable pullbacks. I have been steadfastly bullish since early May primarily due to the V-shaped recovery in earnings revisions breadth that began in mid-April. The rebound in earnings revisions has been a function of the positive reflexivity from max bearishness on tariffs, the AI capex cycle bottoming, and the weaker U.S. dollar. Now, cash tax savings from the One Big Beautiful Bill are an additional benefit to cash flow which should drive higher capital spending and M&A. As usual, stocks have traded ahead of the positive sentiment and the lagging economic data – which leads me to the main point for today. Weak labor data last week may worry some investors in the short term. But ultimately we see that as just another positive catalyst for stocks. Further deterioration would simply get the Fed to start cutting rates sooner and more aggressively.The bond market seems to agree and is now pricing a 90 percent chance of a Fed cut in September, and the 2-year Treasury yield is 80 basis points below the fed[eral] funds rate. This spread is not nearly as severe as last summer when it reached 200 basis points. However, it will widen further if next month's labor data is disappointing again. While weaker economic data could lead to further weakness in equities, the labor data is arguably the most backward-looking data series we follow. It's also why the Fed tends to be late with rate cuts. Meanwhile, inflation metrics are arguably the second most backward looking data, which explains why the Fed also tends to be late in terms of hiking rates. In my view, it's a feature of monetary policy, not a bug. Finally, in my opinion, the bond market's influence is more important than President Trump's public calls for Powell to cut rates. The equity market understands this dynamic, too—which is why it also gets ahead of the Fed at various stages of the cycle. We noted in our Mid-Year Outlook that April was a very durable low for equities that effectively priced a mild recession. To fully appreciate this view, one must acknowledge that equities were correcting for the 12 months leading up to April with the average stock down close to 30 percent at the lows. More importantly, it also coincided with a major trough in earnings revisions breadth. In short, Liberation Day marked the end of a significant bear market that began a year earlier. Remember, equity markets bottom on bad news and Liberation Day was the last piece of a long string of bad news that formed the bottom for earnings revisions breadth that we have been laser focused on. To bring it home, economic data is backward looking, earnings revisions and equity markets are forward looking. April was a major low for stocks that discounted the weak economic data we are seeing now. It was also the trough of the rolling recession that we have been in for the past three years and marked the beginning of a rolling recovery and a new bull market. For those who remain skeptical, it's important to recognize that the unemployment typically rises for 12 months after the equity market bottoms in a recession. Once the growth risk is priced, it's ultimately a tailwind for margins and stocks, as positive operating leverage arrives and the Fed cuts significantly. Based on this morning's rebound in stocks, it looks like the equity markets agree. 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!

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

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

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

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

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

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

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

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

Our Chief Asia Economist Chetan Ahya discusses three key decisions that will determine Asia's international investment position and affect currency trends. Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.Today – an issue that's gaining traction in boardrooms and trading floors: the three big decisions Asia investors are facing right now.It's Tuesday, July 22nd, at 2 PM in Hong Kong.So, let's start with the big picture.Over the past 13 years, Asia's international investment position has doubled to $46 trillion. A sizable proportion of that is invested in U.S. assets.But the recent weakness in the U.S. dollar gives rise to three important questions for investors across Asia: Should they diversify away from U.S. assets? How much of Asia's incremental savings should be allocated to the U.S.? Or should they hedge their U.S. exposure more aggressively?First on the diversification debate. Investors are voicing concern over the U.S. macro outlook, given the twin deficits. At the same time, our U.S. economics team continues to see growth slowing, as better than expected fiscal impulse in the near term will not fully offset the drag from tariffs and tighter immigration policies. This convergence in U.S. growth and interest rates with global peers—and continued debate about the U.S. dollar's safe haven status has already led to U.S. dollar depreciation. And our macro strategists expect further depreciation of the U.S.D by another 8-9 percent by [the] second quarter of next year. So what is the data indicating? Are investors already diversifying? Let's look at Asia's security portfolio as that data is more transparently available. Out of the total international investment of $46 trillion dollars, Asia's securities portfolio alone is worth $21 trillion. And of that, $8.6 trillion is in U.S. assets as of [the] first quarter of 2025. Now here's an interesting point: China's holding had already peaked in 2013, but Asia ex-China's holdings of U.S. assets has been increasing. Asia ex-China's U.S. holdings hit a record $7.2 trillion in the first quarter, largely driven by equities. In other words, in aggregate, Asia investors are not diversifying at the moment. But they are allocating less from their incremental savings. Asia's current account surplus remains high—at $1.1 trillion in the first quarter. And even if it narrows a bit from here, the structural surplus means Asia's total international investment position will keep growing. However, incremental allocations to the U.S. are beginning to decline. The share of U.S. assets in Asia's securities portfolio peaked at 41.5 percent in the fourth quarter of 2024 and started to dip in the first quarter of this year. In fact, our global cross asset strategist Serena Tang notes that Asian investors have reduced net buying of U.S. equities in the second quarter. Finally, let's talk about hedging. Asian investors have started to increase hedging of their U.S. investment position and we see increased hedging demand as one reason why Asian currencies have strengthened recently. Take Taiwan life insurance—often seen as [a] proxy for broader trends. While their hedge ratios were still falling in the first quarter, they started increasing again in the second. That lines up with the sharp appreciation of [the] Taiwanese dollar in the second quarter. Meanwhile, the currencies of other economies with large U.S. asset holdings have also appreciated since the dollar's peak. These are clear signals to us that increasing hedging demand is influencing foreign exchange markets.All in all, Asia's $46 trillion investment position gives it an enormous influence. Whether investors decide to diversify, allocate less or stay the course, and how much to hedge will affect currency trends going forward.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.

As Fed Chair Jerome Powell's term ends next year, our Global Chief Economist Seth Carpenter discusses the potential policy impact of a so-called “shadow Fed chair”.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist. And today – well, there's a topic that's stirring up a lot of speculation on Wall Street and in Washington. It's this idea of a Shadow Fed Chair. It's Monday, July 21, at 2 PM in New York. Let's start with the basics. Fed Chair Jerome Powell's term expires in May of next year. And look at any newspaper that covers the economy or markets, and you will see that President Trump has been critical of monetary policy under Chair Powell. Those facts have led to a flurry of questions: Who might succeed Chair Powell? When will we know? And—maybe most importantly—how should investors think about these implications? President Trump has been clear in his messaging: he wants the Fed to cut rates more aggressively. But even though it seems clear that there will be a new Chair in June of next year, market pricing suggests a policy rate just above 3 percent by the end of next year. That level is lower than the current Fed rate of 4.25 [percent] to 4.50 [percent], but not aggressively so. In fact, Morgan Stanley's base case is that the policy rate is going to be even a bit lower than market pricing suggests. So why this disconnect? First, although there are several names that have been floated by media sources, and the Secretary of the Treasury has said that a process to select the next Chair has begun, we really just don't know who Powell's successor would be. News reports suggest we will get a name by late summer though. Another key point, from my perspective, is even when Powell's term as Chair ends, the Fed's reaction function—which is to say how the Fed reacts to incoming economic data—well, it's probably not going to change overnight. The Federal Open Market Committee, or the FOMC, makes policy and that policy making is a group effort.  And that group dynamic tends to restrain sudden shifts in policy. So, even after Powell steps down, this internal dynamic could keep policy on a fairly steady course for a while. But some changes are surely coming. First, there's a vacancy on the Fed Board in January. And that seat could easily go to Powell's successor—before the Chair position officially changes.  In other words, we might see what people are calling a Shadow Chair, sitting on the FOMC, influencing policy from the inside.Would that matter to markets?Possibly. Especially if the successor is particularly vocal and signals a markedly different stance in policy.  But again, the same committee dynamics that should keep policy steady so far might limit any other immediate shifts. Even with an insider talking. As importantly, history suggests that political appointees often shed their past affiliations once they take office, focusing instead on the Fed's dual mandate: maximum sustainable employment and stable prices.But there are always quirky twists to most stories: Powell's seat on the Board doesn't actually expire when his term as Chair ends. Technically, he could stay on as a regular Board member—just like Michael Barr did after stepping down as the Vice Chair for Supervision. Now Powell hasn't commented on all this, so for now, it's just a thought experiment. But here's another thought experiment: the FOMC is technically a separate agency from the Board of Governors. Now, by tradition, the chair of the board is picked by the FOMC to be chair of the FOMC, but that's not required by law. In one version of the world, in theory, the committee could choose someone else. Would that happen?  Well, I think that's unlikely. In my experience, the Fed is an institution that has valued orthodoxy and continuity. But it's just a reminder that rules aren't always quite as rigid as they seem. And regardless, the Chair of the Fed always matters. While the FOMC votes on policy, the Chair sets the tone, frames the debate, and often guides where consensus ends up. And over time, as new appointees join the Board, the new Chair's influence will only grow. Even the selection of Reserve Bank Presidents is subject to a Board veto, and that would give the Chair indirect sway over the entire FOMC.Where does all of this leave us? For now, this Shadow Chair debate is more of a nuance than the primary narrative. We don't expect the Fed's reaction function to change between now and May. But beyond that, the range of outcomes starts to widen more and more and more.  Until then, I would say the bigger risk to our Fed forecast isn't politics. It's our forecast for the economy—and on that front we remain, as always, very humble. Well, thanks for listening. And if you enjoy the show, please leave us a review wherever you listen; and share Thoughts on the Market with a friend or colleague today.

Markets may seem calm following recent policy headlines, but for Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, investors may need to wait on more data to assess whether the macroenvironment will remain stable.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. Today: Why there's no summer slowdown yet for U.S. policy catalysts for the financial markets. It's Friday, July 18th at 8am in New York. The past week and a half has seen many major policy, events and headlines relevant to the outlook for financial markets. This includes more speculation by the U.S. administration over leadership at the Fed, more information about the deficit impact of the new fiscal bill, and – perhaps most tangibly – announcements of new tariffs that, if they take effect, will be a meaningful step up from already elevated levels. It would all suggest a weaker growth outlook and less overseas demand for U.S. assets. Yet major financial markets seem to have shrugged it all off. The S & P and the U.S. dollar are up about 1 percent over that time, and Treasury yields are modestly higher. So, what's going on? Two possibilities to consider, and it implies investors should pay more attention than they may be inclined to this summer. First, when it comes to the impact of tariffs on the economy, it's possible we're dealing with a delayed impact. The effective average U.S. tariff rate shot up from 3 to 4 percent earlier this year to 13 percent, and if recent announcements go through, that could exceed 20 percent. That's a major escalation in costs for U.S. companies and consumers and something our economists argue takes growth down to 1 percent and elevates the possibility of a recession. But our economists also point out that we may not be experiencing these cost increases quite yet. History suggests several months of lag between implementation and economic impact as companies leverage existing lower cost inventory before making tough decisions on pricing and managing their own costs. That means hard economic data likely does not yet tell us about the impact or lack thereof of tariffs, but that may change in the coming months. Second. It's also possible that the recent announcements of tariff increases don't tell us the whole story. As my colleagues in our equity strategy team point out, corporate America's cost base is most sensitive to the U.S.' largest trading partners – China, Mexico, Canada, and Europe. As we've discussed in prior episodes, we see tariff rate increases as likely on all these trading partners as tough negotiations continue. However, the details will matter greatly if rates are increased, but with a healthy dose of exceptions or quotas. Even if they diminish over time, then the real impact could be significantly blunted. In that case, markets would resume taking cues from other factors such as earnings revisions and forward-looking expectations around AI driven productivity. So bottom line, market movements suggest investors are assuming benign U.S. policy outcomes. But there's plenty of developments to track in the coming weeks and months to test if those assumptions will hold. Trade policy details and hard economic data are key among them. 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.

The dollar's bearish run is likely to affect U.S. equity markets. Michelle Weaver, our U.S. Thematic & Equity Strategist, and David Adams, our Head of G10 FX Strategy, discuss what investors should consider.Read more insights from Morgan Stanley.----- Transcript -----Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, U.S. Thematic and Equity strategist at Morgan Stanley. David Adams: And I'm Dave Adams, head of G10 FX Strategy here at Morgan Stanley. Michelle Weaver: Our colleagues were recently on the show to talk about the impact of the weak dollar on European equities. And today we wanted to continue that conversation by looking at what a weak U.S. dollar means for the U.S. equity market.It's Thursday, July 17th at 2pm in London. Morgan Stanley has a bearish view on the U.S. dollar. And this is something our chief global FX strategist James Lord spoke about recently on the show. But Dave, I want to go over the outlook again, since Morgan Stanley has a really differentiated view on this. Do you think the dollar will continue to depreciate during the remainder of the year? David Adams: We do, and we do. We have been dollar bears this whole year, and it has been very out of consensus. But we do think the weakness will continue and our forecasts remain one of the most bearish on the street for the dollar. The dollar has had its worst first half of the year since 1973, and the dollar index has fallen about 10 percent year to date, but we think we're at the intermission rather than the finale. The second act for the dollar weakening trend should come over the next 12 months as U.S. interest rates and U.S. growth rates converge to that of the rest of the world. And FX hedging of existing U.S. assets held by foreign investors adds further negative risk premium to the dollar. The result is that we're looking for yet another 10 percent drop in the dollar by the end of next year. Michelle Weaver: That's really interesting and a differentiated view for Morgan Stanley. When I think about one of the key themes that we've been following this year, it's the multipolar world or a shift away from globalization to more localized spheres of influence. This is an important element to the dollar story.How have tariffs impacted currency and your outlook? David Adams: Tariffs play a key role in this framework. Tariffs have a positive impact on inflation, but a negative impact on U.S. growth. But the inflation impact comes faster and the negative impact on growth and employment that comes a bit later. This puts the Fed in a really tough spot and it's why our economists are pretty out of consensus in calling for both no cuts this year, and a much faster and deeper pace of cuts in 2026. The results for me in FX land is that the market is underestimating just how low the Fed will go and just how low U.S. rates will go, in general. Tariffs play a big role in helping to generate this rate convergence, and rate differentials are a fundamental driver of currencies. The more that U.S. rates are going to fall, the more likely it is that the dollar keeps falling too. Michelle Weaver: Tariffs have certainly impacted heavily on our view for the U.S. equity market and it's something that no asset class is not impacted by really. Given the volatility and the magnitude of the move we've seen this year, are foreign investors hedging more? David Adams: We do think they've started hedging more, but the bulk of the move is really ahead of us. Foreign investors own a massive amount of U.S. assets. European investors alone own $8 trillion of U.S. bonds and stocks, and that's only about a quarter of total foreign ownership of U.S. assets. Now when foreign investors buy U.S. assets, they have to sell their currency and buy the dollar. But at some point, you're going to have to bring that money back, so you're going to have to sell the dollar and buy back your home currency again. If the dollar rises over this period, you've made a gain, congratulations. But if it falls, you've made a loss. Now a lot of foreign investors will hedge this currency risk, and they'll use instruments like forwards and options to do so. But in the case of the U.S., we found that a lot of foreign investors really choose not to hedge this exposure, particularly on the equity side. And this reflects both a view that the dollar would appreciate; so, they want to take that gain. But it also reflects the dollar's negative correlation to equities. So, what's changing now? Well, a lot of investors are starting to rethink this decision and add those FX hedges, which really means dollar selling. Now, there's a lot of factors motivating their decision to hedge. One, of course is price. If U.S. rates are going to converge meaningfully to the rest of the world – like we expect – that flattens out the forward curve and makes those forwards cheaper to buy to hedge. But the breakdown in correlations that we've seen more broadly, the uptick in policy volatility and uncertainty, and the sell off in the dollar that we've already seen year to date, have all increased the relative benefit of FX hedging. Now, Michelle, I often get asked the question, that's a nice story, but is hedging actually picking up? And the answer is yes. The initial data suggests that hedging has picked up in the second quarter, but because of the size of U.S. asset holdings and given how much it was initially unhedged, we could be talking about a significant long-term flow. We have a lot more to go from here. Michelle Weaver: Yeah. David Adams: We estimated that just over half of Europe's $8 trillion holdings are unhedged. And if hedge ratios pick up even a little bit, we could be talking about hundreds of billions of dollars in flow. And that's just from Europe. But Michelle, I wanted to ask you. What do you think a weaker dollar means for U.S. companies? Michelle Weaver: The weaker dollar is a substantial underappreciated tailwind for U.S. multinational earnings, and this is because these companies sell products overseas and then get paid in foreign currency. So, when the dollar's down, converting that foreign revenue back into dollars, gives them a nice boost, something that domestic only companies aren't going to benefit from. And this is called the translation effect. Recently we've seen earnings revisions breadth, essentially a measure of whether analysts are getting more optimistic or pessimistic start to turn up after hitting typical cycle lows. And based on our house view for the dollar, there's likely more upside ahead based on that relationship for revisions over the next year. David Adams: Interesting. Interesting. And is this something you're hearing about from companies on things like earnings calls? Michelle Weaver: No, this dynamic isn't being highlighted much on earnings calls. Typically, companies talk about foreign exchange effects when the dollar's strengthening and provides a headwind for corporate earnings. But when we're in the reverse scenario like we are now with the dollar weakening and getting a boost to earnings, we tend to not hear as much discussion, which is why I called this an underappreciated tailwind. And according to your team's forecast, we still have a substantial amount of weakening to go and thus a substantial amount of benefit for U.S. companies to go. David Adams: Yeah, that makes sense. And who do you think benefits most from this dynamic? Are there any sectors or investment styles that look particularly good here? Michelle Weaver: Mm hmm. So generally, it's the large cap companies that stand to gain the most from this dynamic, and that's because they do more business overseas. If we look at foreign revenue exposure for different indices, around 40 percent of the S & P 500's revenue comes from outside the U.S., while that's just 22 percent for the Russell 2000 Small Cap Index. But the impact of a weaker dollar isn't the same across the board. Foreign revenue exposure and earnings revision sensitivity to the dollar vary quite a bit, when we look at the sector and the industry group level. From a foreign revenue exposure perspective, Tech Materials and Industrials have the highest foreign revenue exposure and thus can benefit a lot from that dynamic we've been talking about. When we look from an earnings revisions perspective, Capital Goods, Materials, Software and Tech Hardware have the most earnings revisions, sensitivity to a weaker dollar, so they could also benefit there. David Adams: So, I guess this brings us to the million-dollar question that all of our listeners are asking. What do we do with this information? What does this mean for investors? Michelle Weaver: So as the dollar, continues to weaken, investors should keep a close eye on the industries and companies poised to benefit the most – because in this multipolar world, currency dynamics are not just a macro backdrop, but an important driver of earnings and equity performance.Dave, thank you for taking the time to talk. And to our listeners, 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.

U.S. tariffs have had limited impact so far on inflation and corporate earnings. Our Head of Corporate Credit Research Andrew Sheets explains why – and when – that might change.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 I'm going to talk about why tariffs are showing up everywhere – but the data; and why we think this changes this quarter. It's Wednesday, July 16th at 2pm in London. Investors have faced tariff headlines since at least February. The fact that it's now mid-July and markets are still grinding higher is driving some understandable skepticism that they're going to have their promised impact. Indeed, we imagine that maybe more of one of you is groaning and saying, ‘What? Another tariff episode?' But we do think this theme remains important for markets. And above all, it's a factor we think is going to hit very soon. We think it's kind of now – the third quarter – when the promised impact of tariffs on economic data and earnings really start to come through. My colleague Jenna Giannelli and I discussed some of the reasons why, on last week's episode focused on the retail sector. But what I want to do next is give a little bit of that a broader context. Where I want to start is that it's really about tariff impact picking up right about now. The inflation readings that we got earlier this week started to show US core inflation picking up again, driven by more tariff sensitive sectors. And while second quarter earnings that are being reported right about now, we think will generally be fine, and maybe even a bit better than expected; the third quarter earnings that are going to be generated over the next several months, we think those are more at risk from tariff related impact. And again, this could be especially pronounced in the consumer and retail sector. So why have tariffs not mattered so much so far, and why would that change very soon? The first factor is that tariff rates are increasing rapidly. They've moved up quickly to a historically high 9 percent as of today; even with all of the pauses and delays. And recently announced actions by the US administration over just the last couple of weeks could effectively double this rate again -- from 9 percent to somewhere between 15 to 20 percent.A second reason why this is picking up now is that tariff collections are picking up now. US Customs collected over $26 billion in tariffs in June, which annualizes out to about 1 percent of GDP, a very large number. These collections were not nearly as high just three months ago. Third, tariffs have seen pauses and delayed starts, which would delay the impact. And tariffs also exempted goods that were in transit, which can be significant from goods coming from Europe or Asia; again, a factor that would delay the impact. But these delays are starting to come to fruition as those higher tariff collections and higher tariff rates would suggest. And finally, companies did see tariffs coming and tried to mitigate them. They ordered a lot of inventory ahead of tariff rates coming into effect. But by the third quarter, we think they've sold a lot of that inventory, meaning they no longer get the benefit. Companies ordered a lot of socks before tariffs went into effect. But by the third quarter and those third quarter earnings, we think they will have sold them all. And the new socks they're ordering, well, they come with a higher cost of goods sold. In short, we think it's reasonable to expect that the bulk of the impact of tariffs and economic and earnings data still lies ahead, especially in this quarter – the third quarter of 2025. We continue to think that it's probably in August and September rather than June-July, where the market will care more about these challenges as core inflation data continues to pick up. For credit, this leaves us with an up in quality bias, especially as we move through that August to September period. And as Jenna and I discussed last week, we are especially cautious on the retail credit sector, which we think is more exposed to these various factors converging in the third quarter. 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 Paul Walsh, James Lord and Marina Zavolock discuss the dollar's decline, the strength of the euro, and the mixed impact on European equities.Read more insights from Morgan Stanley.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Markets. I'm Paul Walsh, Morgan Stanley's Head of European Product. And today we're discussing the weakness we've seen year-to-date in the U.S. dollar and what this means for the European stock market.It's Tuesday, July the 15th at 3:00 PM in London.I'm delighted to be joined by my colleagues, Marina Zavolock, Morgan Stanley's Chief European Equity Strategist, and James Lord, Morgan Stanley's Chief Global FX Strategist.James, I'm going to start with you because I think we've got a really differentiated view here on the U.S. dollar. And I think when we started the year, the bearish view that we had as a house on the U.S. dollar, I don't think many would've agreed with, frankly. And yet here we are today, and we've seen the U.S. dollar weakness proliferating so far this year – but actually it's more than that.When I listen to your view and the team's view, it sounds like we've got a much more structurally bearish outlook on the U.S. dollar from here, which has got some tenure. So, I don't want to steal your thunder, but why don't you tell us, kind of frame the debate, for us around the U.S. dollar and what you're thinking.James Lord: So, at the beginning of the year, you're right. The consensus was that, you know, the election of Donald Trump was going to deliver another period of what people have called U.S. exceptionalism.Paul Walsh: Yeah.James Lord: And with that it would've been outperformance of U.S. equities, outperformance of U.S. growth, continued capital inflows into the United States and outperformance of the U.S. dollar.At the time we had a slightly different view. I mean, with the help of the economics team, we took the other side of that debate largely on the assumption that actually U.S. growth was quite likely to slow through 2025, and probably into 2026 as well – on the back of restrictions on immigration, lack of fiscal stimulus. And, increasingly as trade tariffs were going to be implemented…Paul Walsh: Yeah. Tariffs, of course…James Lord: That was going to be something that weighed on growth.So that was how we set out the beginning of the year. And as the year has progressed, the story has evolved. Like some of the other things that have happened, around just the extent to which tariff uncertainty has escalated. The section 899 debate.Paul Walsh: Yeah.James Lord: Some of the softness in the data and just the huge amounts of uncertainty that surrounds U.S. policymaking in general has accelerated the decline in the U.S. dollar. So, we do think that this has got further to go. I mean, the targets that we set at the beginning of the year, we kind of already met them. But when we published our midyear outlook, we extended the target.So, we may even have to go towards the bull case target of euro-dollar of 130.Paul Walsh: Mm-hmm.James Lord: But as the U.S. data slows and the Fed debate really kicks off where at Morgan Stanley U.S. Economics research is expecting the Fed to ultimately cut to 2.5 percent...Paul Walsh: Yeah.Lord: That's really going to really weigh on the dollar as well. And this comes on the back of a 15-year bull market for the dollar.Paul Walsh: That's right.James Lord: From 2010 all the way through to the end of last year, the dollar has been on a tear.Paul Walsh: On a structural bull run.James Lord: Absolutely. And was at the upper end of that long-term historical range. And the U.S. has got 4 percent GDP current account deficit in a slowing growth environment. It's going to be tough for the dollar to keep going up. And so, we think we're sort of not in the early stages, maybe sort of halfway through this dollar decline. But it's a huge change compared to what we've been used to. So, it's going to have big implications for macro, for companies, for all sorts of people.Paul Walsh: Yeah. And I think that last point you make is absolutely critical in terms of the implications for corporates in particular, Marina, because that's what we spend every hour of every working day thinking about. And yes, currency's been on the radar, I get that. But I think this structural dynamic that James alludes to perhaps is not really conventional wisdom still, when I think about the sector analysts and how clients are thinking about the outlook for the U.S. dollar.But the good news is that you've obviously done detailed work in collaboration with the floor to understand the complexities of how this bearish dollar view is percolating across the different stocks and sectors. So, I wondered if you could walk us through what your observations are and what your conclusions are having done the work.Marina Zavolock: First of all, I just want to acknowledge that what you just said there. My background is emerging markets and coming into covering Europe about a year and a half ago, I've been surprised, especially amid the really big, you know, shift that we're seeing that James was highlighting – how FX has been kind of this secondary consideration. In the process of doing this work, I realized that analysts all look at FX in different way. Investors all look at FX in different way. And in …Paul Walsh: So do corporates.Marina Zavolock: Yeah, corporates all look at FX in different way. We've looked a lot at that. Having that EM background where we used to think about FX as much as we thought about equities, it was as fundamental to the story...Paul Walsh: And to be clear, that's because of the volatility…Marina Zavolock: Exactly, which we're now seeing now coming into, you know, global markets effectively with the dollar moves that we've had. What we've done is created or attempted to create a framework for assessing FX exposure by stock, the level of FX mismatches, the types of FX mismatches and the various types of hedging policies that you have for those – particularly you have hedging for transactional FX mismatches.Paul Walsh: Mm-hmm.Marina Zavolock: And we've looked at this from stock level, sector level, aggregating the stock level data and country level. And basically, overall, some of the key conclusions are that the list of stocks that benefit from Euro strength that we've identified, which is actually a small pocket of the European index. That group of stocks that actually benefits from euro strength has been strongly outperforming the European index, especially year-to-date.Paul Walsh: Mm-hmm.Marina Zavolock: And just every day it's kind of keeps breaking on a relative basis to new highs. Given the backdrop of James' view there, we expect that to continue. On the other hand, you have even more exposure within the European index of companies that are being hit basically with earnings, downgrades in local currency terms. That into this earning season in particular, we expect that to continue to be a risk for local currency earnings.Paul Walsh: Mm-hmm.Marina Zavolock: The stocks that are most negatively impacted, they tend to have a lot of dollar exposure or EM exposure where you have pockets of currency weakness as well. So overall what we found through our analysis is that more than half of the European index is negatively exposed to this euro and other local currency strength. The sectors that are positively exposed is a minority of the index. So about 30 percent is either materially or positively exposed to the euro and other local currency strength. And sectors within that in particular that stand out positively exposed utilities, real estate banks. And the companies in this bucket, which we spend a lot of time identifying, they are strongly outperforming the index.They're breaking to new highs almost on a daily basis relative to the index. And I think that's going to continue into earning season because that's going to be one of the standouts positively, amid probably a lot of downgrades for companies who have translational exposure to the U.S. or EM.Paul Walsh: And so, let's take that one step further, Marina, because obviously hedging is an important part of the process for companies. And as we've heard from James, of a 15-year bull run for dollar strength. And so most companies would've been hedging, you know, dollar strength to be fair where they've got mismatches. But what are your observations having looked at the hedging side of the equation?Marina Zavolock: Yeah, so let me start with FX mismatches. So, we find that about half of the European index is exposed to some level of FX mismatches.Paul Walsh: Mm-hmm.Marina Zavolock: So, you have intra-European currency mismatches. You have companies sourcing goods in Asia or China and shipping them to Europe. So, it's actually a favorable FX mismatch. And then as far as hedging, the type of hedging that tends to happen for companies is related to transactional mismatches. So, these are cost revenue, balance sheet mismatches; cashflow distribution type mismatches. So, they're more the types of mismatches that could create risk rather than translational mismatches, which are – they're just going to happen.Paul Walsh: Yeah.Marina Zavolock: And one of the most interesting aspects of our report is that we found that companies that have advanced hedging, FX hedging programs, they first of all, they tend to outperform, when you compare them to companies with limited or no hedging, despite having transactional mismatches. And secondly, they tend to have lower share price volatility as well, particularly versus the companies with no hedging, which have the most share price volatility.So, the analysis, generally, in Europe of this most, the most probably diversified region globally, is that FX hedging actually does generate alpha and contributes to relative performance.Paul Walsh: Let's connect the two a little bit here now, James, because obviously as companies start to recalibrate for a world where dollar weakness might proliferate for longer, those hedging strategies are going to have to change.So just any kind of insights you can give us from that perspective. And maybe implications across currency markets as a result of how those behavioral changes might play out, I think would be very interesting for our listeners.James Lord: Yeah, I think one thing that companies can do is change some of the tactics around how they implement the hedges. So, this can revolve around both the timing and also the full extent of the hedge ratios that they have. I mean, some companies who are – in our conversations with them when they're talking about their hedging policy, they may have a range. Maybe they don't hedge a 100 percent of the risk that they're trying to hedge. They might have to do something between 80 and a hundred percent. So, you can, you can adjust your hedge ratios…Paul Walsh: Adjust the balances a bit.James Lord: Yeah. And you can delay the timing of them as well.The other side of it is just deciding like exactly what kind of instrument to use to hedge as well. I mean, you can hedge just using pure spot markets. You can use forward markets and currencies. You can implement different types of options, strategies.And I think this was some of the information that we were trying to glean from the survey was this question that Marina was asking about. Do you have a limited or advanced hedging program? Typically, we would find that corporates that have advanced programs might be using more options-based strategies, for example. And you know, one of the pieces of analysis in the report that my colleague Dave Adams did was really looking at the effectiveness of different strategies depending on the market environment that we're in.So, are we in a sort of risk-averse market environment, high vol environment? Different types of strategies work for different types of market environments. So, I would encourage all corporates that are thinking about implementing some kind of hedging strategy to have a look at that document because it provides a lot of information about the different ways you can implement your hedges. And some are much more cost effective than others.Paul Walsh: Marina, last thought from you?Marina Zavolock: I just want to say overall for Europe there is this kind of story about Europe has no growth, which we've heard for many years, and it's sort of true. It is true in local currency terms. So European earnings growth now on consensus estimates for this year is approaching one percent; it's close to 1 percent. On the back of the moves we've already seen in FX, we're probably going to go negative by the time this earning season is over in local currency terms. But based on our analysis, that is primarily impacted by translation.So, it is just because Europe has a lot of exposure to the U.S., it has some EM exposure. So, I would just really emphasize here that for investors; so, investors, many of which don't hedge FX, when you're comparing Europe growth to the U.S., it's probably better to look in dollar terms or at least in constant currency terms. And in dollar terms, European earnings growth at this point are 7.6 percent in dollar terms. That's giving Europe the benefit for the euro exposure that it has in other local currencies.So, I think these things, as FX starts to be front of mind for investors more and more, these things will become more common focus points. But right now, a lot of investors just compare local currency earnings growth.Paul Walsh: So, this is not a straightforward topic, and we obviously think this is a very important theme moving through the balance of this year. But clearly, you're going to see some immediate impact moving through the next quarter of earnings.Marina and James, thanks as always for helping us make some sense of it all.James Lord: Thanks, Paul.Marina Zavolock: Thank you.Paul Walsh: And to our listeners out there, thank you as always for tuning in.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 analysts Paul Walsh, James Lord and Marina Zavolock discuss the dollar's decline, the strength of the euro, and the mixed impact on European equities.Read more insights from Morgan Stanley.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Markets. I'm Paul Walsh, Morgan Stanley's Head of European Product. And today we're discussing the weakness we've seen year-to-date in the U.S. dollar and what this means for the European stock market. It's Tuesday, July the 15th at 3:00 PM in London.I'm delighted to be joined by my colleagues, Marina Zavolock, Morgan Stanley's Chief European Equity Strategist, and James Lord, Morgan Stanley's Chief Global FX Strategist. James, I'm going to start with you because I think we've got a really differentiated view here on the U.S. dollar. And I think when we started the year, the bearish view that we had as a house on the U.S. dollar, I don't think many would've agreed with, frankly. And yet here we are today, and we've seen the U.S. dollar weakness proliferating so far this year – but actually it's more than that.When I listen to your view and the team's view, it sounds like we've got a much more structurally bearish outlook on the U.S. dollar from here, which has got some tenure. So, I don't want to steal your thunder, but why don't you tell us, kind of frame the debate, for us around the U.S. dollar and what you're thinking.James Lord: So, at the beginning of the year, you're right. The consensus was that, you know, the election of Donald Trump was going to deliver another period of what people have called U.S. exceptionalism. Paul Walsh: Yeah.James Lord: And with that it would've been outperformance of U.S. equities, outperformance of U.S. growth, continued capital inflows into the United States and outperformance of the U.S. dollar. At the time we had a slightly different view. I mean, with the help of the economics team, we took the other side of that debate largely on the assumption that actually U.S. growth was quite likely to slow through 2025, and probably into 2026 as well – on the back of restrictions on immigration, lack of fiscal stimulus. And, increasingly as trade tariffs were going to be implemented…Paul Walsh: Yeah. Tariffs, of course…James Lord: That was going to be something that weighed on growth.So that was how we set out the beginning of the year. And as the year has progressed, the story has evolved. Like some of the other things that have happened, around just the extent to which tariff uncertainty has escalated. The section 899 debate. Paul Walsh: Yeah. James Lord: Some of the softness in the data and just the huge amounts of uncertainty that surrounds U.S. policymaking in general has accelerated the decline in the U.S. dollar. So, we do think that this has got further to go. I mean, the targets that we set at the beginning of the year, we kind of already met them. But when we published our midyear outlook, we extended the target.So, we may even have to go towards the bull case target of euro-dollar of 130.Paul Walsh: Mm-hmm. James Lord: But as the U.S. data slows and the Fed debate really kicks off where at Morgan Stanley U.S. Economics research is expecting the Fed to ultimately cut to 2.5 percent... Paul Walsh: Yeah. Lord: That's really going to really weigh on the dollar as well. And this comes on the back of a 15-year bull market for the dollar. Paul Walsh: That's right. James Lord: From 2010 all the way through to the end of last year, the dollar has been on a tear. Paul Walsh: On a structural bull run.James Lord: Absolutely. And was at the upper end of that long-term historical range. And the U.S. has got 4 percent GDP current account deficit in a slowing growth environment. It's going to be tough for the dollar to keep going up. And so, we think we're sort of not in the early stages, maybe sort of halfway through this dollar decline. But it's a huge change compared to what we've been used to. So, it's going to have big implications for macro, for companies, for all sorts of people.Paul Walsh: Yeah. And I think that last point you make is absolutely critical in terms of the implications for corporates in particular, Marina, because that's what we spend every hour of every working day thinking about. And yes, currency's been on the radar, I get that. But I think this structural dynamic that James alludes to perhaps is not really conventional wisdom still, when I think about the sector analysts and how clients are thinking about the outlook for the U.S. dollar. But the good news is that you've obviously done detailed work in collaboration with the floor to understand the complexities of how this bearish dollar view is percolating across the different stocks and sectors. So, I wondered if you could walk us through what your observations are and what your conclusions are having done the work.Marina Zavolock: First of all, I just want to acknowledge that what you just said there. My background is emerging markets and coming into covering Europe about a year and a half ago, I've been surprised, especially amid the really big, you know, shift that we're seeing that James was highlighting – how FX has been kind of this secondary consideration. In the process of doing this work, I realized that analysts all look at FX in different way. Investors all look at FX in different way. And in …Paul Walsh: So do corporates.Marina Zavolock: Yeah, corporates all look at FX in different way. We've looked a lot at that. Having that EM background where we used to think about FX as much as we thought about equities, it was as fundamental to the story...Paul Walsh: And to be clear, that's because of the volatility…Marina Zavolock: Exactly, which we're now seeing now coming into, you know, global markets effectively with the dollar moves that we've had. What we've done is created or attempted to create a framework for assessing FX exposure by stock, the level of FX mismatches, the types of FX mismatches and the various types of hedging policies that you have for those – particularly you have hedging for transactional FX mismatches. Paul Walsh: Mm-hmm. Marina Zavolock: And we've looked at this from stock level, sector level, aggregating the stock level data and country level. And basically, overall, some of the key conclusions are that the list of stocks that benefit from Euro strength that we've identified, which is actually a small pocket of the European index. That group of stocks that actually benefits from euro strength has been strongly outperforming the European index, especially year-to-date.Paul Walsh: Mm-hmm.Marina Zavolock: And just every day it's kind of keeps breaking on a relative basis to new highs. Given the backdrop of James' view there, we expect that to continue. On the other hand, you have even more exposure within the European index of companies that are being hit basically with earnings, downgrades in local currency terms. That into this earning season in particular, we expect that to continue to be a risk for local currency earnings. Paul Walsh: Mm-hmm.Marina Zavolock: The stocks that are most negatively impacted, they tend to have a lot of dollar exposure or EM exposure where you have pockets of currency weakness as well. So overall what we found through our analysis is that more than half of the European index is negatively exposed to this euro and other local currency strength. The sectors that are positively exposed is a minority of the index. So about 30 percent is either materially or positively exposed to the euro and other local currency strength. And sectors within that in particular that stand out positively exposed utilities, real estate banks. And the companies in this bucket, which we spend a lot of time identifying, they are strongly outperforming the index.They're breaking to new highs almost on a daily basis relative to the index. And I think that's going to continue into earning season because that's going to be one of the standouts positively, amid probably a lot of downgrades for companies who have translational exposure to the U.S. or EM.Paul Walsh: And so, let's take that one step further, Marina, because obviously hedging is an important part of the process for companies. And as we've heard from James, of a 15-year bull run for dollar strength. And so most companies would've been hedging, you know, dollar strength to be fair where they've got mismatches. But what are your observations having looked at the hedging side of the equation?Marina Zavolock: Yeah, so let me start with FX mismatches. So, so we find that about half of the European index is exposed to some level of FX mismatches. Paul Walsh: Mm-hmm. Marina Zavolock: So, you have intra-European currency mismatches. You have companies sourcing goods in Asia or China and shipping them to Europe. So, it's actually a favorable FX mismatch. And then as far as hedging, the type of hedging that tends to happen for companies is related to transactional mismatches. So, these are cost revenue, balance sheet mismatches; cashflow distribution type mismatches. So, they're more the types of mismatches that could create risk rather than translational mismatches, which are – they're just going to happen.Paul Walsh: Yeah. Marina Zavolock: And one of the most interesting aspects of our report is that we found that companies that have advanced hedging, FX hedging programs, they first of all, they tend to outperform, when you compare them to companies with limited or no hedging, despite having transactional mismatches. And secondly, they tend to have lower share price volatility as well, particularly versus the companies with no hedging, which have the most share price volatility. So, the analysis, generally, in Europe of this most, the most probably diversified region globally, is that FX hedging actually does generate alpha and contributes to relative performance.Paul Walsh: Let's connect the two a little bit here now, James, because obviously as companies start to recalibrate for a world where dollar weakness might proliferate for longer, those hedging strategies are going to have to change.So just any kind of insights you can give us from that perspective. And maybe implications across currency markets as a result of how those behavioral changes might play out, I think would be very interesting for our listeners.James Lord: Yeah, I think one thing that companies can do is change some of the tactics around how they implement the hedges. So, this can revolve around both the timing and also the full extent of the hedge ratios that they have. I mean, some companies who are – in our conversations with them when they're talking about their hedging policy, they may have a range. Maybe they don't hedge a 100 percent of the risk that they're trying to hedge. They might have to do something between 80 and a hundred percent. So, you can, you can adjust your hedge ratios…Paul Walsh: Adjust the balances a bit.James Lord: Yeah. And you can delay the timing of them as well.The other side of it is just deciding like exactly what kind of instrument to use to hedge as well. I mean, you can hedge just using pure spot markets. You can use forward markets and currencies. You can implement different types of options, strategies. And I think this was some of the information that we were trying to glean from the survey was this question that Marina was asking about. Do you have a limited or advanced hedging program? Typically, we would find that corporates that have advanced programs might be using more options-based strategies, for example. And you know, one of the pieces of analysis in the report that my colleague Dave Adams did was really looking at the effectiveness of different strategies depending on the market environment that we're in.So, are we in a sort of risk-averse market environment, high vol environment? Different types of strategies work for different types of market environments. So, I would encourage all corporates that are thinking about implementing some kind of hedging strategy to have a look at that document because it provides a lot of information about the different ways you can implement your hedges. And some are much more cost effective than others.Paul Walsh: Marina, last thought from you? Marina Zavolock: I just want to say overall for Europe there is this kind of story about Europe has no growth, which we've heard for many years, and it's sort of true. It is true in local currency terms. So European earnings growth now on consensus estimates for this year is approaching one percent; it's close to 1 percent. On the back of the moves we've already seen in FX, we're probably going to go negative by the time this earning season is over in local currency terms. But based on our analysis, that is primarily impacted by translation.So, it is just because Europe has a lot of exposure to the U.S., it has some EM exposure. So, I would just really emphasize here that for investors; so, investors, many of which don't hedge FX, when you're comparing Europe growth to the U.S., it's probably better to look in dollar terms or at least in constant currency terms. And in dollar terms, European earnings growth at this point are 7.6 percent in dollar terms. That's giving Europe the benefit for the euro exposure that it has in other local currencies. So, I think these things, as FX starts to be front of mind for investors more and more, these things will become more common focus points. But right now, a lot of investors just compare local currency earnings growth.Paul Walsh: So, this is not a straightforward topic, and we obviously think this is a very important theme moving through the balance of this year. But clearly, you're going to see some immediate impact moving through the next quarter of earnings. Marina and James, thanks as always for helping us make some sense of it all.James Lord: Thanks, Paul. Marina Zavolock: Thank you.Paul Walsh: And to our listeners out there, thank you as always for tuning in.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.

Stocks hold steady as tariff uncertainty continues. Our CIO and Chief U.S. Equity Strategist Mike Wilson explains how policy deferrals, earnings resilience and forward guidance are driving the market.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 stocks remain so resilient. It's Monday, July 14th at 11:30am in New York. So, let's get after it. Why has the equity market been resilient in the face of new tariff announcements? Well first, the import cost exposure for S&P 500 industries is more limited given the deferrals and exemptions still in place like the USMCA compliant imports from Mexico. Second, the higher tariff rates recently announced on several trading partners are generally not perceived to be the final rates as negotiations progress. I continue to believe these tariffs will ultimately end up looking like a 10 percent consumption tax on imports that generate significant revenue for the Treasury. And finally, many companies pre-stocked inventory before the tariffs were levied and so the higher priced goods have not yet flowed through the cost of goods sold. Furthermore, with the market's tariffs concerns having peaked in early April, the market is looking forward and focused on the data it can measure. On that score, the dramatic v-shaped rebound in earnings revisions breadth for the S&P 500 has been a fundamental tailwind that justifies the equity rally since April in the face of continued trade and macro uncertainty. This gauge is one of our favorites for predicting equity prices and it troughed at -25 percent in mid-April. It's now at +3 percent. The sectors with the most positive earnings revisions breadth relative to the S&P 500 are Financials, Industrials and Software — three sectors we continue to recommend due to this dynamic. The other more recent development helping to support equities is the passage of the One Big Beautiful Bill. While this Bill does not provide incremental fiscal spending to support the economy or lower the statutory tax rate, it does lower the cash earnings tax rates for companies that spend heavily on both R&D and Capital Goods.Our Global Tax Team believes we could see cash tax rates fall from 20 percent today back toward the 13 percent level that existed before some of these benefits from the Tax Cuts and Jobs Act that expired in 2022. This benefit is also likely to jump start what has been an anemic capital spending cycle for corporate America, which could drive both higher GDP and revenue growth for the companies that provide the type of equipment that falls under this category of spending. Meanwhile, the Foreign-Derived Intangible Income is a tax incentive that benefits U.S. companies earning income from foreign markets. It was designed to encourage companies to keep their intellectual property in the U.S. rather than moving it to countries with lower tax rates. This deduction was scheduled to decrease in 2026, which would have raised the effective tax rate by approximately 3 percent. That risk has been eliminated in the Big Beautiful Bill. Finally, the Digital Service Tax imposed on online companies that operate overseas may be reduced. Late last month, Canada announced that it would rescind its Digital Service Tax on the U.S. in anticipation of a mutually beneficial comprehensive trade arrangement with the U.S. This would be a major windfall for online companies and some see the potential for more countries, particularly in Europe, to follow Canada's lead as trade negotiations with the U.S. continue. Bottom line, while uncertainty around tariffs remains high, there are many other positive drivers for earnings growth over the next year that could more than offset any headwinds from these policies. This suggests the recent rally in stocks is justified and that investors may not be as complacent as some are fearing. 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 U.S. retailers manage the impacts of increased tariffs, they have taken a number of approaches to avoid raising prices for customers. Our Head of Corporate Strategy Andrew Sheets and our Head of U.S. Consumer Retail and Credit Research Jenna Giannelli discuss whether they can continue to do so.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.Jenna Giannelli: And I'm Jenna Giannelli, Head of U.S. Consumer and Retail Credit Research.Andrew Sheets: And today on the podcast, we're going to dig into one of the biggest conundrums in the market today. Where and when are tariffs going to show up in prices and margins? It's Friday, July 11th at 10am in New York. Jenna, it's great to catch up with you today because I think you can really bring some unique perspective into one of the biggest puzzles that we're facing in the market today. Even with all of these various pauses and delays, the U.S. has imposed historically large tariffs on imports. And we're seeing a rapid acceleration in the amount of money collected from those tariffs by U.S. customs. These are real hard dollars that importers – or somebody else – are paying. Yet we haven't seen these tariffs show up to a significant degree in official data on prices – with recent inflation data relatively modest. And overall stock and credit markets remain pretty strong and pretty resilient, suggesting less effect.So, are these tariffs just less impactful than expected, or is there something else going on here with timing and severity? And given your coverage of the consumer and retail sectors, which is really at the center of this tariff debate – what do you think is going on?Jenna Giannelli: So yes, this is a key question and one that is dominating a lot of our client conversations. At a high level, I'd point to a few things. First, there's a timing issue here. So, when tariffs were first announced, retailers were already sitting on three to four months worth of inventory, just due to natural industry lead times. And they were able to draw down on this product.This is mostly what they sold in 1Q and likely into 2Q, which is why you haven't seen much margin or pricing impact thus far. Companies – we also saw them start to stock up heavily on inventory before the tariffs and at the lower pause rate tariffs, which is the product you referenced that we're seeing coming in now. This is really going to help mitigate margin pressure in the second quarter that you still have this lower cost inventory flowing through. On top of this timing consideration, retailers – we've just seen utilizing a range of mitigation measures, right? So, whether it's canceled or pause shipments from China, a shifting production mix or sourcing exposure in the short run, particularly before the pause rate on China. And then really leaning into just whether it's product mix shifts, cost savings elsewhere in the PNL, and vendor negotiations, right? They're really leaning into everything in their toolbox that they can. Pricing too has been talked about as something that is an option, but the option of last resort. We have heard it will be utilized, but very tactically and very surgically, as we think about the back half of the year. When you put this all together, how much impact is it having? On average from retailers that we heard from in the first quarter, they thought they would be able to mitigate about half of the expected tariff headwind, which is actually a bit better than we were expecting. Finally, I'll just comment on your comment regarding market performance. While you're right in that the overall equity and credit markets have held up well, year-to-date, retail equities and credit have fared worse than their respective indices. What's interesting, actually, is that credit though has significantly outperformed retail equities, which is a relationship we think should converge or correct as we move throughout the balance of the year.Andrew Sheets: So, Jenna, retailers saw this coming. They've been pulling various levers to mitigate the impact. You mentioned kind of the last lever that they want to pull is prices, raising prices, which is the macro thing that we care about. The thing that would actually show up in inflation. How close are we though to kind of running out of other options for these guys? That is, the only thing left is they can start raising prices?Jenna Giannelli: So closer is what I would say. We're likely not going to see a huge impact in 2Q, more likely as we head into 3Q and more heavily into the all-important fourth quarter holiday season. This is really when those higher cost goods are going to be flowing through the PNL and retailers need to offset this as they've utilized a lot of their other mitigation strategies. They've moved what they could move. They've negotiated where they could, they've cut where they could cut. And again, as this last step, it will be to try and raise price.So, who's going to have the most and least success? In our universe, we think it's going to be more difficult to pass along price in some of the more historically deflationary categories like apparel and footwear. Outside of what is a really strong brand presence, which in our universe, historically hasn't been the case.Also, in some of the higher ticket or more durable goods categories like home goods, sporting goods, furniture, we think it'll be challenging as well here to pass along higher costs. Where it's going to be less of an issue is in our Staples universe, where what we'd put is less discretionary categories like Beauty, Personal Care, which is part of the reason why we've been cautious on retail, and neutral and consumer products when we think about sector allocation.Andrew Sheets: And when do you think this will show up? Is it a third quarter story? A fourth quarter story?Jenna Giannelli: I think this is going to really start to show up in the third quarter, and more heavily into the fourth quarter, the all-important holiday season.Andrew Sheets: Yeah, and I think that's what's really interesting about the impact of this backup to the macro. Again, returning to the big picture is I think one of the most important calls that Morgan Stanley economists have is that inflation, which has been coming down somewhat so far this year is going to pick back up in August and September and October. And because it's going to pick back up, the Federal Reserve is not going to cut interest rates anymore this year because of that inflation dynamic. So, this is a big debate in the market. Many investors disagree. But I think what you're talking about in terms of there are some very understandable reasons, maybe why prices haven't changed so far. But that those price hikes could be coming have real macroeconomic implications.So, you know, maybe though, something to just close on – is to bring this to the latest headlines. You know, we're now back it seems, in a market where every day we log onto our screens, and we see a new headline of some new tariff being announced or suggested towards countries. Where do you think those announcements, so far are relative to what retailers are expecting – kind of what you think is in guidance?Jenna Giannelli: Sure. So, look what we've seen of late; the recent tariff headlines are certainly higher or worse, I think, than what investors in management teams were expecting. For Vietnam, less so; I'd say it was more in line. But for most elsewhere, in Asia, particularly Southeast Asia, the rates that are set to go in effect on August 1st, as we now understand them, are higher or worse than management teams were expecting. Recall that while guidance did show up in many flavors in the first quarter, so whether withdrawn guidance or lowered guidance. For those that did factor in tariffs to their guide, most were factoring in either pause rate tariffs or tariff rates that were at least lower than what was proposed on Liberation Day, right? So, what's the punchline here? I think despite some of the revisions we've already seen, there are more to come. To put some numbers around this, if we look at our group of retail consumer cohort, credits, consensus expectations for calling for EBITDA in our universe to be down around 5 percent year-over-year. If we apply tariff rates as we know them today for a half-year headwind starting August 1st, this number should be down around 15 percent year-over-year on a gross basis…Andrew Sheets: So, three times as much.Jenna Giannelli: Pretty significant. Exactly. And so, while there might be mitigation efforts, there might be some pricing passed along, this is still a pretty significant delta between where consensus is right now and what we know tariff rates to be today – could imply for earnings in the second half.Andrew Sheets: Jenna, thanks for taking the time to talk.Jenna Giannelli: My pleasure. Thank you.Andrew Sheets: And thank you as always for your time. If you find Thoughts to the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

The ultimate market outcomes of President Trump's tactical tariff escalation may be months away. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas takes a look at implications for investors now.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: The latest on U.S. tariffs and their market impact. It's Thursday, July 10th at 12:30pm in New York. It's been a newsy week for U.S. trade policy, with tariff increases announced across many nations. Here's what we think investors need to know. First, we think the U.S. is in a period of tactical escalation for tariff policy; where tariffs rise as the U.S. explores its negotiating space, but levels remain in a range below what many investors feared earlier this year. We started this week expecting a slight increase in U.S. tariffs—nothing too dramatic, maybe from 13 percent to around 15 percent driven by hikes in places like Vietnam and Japan. But what we got was a bit more substantial. The U.S. announced several tariff hikes, set to take effect later, allowing time for negotiations. If these new measures go through, tariffs could reach 15 to 20 percent, significantly higher than at the beginning of the year, though far below the 25 to 30 percent levels that appeared possible back in April. It's a good reminder that U.S. trade policy remains a moving target because the U.S. administration is still focused on reducing goods trade deficits and may not yet perceive there to be substantial political and economic risk of tariff escalation. Per our economists' recent work on the lagged effects of tariffs, this reckoning could be months away. Second, the implications of this tactical escalation are consistent with our current cross-asset views. The higher tariffs announced on a variety of geographies, and products like copper, put further pressure on the U.S. growth story, even if they don't tip the U.S. into recession, per the work done by our economists. That growth pressure is consistent with our views that both government and corporate bond yields will move lower, driving solid returns. It's also insufficient pressure to get in the way of an equity market rally, in the view of our U.S. equity strategy team. The fiscal package that just passed Congress might not be a major boon to the economy overall, but it does help margins for large cap companies, who by the way are more exposed to tariffs through China, Canada, Mexico, and the EU – rather than the countries on whom tariff increases were announced this week. Finally, How could we be wrong? Well, pay attention to negotiations with those geographies we just mentioned: Mexico, Canada, Europe, and China. These are much bigger trading partners not just for U.S. companies, but the U.S. overall. So meaningful escalation here can drive both top line and bottom line effects that could challenge equities and credit. In our view, tariffs with these partners are likely to land near current levels, but the path to get there could be volatile. For the U.S., Mexico and Canada, background reporting suggests there's mutual interest in maintaining a low tariff bloc, including exceptions for the product-specific tariffs that the U.S. is imposing. But there are sticking points around harmonizing trade policy. The dynamic is similar with China. Tariffs are already steep—among the highest anywhere. While a recent narrow deal—around semiconductors for rare earths—led to a temporary reduction from triple-digit levels, the two sides remain far apart on fundamental issues. So when it comes to negotiations with the U.S.' biggest trading partners, there's sticking points. And where there's sticking points there's potential for escalation that we'll need to be vigilant in monitoring. 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 Cross-Asset Strategist Serena Tang discusses whether demand for U.S. stocks has fallen and where fund flows are surging. Read more insights from Morgan Stanley.----- Transcript -----Serena Tang: Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross-Asset Strategist.Today – is the demand for U.S. assets declining? Let's look at the recent trends in global investment flows.It's Wednesday, July 9th at 1pm in New York.The U.S. equity market has reached an all-time high, but at the same time lingering uncertainty about U.S. trade and tariff policies is forcing global investors to consider the riskiness of U.S. assets. And so the big question we need to ask is: are investors – particularly foreign investors – fleeing U.S. assets?This question comes from recent data around fund flows to global equities. And we have to acknowledge that demand for U.S. stocks overall has declined, going by high-frequency data. But at the same time, we think this idea is exaggerated. So why is that? As many listeners know, fund flows – which represent the net movement of money into and out of various investment vehicles like mutual funds and ETFs – are an important gauge of investor sentiment and market trends. So what are fund flows really telling us about investors' sentiment towards U.S. equities? It would be nice to get an unequivocal answer, but of course, the devil is always in the details. And the problem is that different data sources and frequencies across different market segments don't always lead to the same conclusions. Weekly data across global equity ETF and mutual funds from Lipper show that international investors were net buyers through most of April and May. But the pace of buying has slowed year-to-date versus 2024. Still, it remains much higher than during the same period in 2021 through 2023. Treasury TIC data point to something similar – a slowdown in foreign demand, but not significant net selling. So where are the flows going, if not to the U.S.? They are going to the rest of the world, but more particularly, Europe. Europe stocks, in fact, have been the biggest beneficiary of decreasing flows to the U.S. Nearly $37 billion U.S. has gone into Europe-focused equity funds year-to-date. This is significantly higher than the run-rates over the prior five years. What's more notable here is that year-to-date, flows to European-focused ETFs and mutual funds dominated those targeting Japan and Emerging Markets. This suggests that Europe is now the premier destination for equity fund flows, with very little demand spillovers to other regions' equity markets.These shifts have yet to show up in the allocation data, which tracks how global asset managers invest in stocks regionally. Global equity funds' portfolio weights to Rest-of-the-World has gone up by roughly the same amount as allocation to the U.S. has come down. But allocation to the U.S. has actually gone down by roughly the same amount, as its share in global equity indices; which means that If allocation to the U.S. has changed, it's simply because the U.S. is now a smaller part of equity indices. Meanwhile, an estimated U.S.$9 billion from Rest-of-the World went into international equity funds, which excludes U.S. stocks altogether. Granted, it's not a lot; but scaled for fund assets, it's the highest net flows international equities have seen. In other words, some investors are choosing to invest in equities excluding U.S. altogether. These trends are unlikely to reverse as long as lingering policy uncertainty dampens demand for U.S.-based assets. But as we've argued in our mid-year outlook, there are very few alternative markets to the U.S. dollar markets right now. U.S. stocks might start to see less marginal flows from foreign investors – to the benefit of Rest-of-the-World equities, especially Europe. But demand is unlikely to dry up completely over the next 12 months. 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.

Arushi Agarwal from the European Sustainability Strategy team and Aerospace & Defense Analyst Ross Law unpack what a reshaped defense industry means for sustainability, ethics and long-term investment strategy.Read more insights from Morgan Stanley.----- Transcript -----Ross Law: Welcome to Thoughts on the Market. I'm Ross Law from Morgan Stanley's European Aerospace and Defense team.Arushi Agarwal: And I'm Arushi Agarwal from the European Sustainability Research Team.Ross Law: Today, a topic that's rapidly defining the boundaries of sustainable investing and technological leadership – the use of AI in defense.It's Tuesday, July 8th at 3pm in London. At the recent NATO summit, member countries decided to boost their core defense spending target from 2 percent to 3.5 percent of GDP. This big jump is sure to spark a wave of innovation in defense, particularly in AI and military technology. It's clear that Europe is focusing on rearmament with AI playing a major role. In fact, AI is revolutionizing everything from unmanned systems and cyber defense to simulation training and precision targeting. It's changing the game for how nations prepare for – and engage in – conflict. And with all these changes come serious challenges. Investors, policy makers and technologists are facing some tough questions that sit at the intersection of two of Morgan Stanley's four key themes: The Multipolar World and Tech Diffusion.So, Arushi, to set the stage, how is the concept of sustainability evolving to include national security and defense, particularly in Europe?Arushi Agarwal: You know, Ross, it's fascinating to see how much this space has evolved over the past year. Geopolitical tensions have really pushed national security much higher on the sustainability agenda. We're seeing a structural shift in sentiment towards defense investments. While historically defense companies were largely excluded by sustainability funds, we're now seeing asset managers revisiting these exclusions, especially around conventional and nuclear weapons. Some are even launching thematic funds, specifically focused on security and resilience.However, in the absence of standard methodologies to assess weapon related exposures, evaluate sector-specific ESG risks and determine transparency, there is no clear consensus on what sustainability focused managers can hold. Greater policy focus has created the need to identify a long-term approach to investing in this sector, one that is cognizant of ethical issues. Investors are now increasingly asking whether rapid technological integration might allow for a more forward-looking, risk aware approach to investing in national security.Ross Law: So, it's no news that Europe has historically underspent on defense. Now, the spending goal is moving to 3.5 percent of GDP to try and catch up. Our estimates suggest this could mean an additional $200 billion per year in additional spend – with a focus on equipment over personnel, at least for the time being. With this new focus, how is AI shaping the European rearmament strategy?Arushi Agarwal: Well, AI appears to be at the core of EU's 800 billion euro rearmament plan. The commission has been quite clear that escalating tensions have not only led to a new arms race but also provoked a global technological race. Now to think about it, AI, quantum, biotech, robotics, and hypersonic are key inputs not only for long-term economic growth, but also for military pre-eminence.In our base case, we estimate that total NATO military spend into AI applications will potentially more than double to $112 billion by 2030. This is at a 4 percent AI investment allocation rate. If this allocation rate increases to 10 percent as anticipated by European deep tech firms, then NATOs AI military spend could grow sixfold to $306 billion by 2030 in our bull case.So, Ross, you were at the Paris Air Show recently where companies demonstrated their latest product capabilities. Which AI applications are leading the way in defense right now? Ross Law: Yeah, it was really quite eye-opening. We've identified nine key AI applications, reshaping defense, and our Application Readiness Radar shows that Cybersecurity followed by Unmanned Systems exhibit the highest level of preparedness from a public and private investment perspective.Cybersecurity is a major priority due to increased proliferation of cyber attacks and disinformation campaigns, and this technology can be used for both defensive and offensive measures. Unmanned systems are also really taking off, no pun intended, mainly driven by the rise in drone warfare that's reshaping the battlefield in Ukraine.At the Paris Airshow, we saw demonstrations of “Wingman” crewed and uncrewed aircraft. There have also been several public and private partnerships in this area within our coverage. Another area gaining traction is simulation and war gaming. As defense spending increases and potentially leads to more military personnel, we see this theme in high demand in the coming years.Arushi Agarwal: And how are European Aerospace and Defense companies positioning themselves in terms of AI readiness?Ross Law: Well, they're really making significant advancements. We've assessed AI technology readiness for our A&D companies across six different verticals: the number of applications; dual-use capabilities; AI pricing power; responsible AI policy; and partnerships on both external and internal product categories.What's really interesting is that European A&D companies have higher pricing power relative to the U.S. counterparts, and a higher percentage are both enablers and adopters of AI. To accelerate AI integration, these companies are increasingly partnering with government research arms, leading software firms, as well as peers and private players.Arushi Agarwal: And some of these same technologies can also be used for civilian purposes. Could you share some examples with us?Ross Law: The dual use potential is really significant. Various companies in our coverage are using their AI capabilities for civilian applications across multiple domains. For example, geospatial capabilities can also be used for wildfire management and tracking deforestation. Machine learning can be used for maritime shipping and port surveillance. But switching gears slightly, if we talk about the regulatory developments that are emerging in Europe to address defense modernization, what does this mean, Arushi, for society, the industry and investors?Arushi Agarwal: There's quite a lot happening on the regulatory front. The European Commission is working on a defense omnibus simplification proposal aimed at speeding up defense investments in the EU. It's planning to publish a guidance notice on how defense investment will fit within the sustainable finance framework. It's also making changes to its sustainability reporting directive. If warranted, the commission will make additional adjustments to reflect the needs of the defense industry in its sustainability reporting obligations. The Sustainable Fund Reform is another important development. While the sustainability fund regulation doesn't prohibit investment into the defense sector, the commission is seeking to provide clarification on how defense investment goals sit within a sustainability framework.Additionally at the European Security Summit in June, the European Defense Commissioner indicated that a roadmap focusing on the modernization of European defense will be published in autumn. This will have a special focus on AI and quantum technologies. For investors, whilst exclusions easing has started to take place, pickup in individual positioning has been slow. As investors ramp up on the sector, we believe these regulatory developments can serve as catalysts, providing clear demand and trend signals for the sector.Ross Law: So finally, in this context, how can companies and investors navigate these ethical considerations responsibly?Arushi Agarwal: So, in the note we highlight that AI risk management requires the ability to tackle two types of challenges. First, technical challenges, which can be mitigated by embedding boundaries and success criteria directly into the design of the AI model. For example, training AI systems to refuse harmful requests. Second challenges are more open-ended and ambiguous set of challenges that relate to coordinating non-proliferation among countries and preventing misuse by bad actors. This set of challenges requires continuous interstate dialogue and cooperation rather than purely technical fixes.From an investor perspective, closer corporate engagement will be key to navigating these debates. Ensuring firms have clear documentation of their algorithms and decision-making processes, human in the loop systems, transparency around data sets used to train the AI models are some of the engagement points we mention in our note.Ultimately, I think the key is balance. On the one hand, we have to recognize the legitimate security needs that defense technologies address. And on the other hand, there's the need to ensure appropriate safeguards and oversight.Ross Law: Arushi, thanks for taking the time to talk.Arushi Agarwal: It was great speaking with you, Ross,Ross Law: And thank you all 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.

The American consumer isn't simply pulling back. They are changing the way they spend – and save. Our U.S. Thematic and Equity Strategist Michelle Weaver digs into the data. 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, the U.S. consumer. What's changing about the ways Americans spend, save and feel about the future?It's Monday, July 7th at 10am in London.As markets digest mixed signals – whether that's easing inflation, changing politics, and persistent noise around tariffs – U.S. consumers are recalibrating. Under the surface of headline numbers, a more complex story is unfolding about the ways Americans are not just reacting but adapting to macro challenges.First, I want to start with a big picture. Data from our latest consumer survey shows that consumer sentiment has stabilized, even as uncertainty around tariffs persists, especially into these rolling July deadlines. Inflation remains the top concern for most. But the good news is that it's trending lower. This month more than half of respondents cited inflation as their primary concern, a slight decrease from last month and a year ago. Now, that's a subtle but a meaningful decline suggesting consumers may be adjusting their expectations rather than bracing for continued price shocks. At the same time though political concerns are on the rise. More than 40 percent of consumers now list the U.S. political environment as a major worry. That's slightly up from last month; and not surprisingly concern around geopolitical conflicts has also jumped from a month ago.Now, when we break this down by income levels, we see some interesting trends. Inflation is the top concern across all income groups, except for those earning more than $150,000. For them, politics takes the top spot. Lower income households, though, are more focused on paying rent and debts, while higher income groups are more concerned about their investments.As for tariffs, concern remains high but stable. About 40 percent of consumers are very worried about tariffs and another 25 percent are moderately so. But if we look under the surface, it's really showing us a political divide. 63 percent of liberals are very concerned, compared to just 23 percent of conservatives who say they're very concerned.Despite these worries, though, fewer people overall are planning to cut back on spending. Only about a third say they'll spend less due to tariffs, which is down quite a bit from earlier this year. Meanwhile, about a quarter plan to spend more, and roughly a third don't expect to change their plans at all.This resilience points to the notable behavioral trend I mentioned at the start. Consumers are not just reacting, they're adapting. Looking at the broader economy, consumer confidence is holding steady according to our survey, although it's slightly down from last month. But when it comes to household finances, the outlook is more positive with a significant number expecting their finances to improve and fewer expecting them to worsen – a net positive.Savings are also showing some resilience. The average consumer has several months of savings, slightly up from last year. Spending intentions are stable with nearly a third of consumers planning to spend more next month while fewer planned to spend less. And when it comes to big ticket items, more than half of U.S. consumers are planning a major purchase in the next three months, including vehicles, appliances, and vacations.Speaking of vacations, summer travel season is here and I'm looking forward to taking a trip soon. Around 60 percent of consumers are planning to travel in the next six months, with visiting friends and family being the top reason.So, what's the biggest takeaway for investors?Despite ongoing concerns about inflation, politics and tariffs, U.S. consumers are showing remarkable resilience. It's a nuanced picture, but one that overall suggests stability in the face of uncertainty.Thanks for listening. I hope you enjoyed the show, and if you did, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

For a special Independence Day episode, our Head of Corporate Credit Research considers a popular topic of debate, on holidays or otherwise – national 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 on a special Independence Day episode of the podcast, we're going to talk a bit about the history of U.S. debt and the contrast between corporate and federal debt trajectories.It's Thursday, July 3rd at 9am in Seattle.The 4th of July, which represents the U.S. declaring independence from Great Britain, remains one of my favorite holidays. A time to gather with friends and family and celebrate what America is – and what it can still be.It is also, of course, a good excuse to talk about debt.Declaring independence is one thing, but fighting and beating the largest empire in the world at the time would take more than poetic words. The borrowing that made victory possible for the colonies also almost brought them down in the 1780s under a pile of unsustainable debt. It was a young treasury secretary Alexander Hamilton, who successfully lobbied to bring these debts under a federal umbrella – binding the nation together and securing a lower borrowing cost. As we'd say, it's a real fixed income win-win.Almost 250 years later, the benefits of that foresight are still going strong, with the United States of America enjoying the world's largest economy, and the largest and most liquid equity and bond markets. Yet lately there's been more focus on whether those bond markets are, well, too large.The U.S. currently runs a budget deficit of about 7 percent of GDP, and the current budget proposals in the house and the Senate could drive an additional 4 trillion of borrowing over the next decade above that already hefty baseline. Forecast even further out, well, they look even more challenging.We are not worried about the U.S. government's ability to pay its bills. And to be clear, in the near term, we are forecasting at Morgan Stanley, U.S. government yields to go down as growth slows and the Federal Reserve cuts rates more than expected in 2026. But all of this borrowing and all the uncertainty around it – it should increase risk premiums for longer term bonds and drive a steeper yield curve.So, it's notable then – as we celebrate America's birthday and discuss its borrowing – that it's really companies that are currently unwrapping the presents. Corporate balance sheets, in contrast, are in very good shape, as corporate borrowing trends have diverged from those of the government.Many factors are behind this. Corporate profitability is strong. Companies use the post-COVID period to refinance debt at attractive rates. And the ongoing uncertainty – well, it's kept management more conservative than they would otherwise be. Out of deference to the 4th of July, I've focused so far on the United States. But we see the same trend in Europe, where more conservative balance sheet trends and less relative issuance to governments is showing up on a year-over-year basis. With companies borrowing relatively less and governments borrowing relatively more, the difference between what companies and the government pay, that so-called spread that we talk so much about – well, we think it can stay lower and more compressed than it otherwise would.We don't think this necessarily applies to the low ratings such as single B or lower borrowers, where these better balance sheet trends simply aren't as clear. But overall, a divergent trend between corporate and government balance sheets is giving corporate bond investors something additional to celebrate over the weekend.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.