Thoughts on the Market

Our Head of Research Product in Europe Paul Walsh and Chief European Equity Strategist Marina Zavolock break down the main themes for European stocks this year. Read more insights from Morgan Stanley.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's Head of Research Product here in Europe.Marina Zavolock: And I'm Marina Zavolock, Chief European Equity Strategist.Paul Walsh: Today, we are here to talk about the big debates for European equities moving into 2026.It's Friday, January the 16th at 8am in London.Marina, it's great to have you on Thoughts on the Market. I think we've got a fascinating year ahead of us, and there are plenty of big debates to be exploring here in Europe. But let's kick it off with the, sort of, obvious comparison to the U.S.How are you thinking about European equities versus the U.S. right now? When we cast our eyes back to last year, we had this surprising outperformance. Could that repeat?Marina Zavolock: Yeah, the biggest debate of all Paul, that's what you start with. So, actually it's not just last year. If you look since U.S. elections, I think it would surprise most people to know that if you compare in constant currency terms; so if you look in dollar terms or if you look in Euro terms, European equities have outperformed U.S. equities since US elections. I don't think that's something that a lot of people really think about as a fact.And something very interesting has happened at the start of this year. And let me set the scene before I tell you what that is.In the last 10 years, European equities have been in this constantly widening discount range versus the U.S. on valuation. So next one's P/E there's been, you know, we have tactical rallies from time to time; but in the last 10 years, they've always been tactical. But we're in this downward structural range where their discount just keeps going wider and wider and wider. And what's happened on December 31st is that for the first time in 10 years, European equities have broken the top of that discount range now consistently since December 31st. I've lost count of how many trading days that is. So about two weeks, we've broken the top of that discount range. And when you look at long-term history, that's happened a number of times before. And every time that happens, you start to go into an upward range.So, the discount is narrowing and narrowing; not in a straight line, in a range. But the discount narrows over time. The last couple of times that's happened, in the last 20 years, over time you narrow all the way to single digit discount rather than what we have right now in like-for-like terms of 23 percent.Paul Walsh: Yeah, so there's a significant discount. Now, obviously it's great that we are seeing increased inflows into European equities. So far this year, the performance at an index level has been pretty robust. We've just talked about the relative positioning of Europe versus the U.S.; and the perhaps not widely understood local currency outperformance of Europe versus the U.S. last year. But do you think this is a phenomenon that's sustainable? Or are we looking at, sort of, purely a Q1 phenomenon?Marina Zavolock: Yeah, it's a really good question and you make a good point on flows, which I forgot to mention. Which is that, last year in [Q1] we saw this really big diversification flow theme where investors were looking to reduce exposure in the U.S., add exposure to Europe – for a number of reasons that I won't go into.And we're seeing deja vu with that now, mostly on the – not really reducing that much in U.S., but more so, diversifying into Europe. And the feedback I get when speaking to investors is that the U.S. is so big, so concentrated and there's this trend of broadening in the U.S. that's happening; and that broadening is impacting Europe as well.Because if you're thinking about, ‘Okay, what do I invest in outside of seven stocks in the U.S.?' You're also thinking about, ‘Okay, but Europe has discounts and maybe I should look at those European companies as well.' That's exactly what's happening. So, diversification flows are sharply going up, in the last month or two in European equities coming into this year.And it's a very good question of whether this is just a [Q1] phenomenon. [Be]cause that's exactly what it was last year. I still struggle to see European equities outperforming the U.S. over the course of the full year because we're going to come into earnings now.We have much lower earnings growth at a headline level than the U.S. I have 4 percent earnings growth forecast. That's driven by some specific sectors. It's, you know, you have pockets of very high growth. But still at a headline level, we have 4 percent earnings growth on our base case. Consensus is too high in our view. And our U.S. equity strategists, they have 17 percent earnings growth, so we can't compete.Paul Walsh That's a very stark difference.Marina Zavolock: Yeah, we cannot compete with that. But what I will say is that historically when you've had these breakouts, you don't get out performance really. But what you get is a much narrower gap in performance. And I also think if you pick the right pockets within Europe, then you could; you can get out performance.Paul Walsh: So, something you and I talked about a lot in 2025, is the bull case for Europe. There are a number of themes and secular dynamics that could play out, frankly, to the benefits of Europe, and there are a number of them. I wondered if you could highlight the ones that you think are most important in terms of the bull case for Europe.Marina Zavolock: I think the most important one is AI adoption. We and our team, we have been able to quantify this. So, when we take our global AI mapping and we look at leading AI adopters in Europe, which is about a quarter of the index, they are showing very strong earnings and returns outperformance. Not just versus the European index, but versus their respective sectors. And versus their respective sectors, that gap of earnings outperformance is growing and becoming more meaningful every time that we update our own chart.To the point that I think at this rate, by the second half of this year, it's going to grow to a point that it's more difficult for investors to ignore. That group of stocks, first of all, they trade again at a big discount to U.S. equivalent – 27 percent discount. Also, if you see adoption broadening overall, and we start to go into the phase of the AI cycle where adopters are, you know, are being sought after and are seen as in the front line of beneficiaries of AI. It's important to remember Europe; the European index because we don't have a lot of enablers in our index. It is very skewed to AI adopters. And then we also have a lot of low hanging fruit given productivity demographic challenges that AI can help to address. So that's the biggest one.Paul Walsh: Understood.Marina Zavolock: And the one I've spent most time on. But let me quickly mention a few others. M&A, we're seeing it rising in Europe, almost as sharply as we're seeing in the U.S. Again, I think there's low hanging fruit there. We're seeing easing competition commission rules, which has been an ongoing thing, but you know, that comes after decade of not seeing that. We're seeing corporate re-leveraging off of lows. Both of these things are still very far from cycle peaks. And we're seeing structural drivers, which for example, savings and investment union, which is multifaceted. I won't get into it. But that could really present a bull case.Paul Walsh: Yeah. And that could include pensions reform across Europe, particularly in Germany, deeper capital…Marina Zavolock: We're starting to see it.Paul Walsh: And in Europe as well, yeah. And so just going back to the base case, what are you advocating to clients in terms of what do we buy here in Europe, given the backdrop that you've framed?Marina Zavolock: Within Europe, I get asked a lot whether investors should be investing in cyclicals or value. Last year value really worked, or quality – maybe they will return. I think it's not really about any of those things. I think, similar to prior years, what we're going to see is stock level dispersion continuing to rise. That's what we keep seeing every month, every quarter, every year – for the last couple of years, we're seeing dispersion rising.Again, we're still far from where we normally get to, when we get to cycle peaks. So, Europe is really about stock picking. And the best way that we have at Morgan Stanley to capture this alpha under the surface of the European index. And the growth that we have under the surface of the index, is our analyst top picks – which are showing fairly consistent outperformance, not just versus the European index, but also versus the S&P. And since inception of top picks in 2021, European top picks have outperformed the S&P free float market cap weighted by over 90 percentage points. And they've outperformed, the S&P – this is pre-trade – by 17 percentage points in the last year. And whatever period we slice, we're seeing out performance.As far as sectors, key sectors, Banks is at the very top of our model. It's the first sector that non-dedicated investors ask me about. I think the investment case there is very compelling. Defense, we really like structurally with the rearmament theme in Europe, but it's also helpful that we're in this seasonal phase where defense tends to really outperform between; and have outsized returns between January and April. And then we like the powering AI thematic, and we are getting a lot of incoming on the powering AI thematic in Europe. We upgraded utilities recently.Paul, maybe if I ask you a question, one sector that I've missed out on, in our data-driven sector model, is the semis. But you've worked a lot with our semi's team who are quite constructive. Can you tell us about the investment case there?Paul Walsh: Yeah, they're quite constructive, but I would say there's nuance within the context of the sector. I think what they really like is the semi cap space, which they think is really well underpinned by a robust, global outlook for wafer fab equipment spend, which we see growing double digits globally in both 2026 and 2027.And I think within that, in particular, the outlook for memory. You have something of a memory supercycle going on at the moment. And the outlook for memory is especially encouraging. And it's a market where we see it as being increasingly capacity constrained with an unusually long order book visibility today, driven really by AI inference. So strong thematic overlay there as well.And maybe I would highlight one other key area of growth longer term for the space, which is set to come from the proliferation of humanoid robots. That's a key theme for us in 2025. And of course, we'll continue to be so, in the years to come. And we are modeling a global Humanoids Semicon TAM of over $300 billion by 2045, with key pillars of opportunity for the semi names to be able to capitalize on. So, I think those are two areas where, in particular, the team have seen some great opportunities.Now bringing it back to the other side of the equation, Marina, which sectors would you be avoiding, within the context of your model?Marina Zavolock: There's a collection of sectors and they, for the most part, are the culprits for the low growth that we have in Europe. So simply avoiding these could be very helpful from a growth perspective, to add to that multiple expansion. These are at the bottom of our data driven, sector models. So, these are Autos, Chemicals, Luxury Transport, Food and Beverage.Most of these are old economy cyclicals. Many of these sectors have high China/old economy exposure – as well where we're not seeing really a demand pickup. And then lastly, a number of these sectors are facing ever rising China competition.Paul Walsh: And I think, when we weigh up the skew of your views according to your model, I think it brings it back to the original big debate around cyclicals versus defensives. And your conclusion that actually it's much more complicated than that.Marina, thanks for taking the time to talk.Marina Zavolock: Great to speak with you Paul.Paul Walsh: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our Global Head of Fixed Income Research Andrew Sheets looks at the implications of the U.S. government's efforts to ease regulations, from bank balance sheets to asset valuations.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Today, a core theme of easing policy, and the latest iteration in the U.S. mortgage market. It's Thursday, January 15th at 2pm in London. Central to our thinking for the year ahead is that we're seeing an unusual combination of easing monetary policy, fiscal policy, and regulatory policy – all at the same time. This isn't normal, and usually this type of support is only deployed under much more dire economic conditions. All this is also happening alongside another large supportive force – over $3 trillion of AI- and datacenter-related spending that Morgan Stanley expects all to happen through the end of 2028. This broad-based easing is a global theme. Equities in Japan have been rallying on hopes of even a larger fiscal leasing in that country. In Europe, we think that Germany will continue to spend more while the European Central Bank and Bank of England cut rates more than the market expects.But like many things these days, it's the United States that's at the heart of the story. We think that the U.S. Federal Reserve will continue to lower interest rates this year, even as core inflation persists above its target. The U.S. government will spend about $1.9 trillion more than it takes in, even after adjusting for tariffs as tax cuts from the One Big Beautiful Bill Act kick in. But my focus today is on the third leg of this proverbial three-legged stimulative stool. While easing monetary and fiscal policy probably get the most focus, easing regulatory policy is another big lever that's being pulled in the same direction. Regulatory policy is opaque, and let's face it can be a little boring. But it's extremely important for how financial markets function. Regulation drives the incentives for the buyers of many assets, especially in the all-important banking and insurance sectors. It can set almost by definition what price an asset needs to trade at to be attractive, or how much of an asset a particular actor in the market can or cannot hold. Regulatory policy tightened dramatically in the wake of the Global Financial Crisis, but now it's starting to ease. Our U.S. bank equity analysts expect that finalization of key capital rules later this year – an important regulatory step – could free up about [$]5.8 trillion – with a T – of balance sheet capacity across the Global Systematically Important Banks. In mid-December, the office of the comptroller of the currency and the FDIC withdrew lending guidelines from 2013 that had discouraged banks from making loans to more highly indebted companies. And just last week, the U.S. administration announced that the U.S. mortgage agencies, Fannie Mae and Freddie Mac would buy [$]200 billion of mortgages to hold on their own balance sheet; a significant move that quickly tightens spreads in this key market. For investors, we see several implications. This simultaneous easing across monetary, fiscal, and now regulatory policy supports a market that runs hot and where valuations may overshoot. And in the specific case of these agency mortgages, my colleague Jay Bacow and our mortgage strategy team think that this shift is now very quickly in the price. Having previously been positive on agency mortgage spreads, they've now turned to neutral. 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 Head of India Research and Chief India Equity Strategist Ridham Desai addresses a big debate: whether India stocks are poised for a recovery after underperforming other emerging markets in 2025.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Ridham Desai, Morgan Stanley's Head of India Research and Chief India Equity Strategist. Today: one of the big debates in Asia this year. Can Indian equities recover their strength after a historic slump? It's Wednesday, January 14th, at 2pm in Mumbai.India ended 2025 with its weakest relative performance versus Emerging Markets since 1994. That's right – three decades. The reason? A mid-cycle growth slowdown, rich valuations, and the fact that India doesn't offer an explicit AI-related trade. Add in delays on the U.S. trade deal plus India's low beta in a global bull market, and you've got a recipe for underperformance. But we think the tide is turning. Valuations have corrected meaningfully and likely bottomed out in October. More importantly, India's growth cycle looks poised for a positive surprise. Policymakers have gone all-in on reflation, deploying a mix of aggressive measures to revive momentum. The Reserve Bank of India has cut rates, reduced the cash reserve ratio, infused liquidity and gone in for bank deregulation which are adding fuel to the fire. The government has front-loaded capital expenditure and announced a massive ₹1.5 trillion GST rate cut to encourage people to spend more on goods and services. All these moves – along with improving ties between India and China, Beijing's new anti-involution push, and the possibility of a major India-U.S. trade deal – are laying solid groundwork for recovery. Put simply, India's once-tough, post-pandemic economic stance is easing up. And that could open the door to a major shift in how investors see the market going forward. India's macro backdrop is also evolving. The reduced reliance on oil in GDP, the growing share of exports, especially in services, the ongoing fiscal consolidation – all indicate a smaller saving imbalance. This means structurally lower interest rates ahead. And flexible inflation targeting, and volatility in both inflation and interest rates should continue to decline. High growth with low volatility and falling rates should translate into higher P/E multiples. And don't forget the household balance sheet shift toward equities. Systematic flows into domestic mutual funds are evidence of this trend. Investor concerns are understandable, but let's keep them in context. More companies raising capital often signals growth ahead, not just high valuations. Domestic investment remains strong, thanks to a steady shift toward equities. India's premium valuations reflect solid long-term growth prospects and expectations for lower real interest rates. On the policy front, efforts to boost growth are robust, and we see real growth potentially surprising to the upside. While India isn't a leader in AI yet, the upcoming AI summit in February could help address concerns about India's role in tech innovation. What key catalysts should investors watch? Look for positive earnings revisions, further dovishness from the RBI, reforms from the government including privatization, and the long-awaited U.S. trade deal. But also keep an eye on key risks – slower global growth and shifting geopolitical dynamics. So, after fifteen months of relative pain, could India be on the cusp of a structural re-rating? If growth surprises to the upside – and we think it will – the story of 2026 may just be India's comeback. Stay tuned.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 Strategist Michelle Weaver and U.S. Multi-Industry Analyst Chris Snyder discuss a North America Big Debate for 2026: Whether investments in efficiency and productivity will spark a transformation of U.S. manufacturing. 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. Chris Snyder: I'm Chris Snyder, U.S. Multi-Industry Analyst. Michelle Weaver: Today: Will 2026 be the year of U.S. Manufacturing's transformation? It's Tuesday, January 13th at 10am in New York. U.S. reshoring has been an important component of our multipolar world theme, and manufacturing is one of those topics we have always had our eyes on. We've been making some big predictions about a transformation in this sector, so it makes sense that it features prominently in the big debates we've identified for North America in 2026. In the last few years, there's been a steady stream of investments in automation controls and upgrades across U.S. manufacturing. And this is happening against a backdrop of shifting global supply chains and lingering policy uncertainty. Now, the big market debate is whether these investments will generate a whole wave of greenfield projects – that is brand new, multi-year construction initiatives to build facilities, factories, and infrastructure from the ground up. Chris, what exactly is driving this current wave of efficiency and productivity investment in U.S. manufacturing? And how long term of a trend is it? Chris Snyder: I think what's driving the inflection is tariffs. The view that has underpinned my U.S. reshoring call is that I believe companies have to serve the U.S. market. The U.S. accounts for 30 percent of global consumption – equal to EU and China combined. It is also the best margin region in the world. So, companies have to serve the market, and now what they're doing is they're going back and they're looking at their production assets that they have in the U.S. and they're saying, how can I get more out of what's already here? So, the quickest, cheapest, fastest way to bring production online in the U.S. is drive better productivity and efficiency out of the assets you already have. And we're seeing it come through very quickly after Liberation Day. Michelle Weaver: And you think these investments are an on ramp to larger greenfield projects. What evidence do we have that this efficiency spend is setting the stage for a ramp up in new factory builds? Chris Snyder: I think this is absolutely the leading indicator for greenfields because this is telling us that the supply chain cost calculation has changed. What all of these companies are doing are saying, ‘Okay, how can I get products into the U.S. at the cheapest cost possible?' What we're seeing is the cost of imports have gone higher with tariffs, and now it's more economically advisable for these companies to make the product in the United States. And if that's the case, that means that when they need a new factory, it's going to come to the United States. They might not need a factory now, but when they do, the U.S. is at least incrementally better positioned to get that factory. Other data that we're seeing; I think the most interesting data that's come out of all of this is the bifurcation in global PPI or producer price data. If you look at it on a regional basis, North America markets saw PPI go higher in 2025. They were all the tariff exempt regions – U.S., Canada, and Mexico. Every other region in the world saw PPI down year-to-date. That means that these companies and factories are having to lower prices to stay competitive in the global market and sell their products into the United States. That tells us also where the next factory is going. If you have a factory in the U.S. and a factory in Malaysia, and your U.S. factory is pricing up, that means the return profile is getting better. If your factory in Malaysia is pricing down, it means the returns are getting worse and you're pricing down because it's over-capacitized. That's not a region where you're going to add a factory. You know, what I like to say is – price drives returns, and supply is going to follow returns. And right now, that price data tells us the returns are in the United States. Michelle Weaver: And, for people that might not be familiar with PPI, can you explain it to everyone? It's sort of like CPIs cousin, but how should people think about it? Chris Snyder: Yeah, yeah, so PPI, Producer Price Inflation, it's effectively the prices that my companies, the producers of goods are charging. So maybe this is the price that they would then charge a distributor, who then the distributor ultimately is selling it to a store. And then that's, you know, kind of factoring its way into CPI. But it starts with PPI. Michelle Weaver: And what are some of the key catalysts investors should be looking for in 2026 that could confirm that this greenfield ramp is underway? Chris Snyder: The number one, you know, metric I think the market looks at is manufacturing project starts. Every month there's data that comes out and says how many manufacturing projects were announced in the U.S. that month. And what we've seen coming out of Liberation Day is that number on a project value has gone higher. You know, it hasn't totally inflected, but it has pushed higher. The thing that has inflected is the number of announcements. So, this is not like two or three years ago where we had these mega projects. What we're seeing right now is very broad. And to me that's more important because that shows that there's durability behind it. And it shows that this is because the economics are saying it makes sense. It's not necessarily just because, okay, I got an incentive and I'm trying to follow alongside that. Michelle Weaver: Mm-hmm. The market seems skeptical though, pointing out that the ISM manufacturing purchasing managers index has been shrinking. This could be a sign that demand isn't strong enough to justify building new factories right now. How would you address that concern? Chris Snyder: Yeah, no, I mean, you're definitely right. Like the biggest pushback on the reshoring theme is the demand for goods is not very strong. Consumers are not in a good place. So why would companies add capacity in this backdrop? That's never happened before. Companies only add capacity when they're producing a lot and the utilization goes up. This is not a normal cycle. Throughout history, the motivation to add capacity was when your production rates go higher, your utilization hits a certain level, and then you add capacity. So, it always started with demand to your point. The motivation right now is tariff mitigation. And you do not need higher demand to support that. The U.S. is a $1.2 trillion trade deficit. So, that more than anything gets me confident in the theme and the duration behind it. And I think it's a very different outlook when you look across the international markets. They're the ones that need to find incremental demand to justify investment. Michelle Weaver: And given the scale of U.S. purchasing power and the shift in global capital flows, how do you see these manufacturing trends impacting broader performance in 2026? Chris Snyder: We published our outlook and we're calling for the U.S. Industrial Economy to hit decade high growth levels in the back half of [20]26 and into [20]27. And this is a big reason why. We think about this a lot from a CapEx perspective. And we're seeing the investment, we think that ramps into larger greenfields. But we're also seeing it in the production economy. If you look at the delta between U.S. consumer spend and U.S. manufacturing production, that has really narrowed in recent months. And that tells us that we're increasingly serving U.S. demand through domestic production. So that's another factor that's going to drive activity higher and it doesn't need a cycle. And I think that's what's really important. And I think that is what creates this as a more secular and also durable opportunity. So obviously reassuring is something that's, you know, very close to me and important for the industrial economy. But as you think about the multipolar world theme more broadly, how do you think that evolves in 2026? Michelle Weaver: Yeah, absolutely. Last year the multipolar world was an incredibly powerful theme. And when investors were thinking about the multipolar world last year, it was largely about how are companies going to mitigate the risk of tariffs in the near term. We had the policies come out and surprise everyone in terms of the breadth and the magnitude of the tariffs we saw. We had a lot of policy uncertainty around what is that final level of tariffs going to look like. And a lot of the reaction was really short term. It's how can we use our inventory buffers to try and preserve our margins? How much of these additional tariff costs can we pass off to the end customer? How can we insulate ourselves in the near term? I think this year it's going to turn to more longer-term strategic thinking. Reshoring and a lot of the greenfield projects you were talking about, I think will absolutely be an important component of the multipolar world this year. I think we're also likely to see a greater emphasis on U.S. defense. With the action we just saw in Venezuela. I think we're going to see more of that defense component of the multipolar world starting to be expressed in the U.S. It was a big part of the expression of the theme in Europe last year, but I think it will gain relevance in the U.S. this year. Chris Snyder: Yeah. And I think the next chapter in U.S. industrial growth is just getting going. It's taken 25 years for the U.S. to seed roughly 12 percentage points of global share in manufacturing. We don't think they take that much back. But we think this is a very long runway opportunity. Michelle Weaver: Mm-hmm. And as we watch for the next wave of greenfields, it's clear that efficiency and productivity investments are more than just a stop gap. They're a longer-term theme and they're a foundation for a new era in U.S. manufacturing. Chris, thank you for taking the time to talk. Chris Snyder: Great speaking with you, Michelle. Michelle Weaver: 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.

Our Chief Fixed Income Strategists Vishy Tirupattur discusses the calm market reaction to the latest developments in Venezuela and the potential implications for oil, stocks and bonds.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. On today's podcast, I will talk about the markets' response to the complex political developments in Venezuela, and examine the opportunities and risks it presents to the markets. It is Monday, January 12th at 11 am in New York. Despite the far-reaching geopolitical implications of last weekend's developments in Venezuela, the financial markets have been strikingly calm. Oil prices have barely budged, global equities have rallied, and the reaction in the safe-haven markets – U.S. Treasuries, for example – has been fairly muted. So what explains all of this? Let's start with oil – the commodity most exposed to the situation in Venezuela. The near-term supply appears very manageable. As Morgan Stanley's chief commodities strategist Martijn Rats notes, the market entered 2026 oversupplied, and inventories remain flush. That cushion explains why Brent prices have barely budged, and why Martijn sees prices sliding into the mid-$50s in the coming months.The bigger story is medium term. The prospect of reviving Venezuela's oil industry tilts production risks higher. Despite holding over 300 billion barrels, the world's largest reserves, [the] current output of Venezuela is just 0.8-1 million barrels per day, making it the smallest producer among the major reserve holders. More Venezuelan barrels hitting global markets could keep prices soft, even against a backdrop of rising geopolitical tensions. For oil, the near-term price risk is low while medium-term price risk leans bearish. Let's talk about energy stocks. In line with the expectation of our equity energy analysts led by Devin McDermott, energy equities have largely responded favorably, reflecting the potential for increased oil supply and specific company opportunities. U.S. refiners stand out as poised to gain. A post-Maduro Venezuela could mean higher crude exports of the heavy, sour oil that these refiners are built to process. More imported heavy crude is a clear tailwind for U.S. Gulf Coast refiners like Valero (VLO) and Marathon Petroleum (MPC), potentially lowering their input costs and improving their margins. Similarly, Chevron (CVX), the only U.S. major still operating there under a sanctions waiver, is also poised to rally on the back of this. So for energy stocks, while [the] geopolitical story is complex, the market's message is straightforward. The prospect of greater supply is good news, and some companies appear uniquely positioned to gain as Venezuela's next chapter unfolds. Nowhere has the market reaction been more dramatic than in Venezuela's own sovereign debt. As Simon Waever, Morgan Stanley's global head of sovereign credit strategy anticipated, prices of Venezuela's defaulted bonds – both the government bonds (VENZ) as well as the bonds of state oil company PDVSA – soared to multi-year highs following the weekend's events. The bond complex has already rallied over 25 percent since last weekend to reach an average price of about $35, thanks to the increased likelihood of a creditor-friendly transition. A clearer path for a potential debt restructuring deal improves the prospects for future debt recovery. We expect further upside as the markets price a higher recovery rate if Venezuela's oil production increases further. So what's the bottom line: Last week's developments in Venezuela are a major geopolitical event, but the financial market reaction reflects both the contained nature of the shock and the prospect of constructive outcomes ahead – more oil supply, creditor-friendly debt resolution, etc. Oil markets are signaling that global supply can weather the storm, equity investors are cheering beneficiaries like refiners and seeing the broader risk backdrop as unchanged, and bond investors are selectively adding Venezuela's beaten-down debt in hopes of an eventual recovery. For now, the takeaway is that this political event has not affected the market's positive momentum – if anything, it has created pockets of opportunity and reinforced prevailing trends such as ample oil, and strong credit appetite. As always, we'll keep you informed of any material changes. Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.Important note regarding economic sanctions. This report references jurisdictions which may be the subject of economic sanctions. Readers are solely responsible for ensuring that their investment activities are carried out in compliance with applicable laws.

Our Global Head of Fixed Income Research Andrew Sheets takes a look at multiple indicators that are pointing on the same direction: strong growth for markets and the economy.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Today I'm going to talk about an unusual alignment of signs of optimism for the global cyclical backdrop and why these are important to watch. It's Friday, January 9th at 2pm in London. 2026 is now well underway. Forecasting is difficult and a humbling exercise; and 2025 certainly showed that even in a good year for markets, you can have some serious twists and turns. But overall, Morgan Stanley Research still thinks the year ahead will be a positive one, with equities higher and bond yields modestly lower. It's off to an eventful start, certainly, but we think that core message remains in place. But instead of going back again to our forecasts through the year ahead, I wanted to focus instead on a wide variety of different assets that have long been viewed as leading indicators of the global cyclical environment. I think these are important, and what's notable is that they're all moving in the same direction – all indicating a stronger cyclical backdrop. While today's market certainly has some areas of speculative activity and excessive valuations, the alignment of these things suggests something more substantive may be going on. First, Copper prices, which tend to be volatile but economically sensitive, have been rising sharply up about 40 percent in the last year. A key index of non-traded industrial commodities for everything from Glass to Tin, which is useful because it means it's less likely to be influenced by investor activity, well, it's been up 10 percent over the last year. Korean equities, which tend to be highly cyclical and thus have long been viewed by investors as a proxy for global economic optimism, well, they were the best performing major market last year, up 80 percent. Smaller cap stocks, which again, tend to be more economically sensitive, well, they've been outperforming larger ones. And last but not least, Financial stocks in the U.S. and Europe. Again, a sector that tends to be quite economically sensitive. Well, they've been outperforming the broader market and to a pretty significant degree. These are different assets in different regions that all appear to be saying the same thing – that the outlook for global cyclical activity has been getting better and has now actually been doing so for some time. Now, any individual indicator can be wrong. But when multiple indicators all point in the same direction, that's pretty worthy of attention. And I think this ties in nicely with a key message from my colleague, Mike Wilson from Monday's episode; that the positive case for U.S. equities is very much linked to better fundamental activity. Specifically, our view that earnings growth may be stronger than appreciated. Of course, the data will have a say, and if these indicators turn down, it could suggest a weaker economic and cyclical backdrop. But for now, these various cyclical indicators are giving a positive read. If they continue to do so, it may raise more questions around central bank policy and to what extent further rate cuts are consistent with these signs of a stronger global growth backdrop. For now, we think they remain supporting evidence of our core view that this market cycle can still burn hotter before it burns out. Thank you as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also, please tell a friend or colleague about us today.

Brian Nowak: Welcome to Thoughts on the Market. I'm Brian Nowak, Morgan Stanley's Head of U.S. Internet Research. Andrew Percoco: And I'm Andrew Percoco, Head of North America Autos and Shared Mobility Research. Brian Nowak: Today we're going to talk about why we think 2026 could be a game changer and a point of inflection for autonomous vehicles and autonomous driving. It's Thursday, January 8th at 10am in New York. So, Andrew, let's get started. Have you ridden an autonomous car before? Andrew Percoco: Yeah, absolutely. Took a few in L.A., took one in San Francisco not too long ago. Pretty seamless and interesting experience to say the least. Brian Nowak: Any accidents or awkward left turns? Or did you feel pretty comfortable the whole time? Andrew Percoco: No, I felt pretty comfortable the whole time. No edge cases, no issues. So, all five star reviews for me. Brian Nowak: Andrew, we think your answer is going to be a lot more common as we go throughout 2026. As autonomous availability scales throughout more and more cities. Things are changing quickly. And we kind of look at our model on a city-by-city basis. We think that overall availability for autonomous driving in the U.S. is going to go from about 15 percent of the urban population at the end of 2025 to over 30 percent of the urban population by year end 2026. Andrew Percoco: Yeah, totally agree. Brian, I'm just curious. Like maybe layout for us, you know, what you're expecting for 2026 in more detail in terms of city rollouts, players involved and what we should be watching for throughout the next, you know, nine to 12 months. Brian Nowak: We have multiple new cities across the United States where we expect Waymo, Tesla, Zoox, and others to expand their fleet, expand autonomous driving availability, and ultimately make the product a lot more available and commonplace for people. There are also new potential edge cases that we think we're going to see. We're going to have our first snow cities with Waymo expected to launch in Washington, D.C.; potentially in Colorado, potentially in Michigan. So, we could have proof of concept that autonomous driving can also work in snow throughout [20]26 and into 2027 as well. So, in all, we think as we sit here at the start of [20]26, one year from now, there's going to be a lot more people who are going to say: I'm using an autonomous car to drive me around in my everyday practice. Andrew Percoco: Yeah, that makes a lot of sense. And I guess, what do you think the drivers are to get us there, right? There's also some concerns about safety, adoption, you know, cost structure. What are the main drivers that really make this growth algorithm work and really scales the robotaxi business for some of the key players? Brian Nowak: Part of it is regulatory. You know, we are still in a situation where we are dealing with state-by-state regulatory approvals needed for these autonomous vehicles and autonomous fleets to be built. We'll see if that changes, but for now, it's state by state regulation. After that, it comes down to technology, and each of the platforms needs to prove that their autonomous offerings are significantly safer than human driving. That is also linked to regulatory approval. And so, when we think about fleets becoming safer, proving that they can drive people more miles without having an accident than even a human can – we think about the autonomous players then scaling up their fleets. To make the cars and fleets available to more people. That is sort of the flywheel that we think is going to play out throughout 2026. The other part that we're very focused on across all the players from Waymo to Tesla to Zoox and others is the cost of the cars. And there is a big difference between the cost of a Waymo per mile versus the cost of a Tesla per mile. And we think one of the tension points, Andrew, that you can, you can talk about a little bit here, is the difference in the safety data and what we see on Tesla as of now versus Waymo – versus the cost advantage that Tesla has. So, talk about the cost advantage that Tesla has through all this as of right now. Andrew Percoco: Yeah, definitely. So, you know, as you mentioned, Tesla today has a very clear cost advantage over many of the robotaxi peers that they're competing with. A lot of that's driven by their vertical integration, and their sensor suite, right? So, their vehicle, the cost of their vehicle is – call it $35,000. You've got the camera only sensor approach. So, you don't have lidar, expensive lidar, and radar in the vehicle. And that's just really driven a meaningful cost improvement and cost advantage. On our math about a 40 percent cost advantage relative to Waymo today. Now going forward, you know, as you mentioned, I think the key hurdle here or bottleneck, that Tesla still needs to prove is their safety. And can they reach the same safety standards as a human driver? And, you know, the improvement that you've seen from Waymo. You know, to put some numbers around this. Based on publicly available data in Austin, Tesla's getting in a crash, you know, every about, call it every 50,000 miles; Waymo is closer to every 400,000 miles per crash. So today, Waymo is the leader on safety.I think the one important caveat that I want to mention here is that's on a relatively small number of miles driven for Tesla. They've only driven about 250,000 miles in Austin, whereas Waymo's driven close to, I think, a hundred million miles cumulatively. So, when you look back, I think this is going to be the kind of key catalyst and key data point for investors to watch is – how that data improves over the course of 2026. If you track Waymo – Waymo's data improved substantially as their miles driven improved, and as they launched into new cities.We'd expect Tesla to follow a similar trend. But that's going to be a huge catalyst in validating this camera only approach. If that happens, Tesla's not limited in scale, they're not limited in manufacturing capacity. You can meaningfully see them expand… Or you can see them expand quite quickly once they prove out that safety requirement. Brian Nowak: I think it's a great point because, you know, one of the other big debates that we are all going to have to monitor in the AV space throughout 2026 is: How quickly does Tesla completely pull the safety drivers, and how quickly do they scale up production of the vehicles? Because one of the bank shots around autonomous driving is actually the rideshare industry. You know, we have partnerships; some partnerships between Waymo and Uber and Waymo and Lyft. But Tesla is not partnering with anyone. And so, I think the extent to which we see a faster than expected ramp up in deployment from Tesla can have a lot of impact. Not only on autonomous adoption, competition with Waymo, but also the rideshare industry.So how do you think about the puts and takes on Tesla and sort of removing the drivers and scaling up the fleet this year? What should we be watching? Andrew Percoco: Yeah, so they've already made some strides there in Austin. They've pulled the safety monitor. They haven't opened that up to the public yet without the safety monitor. They're still testing, presumably in that geography. They need to be extremely careful in terms of, you know, the regulatory compliance and making sure they're doing this in a safe way. Ultimately that's what matters most to them. We do expect them to roll it out to the public without the safety monitor in 2026. Whether or not, that's the first quarter or the third quarter – is a little bit tougher to predict. But I think it's reasonable to assume whatever the timeline is, they're going to make sure it's the safest way possible to ensure that there's, you know, no unintended consequences as it relates to regulation, et cetera. I think one, also; one important data point or interesting data point here. You know, we model, I think, a 100 percent CAGR in miles driven, autonomous miles driven through 2032. You can talk a little bit about, you know, what the implications for rideshare, but I think important. It's important to contextualize that would still only represent less than 1 percent of total U.S. miles driven in the U.S. So substantial growth over the next, call it six or seven years. But still a massive TAM to be tapped into beyond 2032. And I think the key there is – what's the cost reduction roadmap look like? And can we get robotaxis to a point where they are cheaper than personal car ownership? And could robotaxis at some point disrupt the car ownership process? Brian Nowak: Yeah. And the other more important point around rideshare will be how much do these autonomous offerings expand the addressable market for rideshare and prove to be incremental? As opposed to being cannibalistic on existing ride share rides. Because you're right that, you know, even our out year autonomous projections still have it less than 1 percent of the total trips. But the question is how much does that add to ride share? Because in some scenarios, those autonomous trips could end up being 20 to 30 percent of the rideshare industry. This matters for Uber and Lyft because while they are partnering Waymo and other autonomous players across a handful of markets, they're not partnered in all the markets. And in some markets, Waymo is going alone. Tesla is going at it alone. And so when we look at our model and we say as of 2024, Uber and Lyft make up 100 percent of the ride share industry based on the current partnerships, which includes Waymo and Tesla and all; and Zoox and all the players, we think that Uber and Lyft will only make up 30 percent of the autonomous driving market. And so it's really important for the rideshare industry that when, number one, we see AV's being incremental to the TAM; and two, that Uber and Lyft are able to continue to add more partnerships over time to drive more of that overall long-term AV opportunity and participate in all this rideshare industry over the next five years. Andrew Percoco: I think it's really clear that the future of autonomous vehicles is here and we've reached an inflection point; and there's a lot of interesting catalysts and data points for us and for investors to watch for throughout 2026.So Brian, thanks again for taking the time to talk. Brian Nowak: Andrew, great speaking with you. And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our Chief Fixed Income Strategist Vishy Tirupattur is joined by Dan Toscano, the firm's Chairman of Markets in Private Equity, unpack how credit markets are changing—and what the AI buildup means for the road ahead.Read more insights from Morgan Stanley.----- Transcript -----Vishy Tirupattur: Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley's Chief Fixed Income Strategist. Today is a special edition of our podcast. We are joined by Dan Toscano, Chairman of Markets in Private Equity at Morgan Stanley, and a seasoned practitioner of credit markets over many, many credit cycles. We will get his thoughts on the ongoing evolution and revolution in credit marketsIt's Wednesday, January 7th at 10am in New York. Dan, welcome.Dan Toscano: Glad to be here.Vishy Tirupattur: So, to get our – the listeners familiar with your journey, can you talk a little bit about your experience in the credit markets, and how you got to where we are today?Dan Toscano: Yeah, sure. So, I've been doing this a long time. You used the nice word seasoned. My kids would refer to it as old. But I started in this journey in 1988. And to make a long story short, my first job on Wall Street was buying junk bonds in the infancy of the junk bond market, when most of what we were financing were LBOs. So, if you're familiar with Barbarians at the Gate, one of the first bonds we bought were RJR Nabisco reset notes. And I've been doing this ever since, so over almost four decades now.Vishy Tirupattur: So, the junk bond market evolved into high yield market, syndicated loan market, CLO market, financial crisis. So, talk to us about your experiences during this transition.Dan Toscano: Yeah. I mean, one of the things these markets do is they finance evolution in industries. So, when I think back to the early days of financing leveraged buyouts, they were called bootstrap deals. The first deal I did as an intermediary on Wall Street as opposed to as an investor, was a buyout with Bain Capital in 1993. At the time, Bain Capital had a $600 million AUM private equity platform. Think about that in the scale of what Bain Capital does in private equity today. You know, back then it was corporate carve outs, and trying to make the global economy more efficient. And you remember the rise of the conglomerate. And so, one of the early things we financed a lot of was the de-conglomeration of big corporates. So, they would spin off assets that were not central to the business or the strengths that they had as an organization.So, that was the early days of private equity. There was obviously the telecom build out in the late 90's and the resulting bust. And then into the GFC. And we sit here today with the distinctions of private capital, private credit, public credit, syndicated credit, and all the amazing things that are being financed in, you know, what I think of as the next industrial revolution.Vishy Tirupattur: In terms of things that have changed a lot – a lot also changed following the financial crisis. So, if you dig deep into that one thing that happened was the introduction of leveraged lending guidelines. Can you talk about what leveraged lending guidelines did to the credit markets?Dan Toscano: Yeah, I mean, it was a big change for underwriters because it dictated what you could and couldn't participate in as an underwriter or a lender, and so it really cut off one end of the market that was determined by – and I think the thing most famously attributed to the leveraged lending guidelines was this maximum leverage notion of six times leverage is the cap. Nothing beyond that. And so that really limited the ability for Wall Street firms to underwrite and distribute capital to support those deals.And inadvertently, or maybe by plan, really gave rise to the growth in the private credit market. So, when you think about everything that's going on in the world today, including, which I'm sure we'll talk about, the relaxation of the leveraged lending guidelines, it was really fuel for private credit.Vishy Tirupattur: So private credit, this relaxation that you mentioned, you know, a few weeks ago, the FDIC and the OCC withdrew the leveraged lending guidelines in total. What do you expect that will do to the private credit markets? Will that make private credit market share decrease and bank market share increase?Dan Toscano: I think many people think of these as being mutually exclusive. We've never thought of it that way. It exists more on a continuum. And so, what I think the relaxation of those guidelines or the elimination of those guidelines really frees the banks to participate in the entire continuum, either as lenders or as underwriters.And so, in addition to the opportunity that gives the banks to really find the best solutions for their clients, I think this will also continue the blurring of distinctions between public market credit and private market credit. Because now the banks can participate in all of it. And when you think about what defines in people's minds – public credit versus private credit, in many cases it's driven by what terms look like. Customary terms for a syndicated bond or loan versus a private credit loan.Also, who's participating in it. You know, these things have been blurring, right? There's a cost differential or a perceived cost differential that has been blurring for some time now. That will continue to happen, in my opinion anyway.Vishy Tirupattur: I totally agree with you, Dan, on that. I think not only the distinction between public credit and private credit, but also within the various credit channels – secured, unsecured, securitized, structured – all these distinctions are also blurring. So, in that context, let's talk a little bit more about what private credit's focus has been and where private credit focus will be going forward. So, what we'll call private credit 1.0. Focused predominantly on lending to small and medium-sized enterprises. And we now see that potentially changing. What is driving private credit 2.0 in your mind?Dan Toscano: Well, the elephant in the room is digital infrastructure. Absolutely. When you think about the scale of what is happening, the type of capital that's required for the build out, the structure you need around it, the ability to use elements of structure. You mentioned several of them earlier. To come up with an appropriate risk structure for lending is really where the market is heading. When you think about the trillions of dollars that we anticipate is needed for the technology industry to complete this transformation – not just around digital infrastructure, but around everything associated with it.And the big one I think of most often is power, right? So, you need capital to build out sources of power, and you need capital to build out the data centers to be able to handle the compute demand that is expected to be there. This is a scale unlike anything we have ever seen. It is the backbone of what will be the next industrial revolution.We've never seen anything like this in terms of the scale of the capital needed for the transformation that is already underway.Vishy Tirupattur: We are very much on board with this idea as well, Dan, in terms of the scale of the investment, the capital investment that is needed. So, when you look ahead for 2026, what worries you about the ind ustrial revolution financing that is underway?Dan Toscano: Given all that's going on in the world, this massive capital investment that's going on globally around digital infrastructure, we've never seen this before. And so, when I look at the capital raising that has been done in 2025 versus what will be done in 2026, I think one of the differences that we have to be mindful of is – nothing's gone wrong while we were raising capital in 2025 because we were very much in the infancy of these buildouts. Once you get further into these buildouts and the capital raises in 2025 that are funding the development of data centers start to season, problems will emerge. The essence of credit risk is there will be problems and it's really trying to predict and foresee where the problems will be and make sure you can manage your way through them.That is the essence of successful credit investing. And so there will definitely be issues when you think about the scale of the build out that is happening. Even if you look just in the U.S., where you need access to all sorts of commodities to build out. And you know, people focus on chips, but you also need steel and roofing, and importantly labor.And as we talk to people about the build outs, one of the concerns is supply of labor supply and cost of labor. So, when you run into situations where maybe a project is delayed a bit, or the costs are a bit more than what was expected, there will be a reaction. And we haven't had that yet. We will start to see that in 2026 and how investors and the markets react to that, I think will be very important. And I'm a little bit worried that there could be some overreaction because people have trained themselves in 2025 to think of like, ‘I'm operating in a perfect environment,' because we haven't really done anything yet. And now that we've done something, something can and will go wrong. So, you know, we'll see how that plays out.I am very fixated in 2026 on the laws of supply and demand. When I think about what's going on right now, we usually have visibility on demand. And we usually have some level of visibility on supply. Right now, we have neither – and I say that in a positive way. We don't know how big the demand is in the capital world to fund these projects. We don't know how big that can be. And almost with every passing day, the supply – and what we're hearing from our clients about what they need to execute their plans – continues to grow in a way that we don't know where it ends. And the scale, we're talking trillions of dollars, right? Not billions, not millions, but trillions.And so, I look at that – not so much as something I worry about, but something I'm really curious about. Will we run out of money to fund all of the ambitions of the Industrial Revolution? I don't think so. I think money will find great projects, but when you think about the scale of what we're looking at, we've never seen anything like it before. And it will be fascinating to watch as the year goes on.Vishy Tirupattur: Thanks Dan. That's very useful. And thanks for taking the time to speak to us and share your wisdom and insights. Dan Toscano: Well, it's great to be here.Vishy Tirupattur: And to our audience, thanks for listening. If you enjoyed the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today

Our Deputy Director of Global Research Michael Zezas and our U.S. Public Policy Strategist Ariana Salvatore discuss the implications of the U.S action in Venezuela for global markets, foreign and domestic policy.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Deputy Global Head of Research for Morgan Stanley. Ariana Salvatore: And I'm Ariana Salvatore, Head of Public Policy Research. Michael Zezas: Today we're talking about the latest events in Venezuela and its implications for global markets.It's Tuesday, January 6th at 10am in New York. So, Ariana, before we get into it: Long time listeners might have noticed in our intro, a changeup in our titles. Ariana, you're stepping in to lead day-to-day public policy research. Ariana Salvatore: That's right. And Mike, you're taking on more of a leadership role across the research department globally. Michael Zezas: Right, which is great news for both of us. And because the interaction between public policy choices and financial markets is as critical as ever, and because collaboration is so important to how we do investment research at Morgan Stanley – tapping into expertise and insight wherever we can find it – you're still going to hear from one of – and sometimes both of us – here on Thoughts on the Market on a weekly basis. Ariana Salvatore: And this week is a great example of this dynamic as we start the New Year with investors trying to decide what, if anything, the recent U.S. intervention in Venezuela means for the outlook for markets. Michael Zezas: Right. So, to that point, the New Year's barely begun, but it's already brought a dramatic geopolitical situation: The U.S. capture and arrest of Venezuela's President Nicolas Maduro – an event that can have far reaching implications for oil markets, energy, equities, sovereign credit, and politics. Ariana, thinking from the perspective of the investor, what's catching your attention right now? Ariana Salvatore: I think clients have been trying to get their arms around what this means for the future of U.S. foreign policy, as well as domestic policy making here too. On the first point, I would say this isn't necessarily a surprise or out of step with the goals that the Trump administration has been at least rhetorically emphasizing all year. Which is to say we think this is really just another data point in a pre-existing longer term trend toward multipolarity. Remember that involves linkage of economic and national security interest. It comes with its own set of investment themes, many of which we've written about, but one in particular would be elevated levels of defense spending globally, as we're in an increasingly insecure geopolitical world. Another tangible takeaway I would say is on the USMCA review. I think the U.S. has likely even more leverage in the upcoming negotiations, and likely is going to push even harder for Mexico to put up trade barriers or take active steps to limit Chinese investment or influence in the country. Enforcement here obviously will be critical, as we've said. And ultimately, we do still think the review results in a slightly deeper trade integration than we have right now. But it's possible that you see tariffs on non-USMCA compliant goods higher, for example, throughout these talks. Michael Zezas: And does this affect at all your expectations for domestic policy choices from the U.S.? Ariana Salvatore: I think it's important to emphasize here that we're just seeing an increasingly diminished role for Congress to play. The past year has been punctuated by one-off US foreign policy actions and a usage of executive authority over a number of different policy areas like immigration, tariffs, and so on. So, I would say the clearest takeaway on the domestic front is we're seeing a policy making pattern that is faster and more unilateral, right? If you don't need time for consensus building on some of these issues, decisions are being made by a smaller and smaller group of people. That in itself just increases policy uncertainty and risk premia, I would say across the board. But Mike, let's turn it back specifically to Venezuela. One of the most important questions is on – what this all means for global oil markets. What are our strategists saying there? Michael Zezas: Yeah. So, oil markets are the natural first place to look when it comes to the impact of these geopolitical events. And the answer more often than not is that the oil market tends not to react too much. And that seems to be the case here following the weekend's Venezuela developments. That's because we don't expect there to be much short-term supply impact. Over the medium-term risks to Venezuela's production skew higher. But while Venezuela famously holds one of the largest oil reserves in the world – it's about 17 percent of the world's oil reserves – in terms of production, its contribution is relatively small. It's less than 1 percent of global output. So, among the top 10 reserve holders, Venezuela is by far the smallest producer. So, you wouldn't expect there to be any real meaningful supply impact in the markets, at least in the near term. So, one area where there has been price movement is in the market for Venezuela sovereign bonds. They have been priced for low recovery values and the potential restructuring that was far off. But now with the U.S. more involved and the prospect of greater foreign investment into the country's oil production, investors have been bidding up the bond price in anticipation of potentially a sooner restructuring and higher recovery value for the bonds. Ariana Salvatore: Right. And to that point, our EM sovereign credit strategists anticipate limited spillover to broader LatAm sovereign credit. Any differentiation is more likely to reflect degrees of alignment with the U.S. and exposure to oil prices and potential increases in Venezuelan production, which could leave Mexico and Columbia among relative under underperformers. Michael Zezas: Right. And this seems like it's going to be an important theme all year because the U.S. actions in Venezuela seem to be a demonstration of the government's willingness to intervene in the Western Hemisphere to protect its interests more broadly. Ariana Salvatore: That's right. So, it's a topic that we could be spending much more time talking about this year. Michael Zezas: Great. Well, Ariana, thanks for taking the time to talk. Ariana Salvatore: Great speaking with you, Mike. Michael Zezas: And as a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen; and share Thoughts on the Market with a friend or colleague today.

Our CIO and Chief U.S. Equity Strategist Mike Wilson discusses key catalysts that investors may be missing, but that are likely to boost U.S. equities in 2026.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 converging market forces bolstering our bullish outlook for 2026. It's Monday, January 5th at 11:30am in New York. So, let's get after it. The New Year is usually a time to look forward. But today, I want to take a step back and talk about what the market is missing. A series of bullish catalysts are lining up at the same time, and the market is still underestimating their collective impact. There's been a lot of focus on individual positives—solid earnings growth, further Fed easing—but in our view, the real story is how these forces are reinforcing one another. Deregulation, positive operating leverage, accommodative monetary policy, and increasingly supportive fiscal policy are all working in the same direction. And as we head into mid-term elections later this year, these policy levers are likely to stay supportive.Importantly, this isn't a market that's already priced for the outcomes I envision. Positioning in cyclical trades remains relatively light, and sentiment in economically sensitive areas is far from exuberant. That combination—of improving fundamentals with cautious positioning—is exactly what tends to characterize the early stages of a recovery. I continue to believe these tailwinds are most underappreciated in cyclical areas like Consumer Discretionary Goods, Financials, Industrials, and small- and mid-cap stocks. Many of the indicators we track are only just beginning to turn higher. This doesn't look late-cycle to me—it looks early in what I have deemed to be a rolling recovery. One reason investors have been hesitant is the sluggishness of traditional business-cycle indicators, particularly the ISM Manufacturing Purchasing Managers Index. There's been a reluctance to press cyclical trades until those gauges clearly re-accelerate; and beneath that hesitation is a lingering anxiety that the U.S. economy could even slip back into a growth scare. My view is different. I believe a three year rolling recession ended with Liberation Day. If that's true, then the moderate softness we're now witnessing in lagging labor data is constructive for equities because it keeps the Fed leaning dovish for longer and more aggressive—a positive for equities. I see the second half of 2025 as the bottoming process for key macro indicators; with 2026 shaping up as a year of re-acceleration. Longer-cycle analysis supports this. Specifically, the 45-month cycle of the ISM Manufacturing Purchasing Managers Index points to a rebound. That recovery has been delayed—but not cancelled. Another tailwind that doesn't get nearly enough attention is energy prices. Gasoline prices in particular are sitting near five-year lows, which is providing real economic relief for lower- and middle-income consumers. That cushion matters, especially as other parts of the economy firm. This past weekend's events in Venezuela argue for lower oil prices for longer. From a sector standpoint, Financials stand out as the key beneficiary of deregulation and these stocks have been great performers over the past year in anticipation of these changes. I think there is more to go in 2026. Housing could be another important piece of the recovery. Subdued wage growth and falling rents may pressure home prices, while some builders are prioritizing volume over margins. While that may cap profitability for the builders, it could unlock housing velocity and feed into a more dovish inflation backdrop. Of course, there are also risks. Liquidity has been our top concern since September, and markets have reflected that through weakness in speculative assets. The good news is that the Fed has responded by ending quantitative tightening early and restarting asset purchases through the Reserve Management Program. This effectively adds liquidity to a system that was showing signs of stress this past several months. Another risk is a renewed slowdown in AI CapEx, particularly as markets demand clearer payback from debt-funded spending. And geopolitically, the U.S. intervention in Venezuela raises new questions. Strategically, it reinforces U.S. influence in the Western Hemisphere and supports our ‘Run It Hot' thesis—but the key wildcard remains whether China chooses to react. Net-net, we think the balance of risks and rewards still favor leaning into this early-cycle recovery and our bullish outlook for US equities in 2026. Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

Our U.S. Economist Heather Berger discusses how larger tax refunds in 2026 could boost income and help support consumer balance sheets throughout the year.Read more insights from Morgan Stanley. ----- Transcript -----Welcome to Thoughts on the Market and Happy New Year! I'm Heather Berger, from Morgan Stanley's US Economics Team. On today's episode – why U.S. consumers can expect higher tax refunds, and what that means for the overall economy. It's Friday, January 2nd, at 10am in New York.As we kick off 2026, it's not just a fresh start. It's also the time when tax refund season is right around the corner. For many of us, those refunds aren't just numbers on a page; they shape the way we budget for many everyday expenses. The timing and size of our refunds this year could make a real difference in how much we're able to save, spend, or get ahead on bills.In the wake of the One Big Beautiful Bill Act, this year's tax refund season is shaping up to be bigger than usual. The new fiscal bill packed in a variety of tax cuts for consumers. It also included spending cuts to programs such as SNAP benefits and Medicaid, but most of those cuts don't pick up until later this decade. Altogether, this means that we'll likely see personal incomes and spending power get a boost in 2026.Many of the new deductions and tax credits for consumers in the bill were made retroactive to the 2025 fiscal year. These include deductions for tips and overtime, a higher child tax credit, an increased senior deduction, and a higher cap on state and local tax deductions, among others. The retroactive portion of these measures should be reflected in tax refunds early this year. Overall, we're expecting these changes to increase refunds by 15 to 20 percent on average. And different groups will benefit from different parts of the bill. For example, the higher state and local tax cap is likely to help high-income consumers the most, while deductions for tips and overtime will be most valuable to middle-income earners.Historically, U.S. consumers receive about 30 to 45 percent of tax refunds by the end of February, with then 60 to 70 percent arriving by the end of March. Because of the new tax provisions, we're anticipating a noticeable boost in personal income during the first quarter of the year. While we do also expect this legislation to encourage higher spending, it's unlikely that we'll see spending rise as sharply as income right away. According to surveys, most consumers say they use their refunds mainly for saving or paying down debt. This can lead to healthier balance sheets, which is shown by higher prepayment rates and fewer loan delinquencies during the tax refund season.When people choose to spend all or some of their tax refunds, they typically put that money toward everyday needs, travel, new clothes, or home improvements. Looking ahead, we do still see some near-term headwinds to spending, such as expected increases in inflation from tariffs and the expiration of the Affordable Care Act credits, which will most affect low-income consumers. As we progress throughout the year, though, we're anticipating steady growth in real consumer spending as the labor market stabilizes, inflation decelerates, and lagged effects of easier monetary policy flow through. On top of that, this year's larger tax refunds should give another lift to household spending.The boost to spending, along with other corporate provisions in the bill, should give the broader economy a push this year too. We expect the bill as a whole to support GDP growth in 2026.  But it then becomes a drag on growth in later years when more of the spending cuts take effect.Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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

Original Release Date: December 3, 2025Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas and Chief Global Cross-Asset Strategist Serena Tang address themes that are key for markets next year.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Serena Tang: And I'm Serena Tang, Morgan Stanley's Chief Global Cross-Asset Strategist.Michael Zezas: Today we'll be talking about key investor debates coming out of our year ahead outlook.It's Wednesday, December 3rd at 10:30am in New York.So, Serena, it was a couple weeks ago that you led the publication of our cross-asset outlook for 2026. And so, you've been engaging with clients over the past few weeks about our views – where they differ. And it seems there's some common themes, really common questions that come up that represent some important debates within the market.Is that fair?Serena Tang: Yeah, that's very fair. And, by the way, I think those important debates, are from investors globally. So, you have investors in Europe, Asia, Australia, North America, all kind of wanting to understand our views on AI, on equity valuations, on the dollar.Michael Zezas: So, let's start with talking about equity markets a bit. And one of the common questions – and I get it too, even though I don't cover equity markets – is really about how AI is affecting valuations. One of the concerns is that the stock market might be too high, might be overvalued because people have overinvested in anything related to AI. What does the evidence say? How are you addressing that question?Serena Tang: It is interesting you say that because I think when investors talk about equities being too high, of valuations – AI related valuations being very stretched, it's very much about parallels to that 1990s valuation bubble.But the way I approach it is like there are some very important differences from that time period, from valuations back then. First of all, I think companies in major equity indices are higher quality than the past. They operate more efficiently. They deliver strong profitability, and in general pretty solid free cash flow.I think we also need to consider how technology now represents a larger share of the index, which has helped push overall net margins to about 14 percent compared to 8 percent during that 1990s valuation bubble. And you know, when margins are higher, I think paying premium for stocks is more justified.In other words, I think multiples in the U.S. right now look more reasonable after adjusting for profit margins and changes in index composition. But we also have to consider, and this is something that we stress in our outlook, the policy backdrop is unusually favorable, right? Like you have economists expecting the Fed to continue easing rates into next year. We have the One Big Beautiful Bill Act that could lower corporate taxes, and deregulation is continuing to be a priority in the U.S.And I think this combination, you know, monetary easing, fiscal stimulus, deregulation. That combination rarely occurs outside of a recession. And I think this creates an environment that supports valuation, which is by the way why we recommend an overweight position in U.S. equities, even if absolute and relative valuation look elevated.Michael Zezas: Got it. So, if I'm hearing you right, what I think you're saying is that comparisons to some bubbles of the past don't necessarily stack up because profitability is better. There aren't excesses in the system. Monetary policy might be on the path that's more accommodative. And so, when compared against all of that, the valuations actually don't look that bad.Serena Tang: Exactly.Michael Zezas: Got it. And sticking with the equity markets, then another common question is – it's related to AI, but it's sort of around this idea that a small set of companies have really been driving most of the growth in the market recently. And it would be better or healthier if the equity market were to perform across a wider set of companies and names, particularly in mid- and small cap companies. Is that something that we see on the horizon?Serena Tang: Yes. We are expecting U.S. stock earnings to sort of broaden out here and it's one of the reasons why our U.S. equity strategy team has upgraded small caps and now prefer it over large caps. And I think like all of this – it comes from the fact that we are in a new bull market. I think we have a very early cycle earnings recovery here. I mean, as discussed before, the macro environment is supportive. And Fed rate cuts over the next 12 months, growth positive tax and regulatory policies, they don't just support valuations. They also act as a tailwind to earnings.And I think like on top of that, leaner cost structures, improving earnings revisions, AI driven efficiency gains. They all support a broad-based earnings upturn. and our U.S. equity strategy team do see above consensus 2026 earnings growth at 17 percent. The only other region where we have earnings growth above consensus in 2026 is Japan; for both Europe and the EM we are below, which drive out equal weight and slight underweight position in those two indices respectively.Michael Zezas: Got it. And so, since we can't seem to get away from talking about AI and how it's influencing markets, the other common question we get here is around debt issuance related to AI.So, our colleagues put together a report from earlier this year talking about the potential for nearly $3 trillion of AI related CapEx spending over the next few years. And we think about half of that is going to have to be debt financed. That seems to be a lot of debt, a lot of potential bonds that might be issued into the market – which, are credit investors supposed to be concerned about that?Serena Tang: We really can't get away from AI as a topic. And I think this will continue because AI-related CapEx is a long-term trend, with much of the CapEx still really ahead. And I think this goes to your question. Because this really means that we expect nearly another [$]3 trillion of data center related CapEx from here to 2028. You know, while half of the spend will come from operating cash flows of hyperscalers, it still leaves a financing gap of around [$]1.5 trillion, which needs to be sourced through various credit channels.Now, part of it will be via private credit, part of it would be via Asset Backed Securities. But some of it would also be via the U.S. investment grade corporate credit bond space. So, add in financing for faster M&A cycle, we forecast around [$]1 trillion in net investment grade bond issuance, you know, up 60 percent from this year.And I think given this technical backdrop, even though credit fundamentals should stay fine, we have doubled downgraded U.S. investment grade corporate credit to underweight within our cross asset allocation.Michael Zezas: Okay, so the fundamentals are fine, but it's just a lot of debt to consume over the next year. And so somewhat strangely, you might expect high yield corporate bonds actually do better.Serena Tang: Yes, because I think a high yield doesn't really see the same headwind from the technical side of things. And on the fundamentals front, our credit team actually has default rates coming down over the next 12 months, which again, I think supports high yield much better than investment grade.Michael Zezas: So, before we wrap up, moving away from the equity markets, let's talk about foreign exchange. The U.S. dollar spent much of last year weakening, and that's a call that our team was early to – eventually became a consensus call. It was premised on the idea that the U.S. was going to experience growth weakness, that there would also be these questions among investors about the role of the dollar in the world as the U.S. was raising trade barriers. It seemed to work out pretty well.Going into 2026 though, I think there's some more questions amongst our investors about whether or not that trend could continue. Where do we land?Serena Tang: I think in the first half of next year that downward pressure on the dollar should still persist. And you know, as you said, we've had a very differentiated view for most of this year, expecting the dollar to weaken in the first half versus G10 currencies. And several things drive this. There is a potential for higher dollar negative risk premium, driven by, I think, near term worries about the U.S. labor markets in the short term. And as investors, I think, debate the likely composition of the FOMC next year. Also, you know, compression in U.S. versus rest of the world. Rate differentials should reduce FX hedging costs, which also adds incentive for hedging activity and dollar selling.All this means that we see downward pressure on the dollar persisting in the first half of next year with EUR/USD at 123 and USD/JPY at 140 by the end of first half 2026.Michael Zezas: All right. Well, that's a pretty good survey about what clients care about and what our view is. So, Serena, thanks for taking the time to talk with me today.Serena Tang: And thank you for inviting me to the show today.Michael Zezas: And to our audience, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and share the podcast. We want everyone to listen.

Original Release Date: November 13, 2025Live from Morgan Stanley's European Tech, Media and Telecom Conference in Barcelona, our roundtable of analysts discusses tech disruptions and datacenter growth, and how Europe factors in.Read more insights from Morgan Stanley.----- Transcript -----Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's European Head of Research Product. Today we return to my conversation with Adam Wood. Head of European Technology and Payments, Emmet Kelly, Head of European Telco and Data Centers, and Lee Simpson, Head of European Technology. We were live on stage at Morgan Stanley's 25th TMT Europe conference. We had so much to discuss around the themes of AI enablers, semiconductors, and telcos. So, we are back with a concluding episode on tech disruption and data center investments. It's Thursday the 13th of November at 8am in Barcelona. After speaking with the panel about the U.S. being overweight AI enablers, and the pockets of opportunity in Europe, I wanted to ask them about AI disruption, which has been a key theme here in Europe. I started by asking Adam how he was thinking about this theme. Adam Wood: It's fascinating to see this year how we've gone in most of those sectors to how positive can GenAI be for these companies? How well are they going to monetize the opportunities? How much are they going to take advantage internally to take their own margins up? To flipping in the second half of the year, mainly to, how disruptive are they going to be? And how on earth are they going to fend off these challenges? Paul Walsh: And I think that speaks to the extent to which, as a theme, this has really, you know, built momentum. Adam Wood: Absolutely. And I mean, look, I think the first point, you know, that you made is absolutely correct – that it's very difficult to disprove this. It's going to take time for that to happen. It's impossible to do in the short term. I think the other issue is that what we've seen is – if we look at the revenues of some of the companies, you know, and huge investments going in there. And investors can clearly see the benefit of GenAI. And so investors are right to ask the question, well, where's the revenue for these businesses? You know, where are we seeing it in info services or in IT services, or in enterprise software. And the reality is today, you know, we're not seeing it. And it's hard for analysts to point to evidence that – well, no, here's the revenue base, here's the benefit that's coming through. And so, investors naturally flip to, well, if there's no benefit, then surely, we should focus on the risk. So, I think we totally understand, you know, why people are focused on the negative side of things today. I think there are differences between the sub-sectors. I mean, I think if we look, you know, at IT services, first of all, from an investor point of view, I think that's been pretty well placed in the losers' buckets and people are most concerned about that sub-sector… Paul Walsh: Something you and the global team have written a lot about. Adam Wood: Yeah, we've written about, you know, the risk of disruption in that space, the need for those companies to invest, and then the challenges they face. But I mean, if we just keep it very, very simplistic. If Gen AI is a technology that, you know, displaces labor to any extent – companies that have played labor arbitrage and provide labor for the last 20 - 25 years, you know, they're going to have to make changes to their business model. So, I think that's understandable. And they're going to have to demonstrate how they can change and invest and produce a business model that addresses those concerns. I'd probably put info services in the middle. But the challenge in that space is you have real identifiable companies that have emerged, that have a revenue base and that are challenging a subset of the products of those businesses. So again, it's perfectly understandable that investors would worry. In that context, it's not a potential threat on the horizon. It's a real threat that exists today against certainly their businesses. I think software is probably the most interesting. I'd put it in the kind of final bucket where I actually believe… Well, I think first of all, we certainly wouldn't take the view that there's no risk of disruption and things aren't going to change. Clearly that is going to be the case. I think what we'd want to do though is we'd want to continue to use frameworks that we've used historically to think about how software companies differentiate themselves, what the barriers to entry are. We don't think we need to throw all of those things away just because we have GenAI, this new set of capabilities. And I think investors will come back most easily to that space. Paul Walsh: Emmet, you talked a little bit there before about the fact that you haven't seen a huge amount of progress or additional insight from the telco space around AI; how AI is diffusing across the space. Do you get any discussions around disruption as it relates to telco space? Emmet Kelly: Very, very little. I think the biggest threat that telcos do see is – it is from the hyperscalers. So, if I look at and separate the B2C market out from the B2B, the telcos are still extremely dominant in the B2C space, clearly. But on the B2B space, the hyperscalers have come in on the cloud side, and if you look at their market share, they're very, very dominant in cloud – certainly from a wholesale perspective. So, if you look at the cloud market shares of the big three hyperscalers in Europe, this number is courtesy of my colleague George Webb. He said it's roughly 85 percent; that's how much they have of the cloud space today. The telcos, what they're doing is they're actually reselling the hyperscale service under the telco brand name. But we don't see much really in terms of the pure kind of AI disruption, but there are concerns definitely within the telco space that the hyperscalers might try and move from the B2B space into the B2C space at some stage. And whether it's through virtual networks, cloudified networks, to try and get into the B2C space that way. Paul Walsh: Understood. And Lee maybe less about disruption, but certainly adoption, some insights from your side around adoption across the tech hardware space? Lee Simpson: Sure. I think, you know, it's always seen that are enabling the AI move, but, but there is adoption inside semis companies as well, and I think I'd point to design flow. So, if you look at the design guys, they're embracing the agentic system thing really quickly and they're putting forward this capability of an agent engineer, so like a digital engineer. And it – I guess we've got to get this right. It is going to enable a faster time to market for the design flow on a chip. So, if you have that design flow time, that time to market. So, you're creating double the value there for the client. Do you share that 50-50 with them? So, the challenge is going to be exactly as Adam was saying, how do you monetize this stuff? So, this is kind of the struggle that we're seeing in adoption. Paul Walsh: And Emmet, let's move to you on data centers. I mean, there are just some incredible numbers that we've seen emerging, as it relates to the hyperscaler investment that we're seeing in building out the infrastructure. I know data centers is something that you have focused tremendously on in your research, bringing our global perspectives together. Obviously, Europe sits within that. And there is a market here in Europe that might be more challenged. But I'm interested to understand how you're thinking about framing the whole data center story? Implications for Europe. Do European companies feed off some of that U.S. hyperscaler CapEx? How should we be thinking about that through the European lens? Emmet Kelly: Yeah, absolutely. So, big question, Paul. What… Paul Walsh: We've got a few minutes! Emmet Kelly: We've got a few minutes. What I would say is there was a great paper that came out from Harvard just two weeks ago, and they were looking at the scale of data center investments in the United States. And clearly the U.S. economy is ticking along very, very nicely at the moment. But this Harvard paper concluded that if you take out data center investments, U.S. economic growth today is actually zero. Paul Walsh: Wow. Emmet Kelly: That is how big the data center investments are. And what we've said in our research very clearly is if you want to build a megawatt of data center capacity that's going to cost you roughly $35 million today. Let's put that number out there. 35 million. Roughly, I'd say 25… Well, 20 to 25 million of that goes into the chips. But what's really interesting is the other remaining $10 million per megawatt, and I like to call that the picks and shovels of data centers; and I'm very convinced there is no bubble in that area whatsoever.So, what's in that area? Firstly, the first building block of a data center is finding a powered land bank. And this is a big thing that private equity is doing at the moment. So, find some real estate that's close to a mass population that's got a good fiber connection. Probably needs a little bit of water, but most importantly needs some power. And the demand for that is still infinite at the moment. Then beyond that, you've got the construction angle and there's a very big shortage of labor today to build the shells of these data centers. Then the third layer is the likes of capital goods, and there are serious supply bottlenecks there as well.And I could go on and on, but roughly that first $10 million, there's no bubble there. I'm very, very sure of that. Paul Walsh: And we conducted some extensive survey work recently as part of your analysis into the global data center market. You've sort of touched on a few of the gating factors that the industry has to contend with. That survey work was done on the operators and the supply chain, as it relates to data center build out. What were the key conclusions from that? Emmet Kelly: Well, the key conclusion was there is a shortage of power for these data centers, and… Paul Walsh: Which I think… Which is a sort of known-known, to some extent. Emmet Kelly: it is a known-known, but it's not just about the availability of power, it's the availability of green power. And it's also the price of power is a very big factor as well because energy is roughly 40 to 45 percent of the operating cost of running a data center. So, it's very, very important. And of course, that's another area where Europe doesn't screen very well.I was looking at statistics just last week on the countries that have got the highest power prices in the world. And unsurprisingly, it came out as UK, Ireland, Germany, and that's three of our big five data center markets. But when I looked at our data center stats at the beginning of the year, to put a bit of context into where we are…Paul Walsh: In Europe… Emmet Kelly: In Europe versus the rest. So, at the end of [20]24, the U.S. data center market had 35 gigawatts of data center capacity. But that grew last year at a clip of 30 percent. China had a data center bank of roughly 22 gigawatts, but that had grown at a rate of just 10 percent. And that was because of the chip issue. And then Europe has capacity, or had capacity at the end of last year, roughly 7 to 8 gigawatts, and that had grown at a rate of 10 percent. Now, the reason for that is because the three big data center markets in Europe are called FLAP-D. So, it's Frankfurt, London, Amsterdam, Paris, and Dublin. We had to put an acronym on it. So, Flap-D. Good news. I'm sitting with the tech guys. They've got even more acronyms than I do, in their sector, so well done them. Lee Simpson: Nothing beats FLAP-D. Paul Walsh: Yes. Emmet Kelly: It's quite an achievement. But what is interesting is three of the big five markets in Europe are constrained. So, Frankfurt, post the Ukraine conflict. Ireland, because in Ireland, an incredible statistic is data centers are using 25 percent of the Irish power grid. Compared to a global average of 3 percent.Now I'm from Dublin, and data centers are running into conflict with industry, with housing estates. Data centers are using 45 percent of the Dublin grid, 45. So, there's a moratorium in building data centers there. And then Amsterdam has the classic semi moratorium space because it's a small country with a very high population. So, three of our five markets are constrained in Europe. What is interesting is it started with the former Prime Minister Rishi Sunak. The UK has made great strides at attracting data center money and AI capital into the UK and the current Prime Minister continues to do that. So, the UK has definitely gone; moved from the middle lane into the fast lane. And then Macron in France. He hosted an AI summit back in February and he attracted over a 100 billion euros of AI and data center commitments. Paul Walsh: And I think if we added up, as per the research that we published a few months ago, Europe's announced over 350 billion euros, in proposed investments around AI. Emmet Kelly: Yeah, absolutely. It's a good stat. Now where people can get a little bit cynical is they can say a couple of things. Firstly, it's now over a year since the Mario Draghi report came out. And what's changed since? Absolutely nothing, unfortunately. And secondly, when I look at powering AI, I like to compare Europe to what's happening in the United States. I mean, the U.S. is giving access to nuclear power to AI. It started with the three Mile Island… Paul Walsh: Yeah. The nuclear renaissance is… Emmet Kelly: Nuclear Renaissance is absolutely huge. Now, what's underappreciated is actually Europe has got a massive nuclear power bank. It's right up there. But unfortunately, we're decommissioning some of our nuclear power around Europe, so we're going the wrong way from that perspective. Whereas President Trump is opening up the nuclear power to AI tech companies and data centers. Then over in the States we also have gas and turbines. That's a very, very big growth area and we're not quite on top of that here in Europe. So, looking at this year, I have a feeling that the Americans will probably increase their data center capacity somewhere between – it's incredible – somewhere between 35 and 50 percent. And I think in Europe we're probably looking at something like 10 percent again. Paul Walsh: Okay. Understood. Emmet Kelly: So, we're growing in Europe, but we're way, way behind as a starting point. And it feels like the others are pulling away. The other big change I'd highlight is the Chinese are really going to accelerate their data center growth this year as well. They've got their act together and you'll see them heading probably towards 30 gigs of capacity by the end of next year. Paul Walsh: Alright, we're out of time. The TMT Edge is alive and kicking in Europe. I want to thank Emmett, Lee and Adam for their time and I just want to wish everybody a great day today. Thank you.(Applause) That was my conversation with Adam, Emmett and Lee. Many thanks again to them. Many thanks again to them for telling us about the latest in their areas of research and to the live audience for hearing us out. And a thanks to you as well for listening. Let us know what you think about this and other episodes by living us a review wherever you get your podcasts. And if you enjoy listening to Thoughts on the Market, please tell a friend or colleague about the podcast today.

Original Release Date: November 19, 2025Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why he continues to hold on to an out-of-consensus view of a growth positive 2026, despite near-term risks.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley's CIO and Chief U.S. Equity Strategist. Today I'll discuss our outlook for 2026 that we published earlier this week. It's Wednesday, Nov 19th at 6:30 am in New York. So, let's get after it. 2026 is a continuation of the story we have been telling for the past year. Looking back to a year ago, our U.S. equity outlook was for a challenging first half, followed by a strong second half. At the time of publication, this was an out of consensus stance. Many expected a strong first half, as President Trump took office for his second term. And then a more challenging second half due to the return of inflation. We based our differentiated view on the notion that policy sequencing in the new Trump administration would intentionally be growth negative to start. We likened the strategy to a new CEO choosing to ‘kitchen sink' the results in an effort to clear the decks for a new growth positive strategy. We thought that transition would come around mid-year. The U.S. economy had much less slack when President Trump took office the second time, compared to the first time he came into office. And this was the main reason we thought it was likely to be sequenced differently. Earnings revisions breadth and other cyclical indicators were also in a phase of deceleration at the end of 2024. In contrast, at the beginning of 2017—when we were out of consensus bullish—earnings revisions breadth and many cyclical gauges were starting to reaccelerate after the manufacturing and commodity downturn of 2015/2016. Looking back on this year, this cadence of policy sequencing did broadly play out—it just happened faster and more dramatically than we expected. Our views on the policy front still appear to be out of consensus. Many industry watchers are questioning whether policies enacted this year will ultimately lead to better growth going forward, especially for the average stock. From our perspective, the policy choices being made are growth positive for 2026 and are largely in line with our ‘run it hot' thesis. There's another factor embedded in our more constructive take. April marked the end of a rolling recession that began three years prior. The final stages were a recession in government thanks to DOGE, a rate of change trough in expectations around AI CapEx growth and trade policy, and a recession in consumer services that is still ongoing. In short, we believe a new bull market and rolling recovery began in April which means it's still early days, and not obvious—especially for many lagging parts of the economy and market. That is the opportunity. The missing ingredient for the typical broadening in stock performance that happens in a new business cycle is rate cuts. Normally, the Fed would have cut rates more in this type of weakening labor market. But due to the imbalances and distortions of the COVID cycle, we think the Fed is later than normal in easing policy, and that has held back the full rotation toward early cycle winners. Ironically, the government shutdown has weakened the economy further, but has also delayed Fed action due to the lack of labor data releases. This is a near-term risk to our bullish 12-month forecasts should delays in the data continue, or lagging labor releases do not corroborate the recent weakness in non-govt-related jobs data. In our view, this type of labor market weakness coupled with the administration's desire to ‘run it hot' means that, ultimately, the Fed is likely to deliver more dovish policy than the market currently expects. It's really just a question of timing. But that is a near-term risk for equity markets and why many stocks have been weaker recently. In short, we believe a new bull market began in April with the end of a rolling recession and bear market. Remember the S&P [500] was down 20 percent and the average S&P stock was down more than 30 percent into April. This narrative remains underappreciated, and we think there is significant upside in earnings over the next year as the recovery broadens and operating leverage returns with better volumes and pricing in many parts of the economy. Our forecasts reflect this upside to earnings which is another reason why many stocks are not as expensive as they appear despite our acknowledgement that some areas of the market may appear somewhat frothy. For the S&P 500, our 12-month target is now 7800 which assumes 17 percent earnings growth next year and a very modest contraction in valuation from today's levels. Our favorite sectors include Financials, Industrials, and Healthcare. We are also upgrading Consumer Discretionary to overweight and prefer Goods over Services for the first time since 2021. Another relative trade we like is Software over Semiconductors given the extreme relative underperformance of that pair and positioning at this point. Finally, we like small caps over large for the first time since March 2021, as the early cycle broadening in earnings combined with a more accommodative Fed provides the backdrop we have been patiently waiting for. We hope you enjoy our detailed report published earlier this week and find it helpful as you navigate a changing marketplace on many levels. Thanks for tuning in. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

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

Our Thematic and Equity Strategist Michelle Weaver and Power, Utilities, and Clean Tech Analyst David Arcaro discuss how investments in AI data centers are affecting electricity bills for U.S. consumers.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.David Arcaro: And I'm Dave Arcaro, U.S. Power, Utilities, and Clean Tech Analyst.Michelle Weaver: Today, a hot topic. Are data centers' raising your electricity bills?It's Tuesday, December 23rd at 10am in New York.Most of us have probably noticed our electricity bills have been creeping up. And it's putting pressure on U.S. consumers, especially with higher prices and paychecks not keeping pace. More and more people are pointing to data centers as the reason behind these rising costs, but the story isn't that simple.Regional differences, shifting policies and local utility responses are all at play here. Dave, there's no doubt that data centers are becoming a much bigger part of the story when it comes to U.S. electricity demand. For listeners who might not follow these numbers every day, could you break down how data centers' share of overall electricity use is expected to grow over the next 10 years? And what does that mean for the grid and for the average consumer?David Arcaro: Definitely they're becoming much bigger, much more important and more impactful across the industry in a big way. Data centers were 6 percent of total electricity consumption in the U.S. last year. We're actually forecasting that to triple to 18 percent by 2030, and then hit 20 percent in the early 2030s. So very strong growth, and increasing proportion of the overall utility, electricity use.In aggregate, this is reflecting about 150 gigawatts of new data centers by 2030. Just a very large amount. And this is going to cause a major strain on the electric grid and is going to require substantial build out and upgrading of the transmission system along with construction of new power generation – like gas plants and large-scale renewables, wind, solar, and battery storage across the entire U.S.And generally, when we see utilities investing in additional infrastructure, they need to get that cost recovered. We would typically expect that to lead to higher electric rates for consumers. That's the overall pressure that we're facing right now on the system, from all these data centers coming in.We've got these substantial infrastructure needs. That means utilities will need to charge higher prices to consumers to cover the cost of those investments.Michelle Weaver: What are the main challenges utilities companies face in meeting this rising demand from data centers?David Arcaro: There are a number of challenges. If I were to pick a few of the biggest ones that I see, I think managing affordability is one of the biggest challenges the industry faces right now, because this overall data center growth is absolutely a shock to their business, and it needs to be managed carefully given the political and regulatory challenges that can arise when customer bills are getting are escalating faster than expected. The utility industry faces scrutiny and constant attention from a political and regulatory standpoint, so it's a balance that has to be very carefully managed. There are also reliability challenges that are important.Utilities have to keep the lights on, you know, that's priority number one. The demand for electricity is growing much faster than the supply of new generation that we're seeing; new power plants just aren't being built fast enough. New transmission assets are not being built, as quickly as the data centers are coming on. So, in many areas we're seeing that leads to essentially less of a buffer, and more risk of outages during periods of extreme weather.Michelle Weaver: And you mentioned, companies are thinking about how can they insulate consumers. Can you take us through some of the specifics of what these utility companies are doing? And what regulators are doing to respond, to protect existing customers from rate increases driven by data centers?David Arcaro: Definitely. The industry is getting creative and trying to be proactive in addressing this issue. Many utilities, we're seeing them isolate data centers and charge them higher electric rates, specifically for those data center customers to try to cover all of the grid costs that are attributable to the data center's needs.A couple examples. In Indiana, we're seeing that there's a utility there who's building new power plants, specifically for a very large data center that's coming into the state and they're ring fencing it. They're only charging the data center itself for those costs of the power plants. In Georgia, a utility there is charging a higher rate for the data centers that are coming in to the Atlanta area – such that it actually more than covers the costs and compensates other consumers in the form of bill credits or even bill reductions as those data centers come on.Similarly, then, in Pennsylvania, there's a utility that has excess transmission infrastructure than the state's [infrastructure]. They're better able to absorb data center activity. They're able to lower customer bills as the data centers come on, as they spread their costs over a larger customer base in that case. So, this isn't universal though. There are some areas around the country where there are costs related to data center growth that get socialized across all consumers.One approach I also wanted to mention that we're seeing data centers pursue more and more actively is to power themselves. Essentially bring their own power, and they're using gas turbines, engines, and fuel cells that they're deploying right on site. This is actually in many cases faster than connecting to the grid, but it also avoids any consumer impact. Companies like Solaris Energy and Bloom Energy are two providers of that type of solution. And we're also seeing at a broader industry level. Another approach is the idea of data centers being flexible or turning off and not consuming power from the grid at certain times when the grid is facing stress, in an extreme weather scenario in the winter or summer. And that idea is gaining traction as well. So, we think the industry is looking for approaches that could ease the pressure on the system and on reliability, manage the affordability issues while continuing to enable and build data centers.Michelle Weaver: You mentioned what a few different states are doing on this front. But data centers are not evenly distributed through states or evenly distributed across regions. Are there regional differences in how data center growth is impacting electricity prices?David Arcaro: There are a couple of key differences that we're seeing around the country. Some areas just aren't getting that many data centers, you know, so I'd point out the northeast – in New England, in New York, we're just not seeing that much data center growth. So, it's less of an issue, the impact of data center power demand impacting customer bills in those areas. And then in some regions around the country, the utility structure is important to be aware of. There are some regions where the price of electricity fluctuates based on the supply and demand of power, rather than being directly set and controlled by a regulator. In those markets, data centers can actually more directly impact the price of electricity and there just isn't an easy way in that case to ring fence them and protect consumers from the impact of price increases.So that's where we think unique challenges can arise. And over time, we would expect to see the most meaningful rate impacts to consumers in those areas specifically. And examples would be New Jersey, Maryland, Illinois, Pennsylvania, Ohio. Those are a couple of the states where we're seeing those more volatile and directly impacted prices.So, as we look at utilities, we think the state exposure is going to be more and more important. And so, a few companies like NextEra, Sempra and AEP are a few utilities that are in states that have less affordability concerns and less direct exposure to rate impacts from data centers. And then several power companies like Vistra and Talen have more of their power plants that are in states that have excess infrastructure; and as a result, potentially less affordability concerns.So, clearly the energy sector is facing real challenges and changes. So, Michelle, how are rising electricity bills actually affecting U.S. households?Michelle Weaver: It's putting even more pressure on a consumer that's already being stretched thin by multiple years of inflation and elevated price levels, and electricity is a really different type of good. It's very different from gasoline or other consumer goods or staples – in that it's an essential good. You need to have it. And it's a network service that households are structurally locked into. Unlike gas where you could adjust your trip frequency or take a different type of transport, there really aren't good substitutes for electricity.And so this dynamic weighs on consumers. They have to continue paying these bills, and it weighs particularly heavily on lower income consumers where utility bills make up a much larger portion of their household budget.So, it crowds out some of that other potential spending.David Arcaro: That makes a lot of sense. It's an important expense to consider in terms of the impact on consumers. And, you know, as a result, are consumers blaming data center electricity demand for this rise that we're seeing in bills or are they pushing back?Michelle Weaver: Yeah. Data center development is quickly becoming a NIMBY or “not in my backyard” issue with communities pushing back and even getting projects canceled. Companies really need to find ways to address local concerns about environmental and water related externalities. And message that they're able to insulate consumers, or do something to mitigate these potentially higher electricity bills.A recent poll of around 2200 voters found that just over half of respondents attribute overall electricity price increases to AI data centers, at least somewhat. While around another third, consider them very responsible. And these responses are consistent across all regions and across political affiliations. And I think this consistency across regions is really interesting. As we're talking about before, data centers are not impacting bills in every region. But consumers are still blaming them and still attributing bill increases there.It's clear that both the energy sector and U.S. consumers are navigating a complex landscape with data center growth at the center of the conversation. As policy responses evolve and the U.S. midterm elections approach, this issue is only going to gain more attention. And we'll be sure to bring you the latest. Dave, thanks for taking the time to talk.David Arcaro: Great speaking with you, Michelle.Michelle Weaver: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Our Chief Cross-Asset Strategist Serena Tang discusses how current market conditions are challenging traditional investment strategies and what that means for asset allocation.Read more insights from Morgan Stanley.----- Transcript -----Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross-Asset Strategist.Today – does the 60/40 portfolio still make sense, and what can investors expect from long-term market returns?It's Monday, December 22nd at 10am in New York.Global equities have rallied by more than 35 percent from lows made in April. And U.S. high grade fixed income has seen the last 12 months' returns reach 5 percent, above the averages over the last 10 years. This raises important questions about future returns and how investors might want to adapt their portfolios.Now, our work shows that long-run expected returns for equities are lower than in previous decades, while fixed income – think government bonds and corporate bonds – still offers relatively elevated returns, thanks to higher yields.Let's put some numbers to it. Over the next decade, we project global equities to deliver an annualized return of nearly 7 percent, with the S&P 500 just behind at 6.8 percent. European and Japanese equities stand out, potentially returning about 8 percent. Emerging markets, however, lag at just about 4 percent. On the bond side, we think U.S. Treasuries with a 10-year maturity will return nearly 5 percent per year, German Bunds nearly 4 [percent], and Japanese government bonds nearly 2 [percent]. They may sound low, but it's all above their long-run averages.But here's where it gets interesting. The extra return you get for taking on risk – what we call the risk premium – has compressed across the board. In the U.S., the equity risk premium is just 2 percent. And for emerging markets, it's actually negative at around -1 percent. In very plain terms, investors aren't being paid as much for taking on risk as they used to be.Now, why is this the case? It's because valuations are rich, especially in the U.S. But we also need to put these valuations in context. Yes, the S&P 500's cyclically adjusted price-to-earnings ratio is near the highest level since the dotcom bubble. But the quality of the S&P 500 has improved dramatically over the past few decades. Companies are more profitable, and free cash flow -- money left after expenses -- is almost three times higher than it was in 2000. So, while valuations are rich, there's some justification for it.The lower risk premiums for stocks and credits, regardless of whether we think they are justified or not, has very interesting read across for investors' multi-asset portfolios. The efficient frontier – meaning the best possible return for any given level of portfolio risk – has shifted. It's now flatter and lower than in previous years. So, it means taking on more risk in a portfolio right now won't necessarily boost returns as much as before.Now, let's turn our attention to the classic 60/40 portfolio – the mix of 60 percent stocks and 40 percent bonds that's been a staple strategy for generations. After a tough 2022, this strategy has bounced back, delivering above-average returns for three years in a row. Looking ahead, though, we expect only around 6 percent annual returns for a 60/40 portfolio over the next decade versus around 9 percent average return historically. Importantly though, advances in AI could keep stocks and bonds moving more in sync than they used to be. If that happens, investors might benefit from increasing their equity allocation beyond the traditional 60/40 split.Either way, it's important to realize that the optimal mix of stocks and bonds is not static and should be revisited as market dynamics evolve.In a world where risk assets feel expensive and the old rules don't quite fit, it's essential to understand how risk, return, and correlation work together. This will help you navigate the next decade. The 60/40 portfolio isn't dead – and optimal multi-asset allocation weights are evolving. And so should you.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.

To conclude their two-part discussion, our Head of Corporate Credit Research Andrew Sheets and Chief Investment Officer for Morgan Stanley Wealth Management Lisa Shalett discuss the outlook for inflation and monetary policy, with implications for investment-grade credit.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Corporate Credit Research at Morgan Stanley.Lisa Shalett: And I am Lisa Shalett, Chief Investment Officer of Morgan Stanley Wealth Management.Andrew Sheets: Yesterday we focused on the topic of a higher for longer inflation regime, and I was asking the questions. Today, Lisa will grill me on my views for the next year. It's Friday, December 19th at 4pm in London. Lisa Shalett: And it's 11am in New York. All right, Andrew, I'm happy to turn tables on you now. I'm very interested in your thoughts about the past year – 2025 – and looking towards 2026. In 2026, Morgan Stanley Research seems to expect a resilient global growth backdrop, with inflation moderating and central banks easing policy gradually. What do you think are the main drivers behind this more constructive inflation outlook, especially taking into account the market's prevailing concerns about persistent price pressures. Andrew Sheets: There are a couple of factors that we think are going to be near term helps for inflation, although I don't think they totally rule out what you're talking about over that longer term period.So first, we, at Morgan Stanley, are very cautious, very negative on oil prices. We think that there's going to be more supply of oil over the next year than demand for it. And so lower oil prices should help bring inflation down. There's also some measures of just how the inflation indices measure shelter and housing. And so, while we think, kind of, looking further ahead, there are some real shortages emerging in things like the rental markets – where you just haven't had a whole lot of new rental construction coming online, as you look out a year or two ahead. But in the near term, rental markets have been softer. Home prices are coming down with a lag in the data. And so, shelter inflation is relatively soft. So, we think that helps. While at the same time fiscal policy is very supportive and corporates, as we discussed in our last conversation, they're really embracing animal spirits – with more spending, more spending on AI, more capital investment generally, more M&A. And so, those factors together, we think, can over the next 12 months, still mean pretty reasonable growth and Inflation that's still above target – but at least trending a little bit lower. Lisa Shalett: You believe that central banks, including the Fed, will cut rates more slowly given better growth. And this slower pace of easing could actually be positive for the credit markets. So, could you elaborate on your expertise on credit and why a gradual Fed approach may be preferable? What risks and opportunities might this create? Andrew Sheets: Yeah, so I think this is kind of one of these big debates going into this year is – which would we rather have? Would we rather have a Fed that was more active, cutting more aggressively? Or cutting more slowly? And, indeed, we're having this conversation on the heels of a Fed meeting. There's a lot of uncertainty about that path. But the way that we're thinking about it is that the biggest risk to credit would be that this outlook for growth that we have is just too optimistic. That actually growth is weaker than expected. That this rise in the unemployment rate is signaling something far more challenging for the economy ahead and in that scenario the Fed would be justified in cutting a lot more. But I think historically in those periods where growth has deteriorated more significantly while the Fed has been cutting more, those have been periods where credit – and indeed the equity market – have actually done poorly despite more quote unquote Fed assistance. So, periods where the Fed is cutting more gradually tend to be more consistent with policy in the right place. The economy being in an okay place. And so, we think, that that's the better outcome. So again, we have to kind of monitor the situation. But a scenario where the Fed ends up doing a little bit less than the market, or even we expect with rate cuts – because the economy's holding up. That can still be, we think, an okay scenario for markets. Lisa Shalett: So, things are okay and animal spirits are returning. What does that mean for credit markets? Andrew Sheets: Yeah, so I think this is the bigger challenge: is that if our growth scenario holds up, corporates I think have a lot of incentives to start taking more risk – in a way that could be good for stock markets, but a lot more challenging to the lenders, to these companies for credit. Corporates have been impressively restrained over the last several years. They've really, kind of, held back despite lots of fiscal easing, despite very low rates. Those reasons for waiting are falling away. And so, in this backdrop that you, Lisa, were describing the other day around – easier monetary policy, easier fiscal policy, easy regulatory policy, and you know, just for good measure, maybe the biggest capital spending cycle since the railroads through AI. These are some pretty powerful forces of animal spirits. And that's a reason why we think ultimately, we see a lot more issuance. We see roughly a trillion dollars of net supply. So, total supply, less redemptions in U.S. investment grade. That's a huge uptick from this year, and we think that drives spreads wider, even if my colleague Mike Wilson is correct that equity markets rise. Lisa Shalett: So, wow. So, we have very strong U.S. equities. But perhaps an investment grade credit market that underperforms those equities. How else would you think about your asset allocation more broadly, and how might those dynamics around credit issuance and equity success play out regionally? Andrew Sheets: Yeah, so, I think this scenario where equities are up, credit is underperforming. The cycle is getting more aggressive. It's a little unusual, but I think we do have some templates for it and specifically I think investors could look to 2005 or 1997 and 1998. Those were all years where equities were up double digits, where credit spreads were wider. Where yields were somewhat range bound, where corporate aggression was increasing. That is all very consistent with Morgan Stanley's 2026 story. And yet, you did have this divergence between equities and credit market. So, I think it is a market where we see better risk-reward in stocks than in credit. I think it's a market where we want to be in somewhat smaller credits or somewhat smaller equities. We like small and mid cap stocks in the U.S. over large caps. We like high yield over investment grade. And we do think that European credit might outperform as it's somewhat lagging this animal spirits theme that we think will be led by the U.S. Lisa Shalett: So, if that's the outlook, what are the risks? Andrew Sheets: Yeah, so I think there are two risks, and you know, we alluded to one of them early on in this conversation – would be just that growth is weaker than we expect. Usually when the unemployment rate is rising, that's a pretty bad time to be in credit. The unemployment rate is rising. Now, Morgan Stanley economists think that that rise will be temporary, that it will reverse as we go through 2026. And so, it'll be less of a thing to worry about. But you know, a sign that maybe companies have been holding off on firing, waiting for more tariff clarity, if that doesn't come, then that would be a risk to growth. The other risk to growth is just around this AI-related spending. It is very large and the companies that are doing it are some of the wealthiest companies in the world, and they see this spending potentially as really core to their long-term strategic thinking. And so, if you were to ever have an issuer or a set of issuers who were just less price sensitive, who would keep issuing into the market, even if it was starting to reprice that market and push spreads wider, this might be the group. And so, a scenario where that spending is even larger than we expect, and those issuers are less price sensitive than we expect – that could also drive spreads wider, even if the underlying economic backdrop is somewhat okay. Lisa Shalett: Super. That's probably a great place for us to wrap up. So, I'll hand it back to you, Andrew. Andrew Sheets: Well, great, Lisa, always a pleasure to have this conversation. And, as a reminder for all you listening, if you enjoy Thoughts of the Market, please take a moment to rate and review us wherever you listen, it helps more people find the show. *****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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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