Thoughts on the Market Podcast

Matt Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley.

Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.

Matt Hornbach: Today, we'll be discussing the Jackson Hole Economic Symposium and Chairman Warsh's opening remarks.

It's Thursday, August 27th at 10am in New York.

So, Mike, let's get right into it and talk about the upcoming opening remarks by Chairman Warsh at the Jackson Hole Economic Symposium that will be delivered to the public at 10 am tomorrow, Friday. How are you thinking about what to expect from those opening remarks?

Michael Gapen: Well, historically, and by historically, I mean in a post-2008-2009 world, Jackson Hole has been used, not every year, but frequently as a venue to communicate to markets. The longest gap on the Fed's meeting calendar is between the July and September meetings. So, Jackson Hole falls between that and provides a useful opportunity to communicate what might be coming.

That's what's normally been done. Warsh has repeatedly stated he wants the Fed to talk less and communicate less and say less. So, I don't think we will see or hear, in this case, a lot about his views about how the economy is operating today and how monetary policy may be conducted into year-end. So, I don't think we'll hear a lot about, say, the December; the outlook for the economy from September to December, and what it might imply for interest rate policy or balance sheet policy.

So, little in the way of near-term forward guidance.

I do think, however, he did say in the July press conference that the venue would be good to tackle some of these big questions that he has talked about, that he's created these task forces for. So, whether it is the balance sheet or the inflation framework, or communication or AI and productivity or data quality and so forth. This would provide, I think, a reasonable opportunity for him to start talking about that.

I don't think maybe we'll get a lot of conclusions. But I would look for commentary that's more in the question; or in the spirit of those big questions and less about the near-term conduct of policy.

So maybe not what markets want, but this is what markets will get.

Matt Hornbach: Just rewinding a bit, the conference itself is on a somewhat of a niche topic. What exactly is the conference about? And, in terms of the papers that get released at the conference, do you have any sense as to where they might be headed?

Michael Gapen: So, the topic of this conference, the economic symposium, as you noted, is Financial Innovation: [its] Implications for [the] Payments [system] and [monetary] Policy.

So, I would expect there to be a lot of sessions for things like central bank digital currencies or stable coins or Bitcoins. Near money type innovation that has happened in recent years, which leads to things like competition for deposits from the non-financial sector vis-a-vis the financial sector.

So, a competition of near moneyness to money, if you will. Its implications for the interaction between the non-financial system and the financial system, competition for deposits. Does it create risks around financial disintermediation? And therefore, how might the regulatory environment and monetary policy work in that world?

So little more, I'll call it, esoteric and maybe arm's length from the day-to-day conduct of policy. But I would look at the speeches probably in that vein. Deposit competition, financial market stability, and what kind of regulatory framework might you need to ensure we can still conduct policy effectively in that world.

Matt Hornbach: Sounds like an exciting set of papers…

Michael Gapen: Yes. Yes.

Matt Hornbach: … for professors to read through.

Michael Gapen: This is why they don't often leak the schedule too far in advance, right? We all might decide not to listen.

Matt Hornbach: Indeed. Well, it is the end of August, and people are probably still on holiday here and there…

Michael Gapen: I'm doing my best, but you called me in today.

Matt Hornbach: Yeah, the least I could do. So, you did mention that this might be an opportunity for Chairman Warsh to maybe spotlight a bit these task forces and the topics that they're tackling, one of which is the inflation framework.

And that word framework, I think, is important because the investors that we've been speaking with are frustrated that the Fed has not really laid out a framework – for monetary policymaking in this new era of Chairman Warsh, and his leadership at the Fed.

So, I'm curious, if we're not going to get forward guidance on monetary policy and what will happen at the next meeting. And we're also not going to get much forward guidance on the framework that the Fed is using to decide on what to do with short-term interest rates. What are we meant to think about the framework?

Michael Gapen: Yeah, I think ultimately, of course, we're going to need to know this, and this is what economists would refer to as the ‘difference between forward guidance and the "reaction function." So, the framework is really, you've got a set of tools, how do you intend to use them to achieve your objectives?

A conventional Fed would say, "Well, if interest rates are low and inflation's too high, then we should raise rates," right? So high inflation brings high interest rates, low inflation brings low interest rates. All else equal, there's still the employment side of the mandate, of course. And the market had that view, at least initially, right?

As we were in the June-July period and Warsh was talking hawkishly, the curve generally flattened. Expectations for front-end yields moved higher, and inflation-fighting credibility maybe kept the back end stable or brought the back end down. So, you could argue the markets looked at Warsh as maybe bringing a conventional reaction function and a conventional framework.

But in the June and July FOMC meeting and in conversations with the press during the press conferences, Warsh – I don't want to say backtracked. He just didn't validate that and did say that we will achieve price stability. Didn't quite say how he would use the tools to do that. And even suggested maybe interest rates weren't the primary mechanism with which to influence, create, deliver price stability.

So, the curve then steepened out. So, I think the market is wondering what Fed chair we have and what his reaction function is? And if inflation's running hot, is it an interest rate answer or is it a balance sheet answer?

I'd also just add one last thing, Matt, is it makes a difference what the rest of the 18 people on the FOMC think. [Be]cause I think you would agree, and I'll put forward right now, I think they have a largely conventional view. Half of the committee thought it was time to raise rates in June. So, we have a balance between not knowing the chair's framework and having to intuit it. Or hope that we hear more. But then also knowing the other 18 who could band together and have greater voting power act in a largely conventional framework.

I think that's the debate and the dilemma that we're all dealing with.

Matt Hornbach: Yeah, I think investors, have certainly expressed frustration about the lack of guidance in any form or fashion. Perhaps with the exception of the balance sheet; we have a general idea that the balance sheet will be smaller in the future.

And we have a sense from what Chairman Warsh has said in front of the House of Representatives during his semi-annual testimony that any changes would happen gradually over time. But, in terms of the pricing of the July meeting, and what happened at the July meeting, investors were very disappointed that the Fed did not go ahead and raise rates in July.

Now, the market was only assigning about a one in three odds of a rate hike in July. And so, the fact that the Fed did not go ahead and raise interest rates in July was not a surprise in the sense of market pricing. But I do sense that investors were frustrated; that because they didn't get much forward guidance going into the July meeting, that the market might not have priced more probability on a July rate hike because the Fed, in fact, did not signal that they were leaning in that direction.

But I see it as somewhat ironic because it seems to me, and I'd like to get your view on this. It seems to me that Chairman Warsh doesn't want to provide that type of specificity. He'd rather have the markets tell him what to do at an upcoming meeting, as opposed to him telling markets what to do at an upcoming meeting.

How do you think about that?

Michael Gapen: Oh, I think it's… [It] strains credibility to think that by saying nothing, you get the market's interpretation of the economy, data, and events – without the market thinking what the Fed thinks about it. I don't think that there's a world where you get the unvarnished market expectation independent of the Fed.

So, I don't personally agree in the analogy of the market should play the ball and not the referee. The Fed is not a referee in markets. The Fed is a player in markets. Monetary policy acts through financial markets to achieve a set of financial conditions to deliver price stability and maximum employment.

So, the Fed and markets are on the field at the same time. The Fed, in some ways, is the 800-pound gorilla on the field at the same time. So, everybody else on the field has to know what the gorilla is doing in order to do what they're supposed to do.

Yes, there's always some circularity between Fed communication and market reaction to that. But I think that's natural and normal and important in making monetary policy effective – meaning it has to transmit through financial markets.

And so, you could diminish the effectiveness of monetary policy if you don't tell the market what, at least what your framework is and what your reaction function is. And the tools that you intend to use and how you would intend to use them. Then the market could be an inefficient transmitter of monetary policy.

So, I disagree with the notion that by saying less, the Fed learns more. But that's my view. I'm one of many. That's my opinion. The chair obviously has a different view.

Matt Hornbach: Well, I can certainly understand not wanting to be the referee, especially after what we saw at the World Cup. There were a couple of games where the referee…

Michael Gapen: And nobody likes the referee. At least half the people are upset with the referee.

Matt Hornbach: Indeed. Okay. So, Mike, I think we're going to leave it there.

Michael Gapen: Thanks for having me on, Matt.

Matt 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. 

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, at what point do higher yields and higher debt actually matter?

It's Wednesday, August 26th at 2pm in London.

In its first 240 years, the United States of America accumulated roughly $20 trillion in federal debt. The country has borrowed another [$]20 trillion in just the last 10.

The question for investors is when this debt load will act as a brake on economic activity? Or, worse, create stress that disrupts today's relative calm?

So, let's start with the first question.

For economic activity, the bar seems pretty high. You see, even with all the activity around AI, U.S. corporate debt as a share of the overall economy is broadly unchanged in the last decade and actually lower than where it was before the pandemic.

The balance sheets of the household sector in the U.S. are even stronger. Household debt to GDP is lower than where it was prior to COVID and lower than where it was in the year 2000. And this may even understate the strength – because much of this debt is locked in at historically low mortgage rates; while household assets, the other side of the balance sheet, have soared to record levels.

That may help explain why both consumers and businesses have remained more resilient than expected this year despite the higher interest rates and energy prices.

This divergence of trend between public and private balance sheets is also global. Europe has also seen higher government debt offset by even more private sector de-leveraging, while Japan has seen rising public borrowing and pretty stable private sector leverage.

To some degree, this divergence between the public and private sides of the economy reflects a policy choice. Governments determine how to balance taxation and spending. And many countries, not just the U.S., have reduced taxes over the last decade while allowing public borrowing to increase.

A deterioration of public sector finances relative to private sector finances – it's not especially surprising given that choice.

If strong balance sheets are helping U.S. households and companies be less sensitive to higher rates, where should we look for stress?

Well, for all of this debt, the U.S. bond market is actually still pretty well-behaved. U.S. inflation expectations are roughly unchanged year to date. Expected bond market volatility is historically low.

Indeed, one reason that recent intervention by the U.S. Treasury into the bond market was such a surprise to investors was the lack of these usual stress markers. Instead, the point at which these higher yields might have a larger market impact may be up to another factor: asset allocation.

Today, 30-year Treasury bonds yield about 3 percent more than expected inflation over that period. Long-dated U.S. investment-grade corporate bonds once again yield more than 6 percent. And so, the question of when higher yields begin to matter may be less about when businesses stop borrowing or consumers stop spending. And be more about when investors decide that bonds offer better value than stocks.

So far, Morgan Stanley Research is not seeing clear evidence of that shift. Fund flow data and market correlations do not suggest a significant reallocation away from equities, and strong earnings growth is helping support the equity valuation case.

But these are metrics that we'll be watching. In the meantime, we think that rising U.S. debt and Treasury market intervention may weaken the U.S. dollar, especially against a high-yielding currency with much, much lower debt levels – the Australian dollar.

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

Paul Walsh: Welcome everyone to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's Head of Research in Europe.

Michelle Weaver: And I'm Michelle Weaver, U.S. Thematic and Equity Strategist.

Daniel Blake: And I'm Daniel Blake, Head of Asia Thematic Strategy.

Walsh: And today we're discussing why thematic investing may be entering a new phase – moving from simply identifying big ideas to systematically measuring them.

It's Tuesday, the 25th of August at 2pm in London.

Weaver: It's 9am in New York.

Blake: And it's 9pm in Singapore.

Walsh: Daniel, let's kick our discussion off today. Thematic investing has become one of the most important ways for investors to think about long-term opportunities. But your latest work suggests the framework itself is evolving. So, what's changing?

Blake: Well, if you look at where we've started. So thematic investing has been narrative-driven, focusing on identifying major structural trends for investors. So, at Morgan Stanley, we've identified core themes of artificial intelligence and tech diffusion, the future of energy, societal shifts, and the transition to a multipolar world.

So, what's changing is that investment approaches are becoming much, much faster. So, we're now seeing clients deploy agentic AI to drive trade recommendations. And sure, AI can read a new 100-page thematic report from Morgan Stanley faster than humans. But for the right conclusions, it's important to connect these models with high-quality data sets. And we think that's going to be helpful for human investors as well.

So, this is where the third phase of thematic investing comes in. The first phase was identifying secular trends that cut across markets and industries. The second phase was creating investable products around those themes. But this next phase is about measuring that exposure systematically in real time.

So, this allows investors and their AI agents to identify whether a theme's importance is broadening or fading and to track individual companies' exposure to that theme over time.

Walsh: So, the thematic investing is moving from narrative-driven to a higher velocity data-driven approach. And I guess that's where our thematic mapping exercise really comes in. So, Michelle, when investors hear the term thematic map, they may think it's just another screening tool. But it's much, much more than that, isn't it?

Weaver: Absolutely. The easiest way to think about it is it's a research framework that sits on top of traditional sector and regional analysis. Historically, investors organize portfolios by country, sector, or industry group, and those verticals are still very important.

But increasingly, the biggest investment forces cut horizontally across those boundaries. AI touches software companies, industrials names, healthcare, financials, and it's even had a huge impact on the utility sector.

Thematic mapping helps us identify where those exposures exist across thousands of stocks, and importantly, how significant those exposures are – all with the help of our analyst experts.

And the innovation isn't simply identifying if a company's exposed to AI, energy transition, or defense spending. It's determining whether that exposure is central to the investment thesis, just supportive or insignificant. And that's very different from traditional thematic baskets.

Walsh: So, we identify the exposure, but the idea of significance seems particularly important because investors constantly hear companies talking about themes on earnings calls for example and in their public communications.

But how do you separate genuine exposure from a more marketing-driven language around thematics, Daniel?

Blake: This we see as the most valuable and ultimately human-driven part of the framework. So, as an example, we know that many companies are outlining their AI initiatives, and not all of them will end up being AI beneficiaries. So, the key question is how a given theme will impact revenues, margins, competitive positioning, and valuations.

And this requires the deep knowledge of both the industry and the company, as well as where things are going. And so that's where our analysts come in. Across all countries, all sectors, mapping the materiality of their entire coverage, that's almost 4,000 companies, to every global theme in real time.

Sp. our job in the thematic strategy team is to coordinate the framework, help identify emerging themes, and draw out the insights and recommendations. But the core insights are really coming at the analyst level, company by company.

Walsh: And so, to your point, Daniel, it's about the analyst overlay in terms of significance that is really important. So, investors really shouldn't think of thematic exposure as a simple yes or no question…

Blake: Exactly. That's really the new innovation in this framework, and most companies will sit somewhere along that spectrum for a given theme. And there's value in tracking how that position is changing over time.

Walsh: Yeah, rate of change is clearly critical. And Michelle, one of the things I found particularly interesting is that the framework isn't just about identifying winners. It's also about identifying companies that may be challenged by structural change as well. Why don't you help our listeners understand why that's so important?

Weaver: Because every major theme, yes, creates a lot of opportunity, but it also creates disruption. And I think investors naturally focus on beneficiaries. Where are we looking on the long side? But in many cases, understanding who might be negatively exposed can be just as valuable.

If you think about AI, there are obvious beneficiaries, whether those are the big enablers or they're companies adopting the technology successfully. But there could also be companies facing pricing pressure, margin pressure, or broader disruption because of that same theme.

And that's equally true whether we're thinking about the future of energy, societal shifts and big demographic realignments, or the multipolar world. And a complete thematic framework should help investors understand both parts of that equation. And this is becoming increasingly important as markets move from broad thematic enthusiasm towards more selective stock picking.

Walsh: Absolutely. The ability of the thematic mapping to help us understand both sides the equation clearly incredibly important. Let’s bring it back to investors' portfolios. Daniel, how should investors think about thematic mapping as part of portfolio construction rather than simply stock selection?

Blake: If you're looking at that portfolio construction level, whether you're a retail investor or you're one of the largest asset owners of sovereign funds, one of the biggest benefits is for revealing and managing hidden exposures.

So, an investor might believe that their portfolio is diversified with positioning across many sectors and markets. But when you use the thematic map to underline, to explore the underlying thematic exposure, you might find that many of these holdings are tied to the same structural trend.

So, the thematic map allows investors to better diversify portfolios while retaining the best expressions of desired themes. And as you mentioned, it's not just a screening tool. But it's pretty useful as a screening tool as well if you want to take exposure to a given theme overlay with valuations and preferences. It’s very helpful for that reason as well.

Walsh: Yeah, understood Daniel. And Michelle, as we look stock markets right now, how are you seeing the opportunities via the thematic mapping work that we’ve done?

Weaver: Flagging potential rotations is another key part of what this analysis offers. And if we think about your question from a valuation perspective, AI adopters currently look relatively inexpensive, but they still offer strong expected earnings growth. And we're also seeing analyst sentiment beginning to improve.

You're seeing a growing number of companies having their earnings estimates revised higher. We're also seeing a similar opportunity across our societal shifts themes. Valuations here are well below their typical levels over the past decade. And at the same time, we're also seeing earnings expectations improve here.

Walsh: So, perhaps the biggest takeaways are that thematic investing is becoming more measurable, more transparent, and more integrated into portfolio management.

It's no longer just about spotting the next big idea. It's about understanding where that idea exists, how much it matters, and of course, how it's evolving.

Michelle, Daniel, thanks so much for taking the time to talk.

Weaver: Great speaking with you Paul.

Blake: Thanks for having us.

Walsh: 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.

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 shifting landscape in macro markets.

It's Monday, August 24^th at 11:30am in New York.  

So, let’s get after it.

Over the past few weeks we’ve seen  large moves in rates, oil, gold and crypto. What does it mean for equities?

First, investors are still treating these markets as separate stories, when they are all part of the same regime shift that began with COVID. More than six years ago, in the depths of that recession, I argued investors should prepare for the return of inflation. That was a very out of consensus view.

At that time, the world was obsessed with deflation, the 10-year Treasury yield was below 1 percent, stocks had been hit hard, and gold was sitting around $1,500 an ounce. But the policy response to COVID – what I called helicopter money – changed the game. It marked the end of the 40-year disinflationary regime and a very different investment environment for investors to navigate.

It is also the foundation of our run it hot thesis. In a world where inflation has returned, cycles are likely to be shorter, policy more reactive, and leadership changes more frequent. That is very different from the 1982-to-2020 period.

Then falling inflation and falling rates allowed economic cycles to stretch for eight or 10 years. We are now in a world that looks more like the post-World War II era: stronger nominal GDP growth, more persistent inflation, higher economic volatility, and a bond market that is no longer the tailwind it used to be for risk assets. In short, the great secular bull market in bonds ended with COVID. This has huge implications for investors of all stripes.

My near term view on rates is also different from the mainstream. A lot of investors are saying rates are rising because of debt and deficits. I am not dismissing those factors. But I think the bigger driver is strong nominal GDP growth, which really is the result of aggressive fiscal policy since the pandemic. We are in an era of fiscal dominance, and in that environment the Treasury and the Fed are forced to find ways to fund deficits without breaking markets.

That is how I interpret the Treasury’s recent buyback activity. I don’t think this is quantitative easing or yield-curve control. The scale of the program is not large enough. Instead, it’s just another tool to maintain market functioning and stable financial conditions. So when I look at the large move in precious metals and crypto last week, to me it suggests that markets believe this is just a first step toward larger intervention – if financial conditions tighten further.

For equities, this all reinforces the quality rotation we have been recommending. Since the peak rate of change in earnings revisions breadth in June, led by Semiconductors, the market has gone through a significant leadership change. Quality factors have started to outperform after a year of lagging, which is exactly what we would expect as a post-recession recovery matures.

High free cash flow, high gross margins, stable sales growth, and low capex-to-sales factors have all been working. Some investors are frustrated that the S&P 500 barely sold off during the historic momentum unwind. But if quality is coming back into favor, that makes perfect sense. The S&P 500 is one of the highest-quality benchmarks in the world. Leadership at the stock level may continue to morph, but index leadership for the S&P is unlikely to fade – and may even get stronger.

The near-term risk remains oil. Brent crude prices have moved higher over the past couple of weeks. And rising oil has historically been a much more reliable headwind for equities than falling oil has been a tailwind. Our still constructive equity view does not require crude to collapse. It simply requires crude to stop rising. If oil spikes again because the Strait of Hormuz remains closed, that could pressure input costs, push yields and bond volatility higher, and create another round of market instability.

Bottom line, the run it hot regime is alive and well. It supports equities. But it also shortens cycles, increases rotations, and forces investors to be more tactical at times. I currently like large-cap quality stocks, AI adopters, and the S&P 500 over international peers.

Hedge the oil risk with energy stocks and keep your head on a swivel as we navigate the next phase of this recovery and bull market.

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!

Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist.

Today: Why the summer of 2026 is all about AI Financing and the evolution of credit markets.

It is Friday August 21st at 2pm in New York.

The summer of 2026 may ultimately be remembered not for a new model release or a breakthrough chip, but for developments in AI financing that highlighted how quickly capital markets are adapting to the demands of the AI buildout.

The starting point of our analysis remains unchanged: the demand for compute continues to outstrip supply of compute, resulting in upward revisions in AI infrastructure capex expectations as hyperscalers commit additional capital to secure future capacity.

Our equity research colleagues now estimate that the total capex for the four largest hyperscalers will rise 57 percent in 2027 versus 2026. These spending plans reflect growing conviction that such investments can generate 25 percent plus returns on invested capital.

At the same time, the lag between capex deployment and monetization continues to pressure near-term cash generation, with our analysts' 2027 free cash flow estimates for the four hyperscalers continuing to move lower.

To a credit analyst, what this means is that the result is a widening financing gap in 2027. That means AI-related credit issuance will remain substantial and may even need to increase further before cash flows from these investments begin to catch up.

Developments in credit spreads this summer have been equally telling. Credit spreads for hyperscalers have widened meaningfully. More notable even than the absolute level of widening is the divergence across financing channels.

For example, spread widening was most pronounced in unsecured bonds, where issuance volumes accelerated sharply and investors remained exposed to a broader range of risks tied to the AI investment cycle. By contrast, spread widening in data center ABS and CMBS was much more modest.

These structures are backed by operating assets that have already been constructed, powered, and leased, with contractual cash flows largely established. Combined with a more measured pace of issuance, these characteristics helped insulate securitized credit products from the volatility seen in unsecured credit markets.

The divergence across credit markets also reflects the differences in issuer incentives and sensitivity to funding costs, which will shape issuance volumes going forward. At the higher end of the quality spectrum, the major hyperscalers, with average ratings of roughly AA, combine substantial financing needs with significant ratings flexibility.

Given their ROIC expectations, these issuers are relatively insensitive to modest changes in borrowing costs. Higher funding costs alone are unlikely to materially slow capital raising by the highest-quality participants in the AI ecosystem.

The opposite is true further down the quality spectrum. Lower quality hyperscalers and  data center developers, including former bitcoin miners and REITs, have less balance-sheet flexibility and lower tolerance for higher funding costs. For these borrowers, wider spreads represent a more meaningful constraint, making funding costs a natural stabilizer of future supply.

The next phase of AI financing is also likely to look quite a bit different as incremental capex shifts from data center shells toward compute equipment, particularly servers and chips, as well as energy assets. While some of these assets have already been financed through high-yield bonds and leveraged loans, compute infrastructure is particularly well-suited to asset-level financing, creating a larger role for private capital.

The emergence of large-scale component financing is likely to be enabled by the highest-quality issuers flexing their ratings as well as balance-sheet strength. We expect these issuers to increasingly provide backstops, credit support arrangements, and residual value guarantees, helping private capital underwrite ever-larger pools of AI infrastructure assets.

As AI scales from a technology cycle into a capital cycle, understanding the nuances of financing is becoming increasingly important. In the next phase of the AI buildout, understanding the flow of capital may prove nearly as important as understanding the flow of innovation itself. AI is no longer just a technology story. It is increasingly a capital markets story as well.

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.

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.

Stephen Byrd: And I'm Stephen Byrd, Head of Global Thematic Research at Morgan Stanley.

Ariana Salvatore: Today, we'll be talking about AI sovereignty, what it means, what countries around the world are doing to advance their own goals, and what a more fragmented AI ecosystem could mean for investors.

It's Thursday, August 20th at 2pm in New York.

Stephen Byrd: And it's 9pm in Helsinki.

Ariana Salvatore: As AI becomes more powerful and therefore more important to the global economy, countries are asking a basic question: How much of it do we need to control ourselves? That's at the heart of AI sovereignty, making sure governments around the world can access the computing power, data, energy, and technology they need even as geopolitical tensions may rise.

Stephen Byrd: And that seems to fit into a broader trend we've been talking about for some time, a more multipolar world where governments are increasingly willing to intervene in markets around strategically important technologies.

Ariana Salvatore: Exactly. We describe this as a potential ‘two worlds dynamic.’ The U.S. and China have been gradually de-risking from one another, particularly in advanced technology.

We've already seen policy tools, including export controls, tariffs, and incentives for domestic manufacturing. And as AI becomes more strategically important, our expectation is for policy intervention to increase rather than decrease. But what's interesting is that the U.S. and China aren't necessarily pursuing sovereignty in the same way.

Stephen Byrd: So, let's unpack that. Can you start with the U.S.? What does the American approach look like?

Ariana Salvatore: Yes. We think the U.S. is trying to do two things at once, basically. On one hand, it wants to preserve national security guardrails around some of the most sensitive AI capabilities. But on the other hand, it has an incentive to make sure the American AI tech stack is broadly available to allies and partners.

So, there's an inherent tension there between those two objectives. Obviously, if you restrict access too much, you can encourage other countries to develop alternatives,. But if you allow unrestricted access, policymakers may begin to worry about losing control over strategically important technology.

So, the way that we chart this is through a middle path. We think the direction of travel looks less like complete technological separation and more like selective access – tighter controls around sensitive capabilities alongside an effort to maintain the global reach of the U.S. AI ecosystem.

Stephen Byrd: Whereas China's approach is more focused on building out an indigenous ecosystem. Specifically, we see policymakers in China pursuing greater self-sufficiency across the AI stack, from chips and computing infrastructure to cloud and models.

Our China strategists argue that bifurcation could actually increase China's incentive to build a larger China-compatible AI ecosystem abroad, particularly across the Global South and other markets that aren't firmly aligned with the U.S. ecosystem.

China's model emphasizes lower-cost models, open weight ecosystems, subsidized compute, cloud partnerships and infrastructure exports. So, the competition could increasingly be about not only which country has the most advanced model, but which ecosystem can achieve the widest adoption.

Ariana Salvatore: That's right, and that brings us back to this idea of two worlds.

So, Stephen, is the implication here that we're going to be heading toward two completely separate AI systems?

Stephen Byrd: Not necessarily, I'd say. You know, the supply chains are still deeply interconnected, so our research does not suggest a sudden decoupling. But we could see greater duplication and less globally fungible infrastructure.

Countries may increasingly want compute located domestically or regionally. Sensitive data may need to stay within particular jurisdictions, and companies may need different cloud cybersecurity or distribution arrangements in different markets. And that means the same global level of AI demand could require more physical infrastructure than it would in a completely integrated world.

Ariana Salvatore: So, fragmentation, like other themes within multipolarity, are more economically inefficient. But potentially pretty important for the investment cycle. We think sovereign AI can make the system more redundant and more capital-intensive as a result. Our research teams think there are potential beneficiaries from that across semiconductors, data centers, networking, power, cloud, cybersecurity, and infrastructure software.

Let's look at data centers specifically. If governments and enterprises increasingly require local hosting and greater control over sensitive data, you will inevitably need more geographically distributed infrastructure. Colocation operators, we think, can benefit because they provide the power, cooling, space, security, and interconnection that can allow customers to keep workloads in specific jurisdictions.

So, the fragmentation we're talking about may introduce inefficiency at a system level while simultaneously creating incremental infrastructure demand. 

Stephen Byrd: And there's another constraint here that we probably shouldn't overlook, which is energy. Compute ultimately needs power. So, access to reliable, affordable electricity becomes part of a country's competitive position in AI, which ties into our politics of energy theme that we outlined in January of this year.

But as we've also noted, that creates a political constraint. Our thematic work has highlighted rising concern around the impact of data center growth on power prices and on local infrastructure. This has really shown up in a big way in the U.S. And that can mean more pressure to protect existing rate payers, more emphasis on low-cost power. And greater interest in behind-the-meter or off-grid power solutions that allow data centers to secure electricity without putting the same pressure on the grid.

Ariana Salvatore: Which suggests that there's a cost, in fact, to AI sovereignty as well.

Stephen Byrd: Absolutely. And if countries want more domestic compute, duplicated infrastructure, localized supply chains, and greater redundancy, the system may become more resilient, but potentially more expensive – and we're certainly seeing signs of it being more expensive.

Compute and power are already constrained in many markets. Add to that regulatory requirements, localization, and potential restrictions on technology transfer, and reducing dependence can carry an inflationary cost. So, for investors, I think the question isn't simply whether sovereign AI increases spending. It's also where that spending has to occur, what gets duplicated, and which parts of the stack become strategically indispensable.

Ariana Salvatore: So, Steven, to frame this for investors, the way we see this theme unfolding suggests that sovereign AI reinforces rather than undermines the broader AI CapEx cycle. We think competition between the U.S. and China is intensifying. Countries outside those two ecosystems increasingly will want greater national resilience and flexibility. And that combination can support additional spending on compute, data centers, networking, and power for years to come.

Lastly, an increasingly important question is who controls and supplies that infrastructure, energy, standards, and supply chains that will allow those models to operate at scale?

Stephen Byrd: And that may ultimately be the most important thing to watch. Sovereign AI is another example of geopolitics moving directly into the technology investment cycle and potentially changing not only where AI gets built, but how much infrastructure the world needs to build it.

Ariana Salvatore: Steven, we'll leave it there. Thanks so much for joining me.

Stephen Byrd: Great to be here, Ariana.

Ariana Salvatore: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Welcome to Thoughts on the Market. I’m Julia Rizzo, Latin America Agribusiness Analyst at Morgan Stanley.

Today: how El Niño could move from the Pacific into commodity markets, grocery prices, and investor portfolios.

It’s Wednesday, August 19th, at 10am in Sao Paulo.

You may not follow rainfall patterns in Brazil or cocoa-growing conditions in West Africa. But you immediately notice when chocolate, groceries, or electricity cost more. And you can connect the dots to El Niño -- a warming cycle in the Pacific Ocean that disrupts weather globally. It changes where rain falls and shapes the outlook for crops, power markets, transportation, and inflation.

There is now a 95 percent chance of a very strong El Niño in the fourth quarter of 2026. It could end up being among the most powerful events in more than 75 years of recorded history. Timing and location matter greatly. Crop damage often depends on whether heat or heavy rain arrives during a narrow planting, flowering, or harvest window.

The most direct effects are likely to appear first in commodities. Sugar is on the list of commodities most exposed to favorable price dynamics from weather conditions. Cocoa also looks tight. Grains are more complicated. Soybeans need evidence of a net South American production loss. Problems in northern Brazil may be offset by stronger crops in Argentina or Brazil south. Corn is even more dependent on timing. The key near-term catalyst remains U.S. weather and crops.

What happens next matters well beyond agricultural markets. Food is the main channel through which El Niño reaches the broader economy, and the effect usually appears after a one-year lag. That makes inflation primarily a 2027 story.

In Latin America, the largest incremental inflation risks are concentrated in Peru, Brazil, and Colombia, with most of the pressure arriving in 2027. That matters for central banks. Weather shocks can fade. So, policymakers often look through an initial rise in food prices. The greater concern is that higher food costs may begin to influence inflation expectations, wages, rents, or other prices across the economy. Colombia stands out as the clearest case where those second-round effects could complicate monetary policy.

India and Indonesia also face meaningful economic exposure. Agriculture accounts for a large share of output and employment in these countries. India is especially sensitive. Agriculture represents about 18 percent of the GDP, 43 to 45 [percent] of jobs, while food makes up roughly 36 percent of the consumer price basket. Record food reserves may provide some protection, though a poor growing season could still weigh on rural incomes and keep food inflation elevated.

The economic consequences will vary widely. Higher agricultural prices can support farmer income and benefit some parts of the food and agricultural supply chain. They can also raise costs for households, food producers, and businesses that depend on grains and sugar. Utilities may benefit in markets where hotter or drier conditions lift electricity prices, while heavy rainfall could disrupt transport routes and airports in those exposed regions.

Historical asset-price signals are limited, so this is less of a broad macro trade than a detailed assessment of local exposure. Rainfall, crop timing, inventories, and the ability to pass higher costs on to consumers will determine where the pressure lands.

El Niño may begin in the Pacific, but its market footprint can travel from cocoa farms in West Africa to a grocery aisle, a power grid, or a central bank meeting.

Thanks for listening. If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.

Welcome to Thoughts on the Market. I’m Joon Seok, Morgan Stanley’s Chief Korea Equity Strategist.

Today: Why Korea’s equity market may be moving from a sharp reset toward a broader and more sustainable recovery.

It’s Tuesday, August 18th, at 2pm in Seoul.

South Korea’s stock market has delivered the kind of ride that makes even long-term investors check their phones more often than they would like. The KOSPI surged 101 percent in the first half of [20]26, then fell more than 38 percent from its peak by July 30th. But the market now appears to be moving toward a more durable recovery.

The first reason is valuation. Take the KOSPI’s forward price-to-earnings ratio, which compares share prices with expected profits over the next year. It fell below five times, its lowest level since 2004. Our capitulation index also dropped to minus 2.53. This index combines market momentum with the breadth of the sell-off, so it helps show whether fear has become widespread. Readings below minus two have often marked troughing territory outside the major crises.

The second reason is that forced selling appears to be easing. Now, we have seen leverage as a double-edged sword as leverage helped fuel the rally, but it also made the decline sharper as investors were forced to cut positions. Assets in leveraged single-stock ETFs have fallen about 70 percent from their June peak, and margin lending has also come down. Now, hedge funds have completed roughly three quarters of a typical risk-reduction cycle. Put simply, the most intense selling may already be behind us.

Still, a healthier recovery needs more than a rebound by the tech sector. Tech remains central because AI infrastructure continues to drive demand for advanced memory. Morgan Stanley Research expects global spending by large tech platforms to reach 805 billion U.S. dollars in [20]26 and 1.2 trillion dollars in [20]27. That creates a lot of opportunity – but it also keeps markets sensitive to any change in capital spending, chip pricing or competition.

The broader Korean economy offers support. Real GDP growth has exceeded 3 percent for two consecutive quarters up sharply from 1.1 percent in 2025. Full-year growth is now likely to land in the mid-3 percent range; and generally, Korea's growth is around 2 percent. Importantly, the improvement is spreading beyond exports. Consumption is recovering, tourism has surpassed pre-pandemic levels, and the government is targeting 23 million foreign tourists this year.

There are trade-offs. Inflation reached 3.2 percent in June, and the Bank of Korea raised its policy rate to 2.75 percent. A measured hiking cycle could take rates to 3.5 percent by the first quarter of 2027. Higher rates may help financial-sector earnings, but they also raise financing costs for households and businesses.

The source of market liquidity is changing as well. Domestic retail investors drove much of the first-half rally, but tighter leverage rules mean foreign investors are likely to determine the next leg higher. Corporate-governance reforms and better capital management could also encourage broader international participation.

We continue to see a path toward a KOSPI target of 9,000 by June 2027, with a bull case of 10,500 and a bear case of 5,500. The next phase should be steadier and more balanced. Industrials, financials, healthcare, communications, and consumer staples should also contribute alongside technology.

Korea still has room to run. But the stronger signal may be quality – meaning earnings resilience, disciplined capital management and broader participation. The stock market’s initial rally was fueled by speed and concentrated leadership. The next phase will require wider and more durable support.

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.

Andrew Ruben: Welcome to Thoughts on the Market. I'm Andrew Ruben, Latin America Retail and E-commerce Analyst at Morgan Stanley.

Nathan Feather: And I'm Nathan Feather, U.S. Small and Mid-Cap Internet Analyst at Morgan Stanley.

Andrew Ruben: Today, what happens when the shopping cart starts thinking for itself and maybe even for you?

It's Monday, August 17th at 10am in New York.

As we think about trends that are driving e-commerce, which remains a share gainer within the overall retail landscape, it seems that there's a transformation that's quickly building around agentic e-commerce.

So, Nathan, I think it's timely for us to talk today as agentic seems like it could be the next catalyzer of growth and innovation within the e-commerce landscape.

Nathan Feather: How much bigger do we think agentic commerce could make the global e-commerce market?

Andrew Ruben: Global e-commerce as we see it is a nearly [$]5 trillion market today. That implies 22 percent of retail sales. The way we see over the next five years is a $7 trillion opportunity, with growth accelerating to a 9 percent compounded rate, up from about 7 percent over the past four years. And this is partly on the tailwinds from agentic.

What we see here is this broad arc of reducing friction with e-commerce over time.

Think about how easy it is now to pick up your phone, search for some inventory, click, and the goods can be here within one, two days, if not same day. That's reduction of friction that we think physical retail can't match, and the improvements of agentic commerce. Having this agent that can help you search, help you discover – that should further the e-commerce opportunity.

We think agentic alone could add about 6 percent to the five-year e-commerce addressable market, with about 20 percent of industry volumes having some material agent influence.

So, within this opportunity, Nathan, agentic isn't one size. How should investors distinguish between AI influence shopping and fully autonomous purchasing?

Nathan Feather: To your point, there's a wide different flavors that we're calling agentic commerce. And it starts really at the top of the funnel with, you know, you could go to your chatbot of choice and say, ‘I want a hiking backpack with a water bottle slot and a place to hold my keys,’ right? ‘Show me the best options in a certain price range.’

And there you're capturing the top of the funnel, but as you click in, you may bounce out to a retailer and purchase on there. Or it could go even further, and maybe you complete your entire checkout within that specific chatbot.

Now, right now what we're seeing is about half of consumers are starting the top of the funnel at least sometimes with a chatbot, but a very small portion are actually completing purchases. And so, as time evolves, we expect that funnel to widen and start to see a little bit more of this fully autonomous purchasing; although for the most part, we think it's really going to remain top of funnel and mid-funnel.

Now, adoption does look very different across regions, partially because of different consumer behaviors. Why has AI shopping gained more traction in some markets than in others?

Andrew Ruben: I think that's right, and what we see is so far to date, agentic shopping has been led by the U.S. and China. These are the two largest e-commerce markets globally, also among the highest penetration. Some data to support it: We have proprietary Morgan Stanley AlphaWise survey that show about 30 percent of China consumers shopping using AI tools over the past month. And that compares to about 12 percent in Brazil.

Now, we do see some barriers in terms of the pace of companies' innovation, but I think this is more a matter of time. The example you give of that shopping journey, that does seem like it should be applicable globally.

There is also a second barrier, and that would be trust. We do see that consumers are using AI search, using AI discovery, and as they get more comfortable with agentic, we think the use cases can increase over time. But as we see consumers today, they're comfortable with search, but not many are willing to let AI do the full end-to-end checkout.

Ultimately, as we see it, the companies will drive the innovation, but it's consumers who determine uptake.

And that raises the question of who owns the customer journey. Do retailers keep control, or do the general AI agents take the lead?

Nathan Feather: To be frank, this is one of the major unanswered questions within this market. And, you know, we can speculate, but we're not going to know for a few years. So, let's go through the potential paths here.

I think the first goes within the customer journey. Where does the customer want to check out? Who has the best experience as you go through that journey? And early on, it's retailers. They have your purchase history. They have your payment information. They have your shipping.

To your point, they're trusted. You know if you're going to shop at one of these large retailers, you're going to get what you want. And if you don't, you're going to be able to get that refunded.

And so, we think at least early on, retailers will likely keep control of that purchase journey and actually be able to innovate a lot on site. Launch on-site agents that are able to get you to the inventory they have even faster.

But retailers could gain control over time. They can shop across multiple websites. They can price match. And so, it is going to be a question over time which of these ends up taking the lead. And the economics will change as a result of that.

And Andrew, what determines whether agentic commerce ends up generating purchases that wouldn't have happened otherwise rather than simply shifting existing sales to a new channel?

Andrew Ruben: It's a good point on the economics because let's say an agentic transaction happens on a company's site. You do still have costs, and that relates to the large language model. The conversation query going back and forth, that's going to be more expensive than a traditional keyword search.

So, here's where incrementality comes in. If you're a consumer that's having this transaction on the site, we think that gives better targeting, better information, and should ultimately put the product in front of you that you want to buy. And what this translates to is incremental sales, a sale that wouldn't have happened if you only had traditional search or an experience that you couldn't match in the physical channel.

So, we do think that if the sale is incremental and those model costs eventually come down, then that's the setup for an agentic sale to be profitable. I'd also mention the advertising business. It's important for e-commerce having suppliers that will pay to be one of the product listings up front.

Our view is that if you're searching better, then you should get better discovery, and the value of that top real estate should hold. That should be more important for the supplier with better targeting, and they can pay up for that.

But there is the risk on the other side. How real do you think the risk is that external agents divert traffic and advertising dollars away from e-commerce platforms?

Nathan Feather: Well, the risk is real, and it's really dependent on the customer journey. You know, if you go to a chatbot today, you're expecting when you type in your query, you're going to get the most accurate result that they can offer. The issue with advertising is people are paying for that top slot. It's not inherently maybe the best product. It's the person who wanted to pay the most to get that top slot.

When you go to, you know, a search website, it's not necessarily the expectation, right? You know that the first few results are going to be paid, and then there's going to be organic after that. And so, from a customer side of things, there's going to be a question of whether there's the permission to see advertising within that flow.

If there's not, you could see advertising dollars get diverted, and that is a risk. If you look at large e-commerce retailers, especially marketplaces today, a majority or sometimes all of their profits actually come from the on-site advertising that exists. And so, it's something worth watching. Although we note early on, this ended up being less of a risk than people initially expected.

Now, zooming out here, we've covered a lot of ground. So, as we think about it broadly, what are the likely factors that separate the winners here? In other words, what are the capabilities that matter most as we move into an agentic world?

Andrew Ruben: Right. And to get to those capabilities, I think agentic commerce is going to improve e-commerce as a digital service. But this still surrounds the movement, the sourcing, the pricing of physical goods.

So, I believe that the rules of retail and e-commerce should still hold. That's the fundamentals of do you have the broad selection, the right inventory at the right location that can get to the right consumer? Second, the ability and willingness to innovate. That's companies that have their own agents, that have partnerships, that are developing these tools we think will be better positioned.

And then third, thinking about some complementary assets. If you're a marketplace platform with logistics, with loyalty, with financial services, this should support the positioning depending on how the customer journey evolves. Each of these factors we think will matter in an agentic world.

And then finally, what evidence should investors watch to see whether agentic commerce has moved from experimentation to a durable growth driver?

Nathan Feather: There's a couple of different factors we're looking for here, and it's important to note we're looking for leading indicators. Given agentic is still a relatively small portion of purchases, we're trying to find those things that could identify where you're going to hit inflection points. So, a few things I'd call out.

The first are company disclosures. What are the actual retailers in this industry saying about experimentation? And are the products that they're testing actually moved into production?

Second, looking at consumer surveys and whether people are starting to use these AI tools more at the top of the funnel, we think will filter down more to the bottom of the funnel over time as additional things are launched.

And last, how is your own search behavior changing? Are you starting to see you gravitate more towards an AI chatbot as you're going through your shopping journey? Oftentimes, you'll start to see the behavior start to shift, and then the dollars flow over time.

Andrew Ruben: That's it. The shopping cart may become smarter and ultimately grow faster. But for investors, the defining question remains the same: Who owns the customer journey? Nathan, thanks for speaking with me today.

Nathan Feather: Great to be here with you, Andrew.

Andrew Ruben: 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.

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, why the UK may need better PR.

It's Friday, August 14th at 2pm in London.

The last decade has been rough for the United Kingdom. Brexit was a true economic earthquake, and the subsequent weakening of economic ties to mainland Europe, the UK's largest trading partner, made economic activity weaker and more complicated.

Then COVID hit the economy hard. So did spiking energy prices when Russia invaded Ukraine. Political volatility has been high, with seven prime ministers in the last 10 years. And at present, UK growth is weak, inflation is too high, and debt to GDP is rising.

Moreover, in a post-COVID world that's increasingly driven by the profit and power of technology, including AI, the UK market seems almost stuck in another era. Of the 10 largest companies in the U.S. stock market, eight are in technology. In the UK, none of the 20 largest companies are in tech.

Safe to say, being downbeat on the prospects for the UK is one of the most consensus views that I encounter. But it can also be deceiving. Simple stories in the market rarely are.

Let's start with the argument that UK markets are boring, stagnant, and being left behind by their lack of technology. It's just not true. Through early August, the S&P 500 has returned 85 percent over the prior five years. The UK market? It's returned 82 percent. And over the last twelve months, the performance of the UK and U.S. markets are also similar. In short, don't judge a book by its cover.

The UK's currency, meanwhile, shows no sign of global investors shunning the island. Over the last 10 years, the UK pound has actually gained value against the U.S. dollar. Notable given how strong the performance of the U.S. economy and markets have been over that time. And that's also pretty impressive relative to its peers. Over this same timeframe, the value of the Japanese yen, the Brazilian real, the Indian rupee, and the Korean won have all fallen significantly. The UK's currency, on a relative basis, has outperformed.

Now, the UK's growth is weak. Morgan Stanley forecasts growth of just 1 percent this year versus a bit over 2 percent for the United States. But it's notable just what sort of headwind the country has been dealing with. The UK household and corporate sectors are both increasing their savings rates and doing so at the same time; and more savings means less spending and economic activity.

To put some context around this, U.S. households are currently saving only about 3 percent of their disposable income. In the UK, it's over 9 percent. And so, if that UK savings rate can just simply stop moving higher – or even fall – well, it would represent a big support to growth going forward.

But aren't we avoiding the big question, the fiscal question? After all, we at Morgan Stanley forecast that general UK government debt to GDP will be about 96 percent this year, some of the highest levels since World War II. But this is a global market, and I do think that the relative picture matters.

So, when thinking about the UK's 96 percent debt to GDP ratio, let's consider what the numbers are elsewhere. That ratio is 120 percent in China. It's 120 percent in France. It's 125 percent in the U.S. It's 138 percent in Italy, and it's 208 percent in Japan. And out of all of these countries, the UK is the only one where we think the government deficit is materially smaller in 2027 than it was in 2025. Also, year-to-date, 10-year bond yields in the UK have risen less than yields in the U.S. or Japan.

A new UK Prime Minister does raise the potential for new policy, something investors will need to watch closely. The country remains sensitive to swings in global energy prices. Yet we think the underlying story is more nuanced and positive than often gets discussed.

Market performance has been bearing this out, and in many cases, the bar is low.

Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Andrew Percoco: Welcome to Thoughts on the Market. I’m Andrew Percoco, Head of North America Auto and Shared Mobility Research.

Tim Hsiao: And I'm Tim Hsiao, Greater China Auto and Shared Mobility Analyst.

Andrew Percoco: Today, why robotaxis may be approaching a commercial inflection point.

It's Thursday, August 13th at 8am in New York.

Tim Hsiao: And 8 pm in Hong Kong.

Andrew Percoco: So Tim, for years, robotaxis were really confined to limited pilot rollouts across the globe. You've done a lot of work over the last few weeks. We put out a big collaborative report on the robotaxi market and how it could be a $1 trillion TAM by 2040.

What makes this moment different than some of the other robotaxi hype cycles that we've seen in the past?

Tim Hsiao: We observe four things have been converging. Firstly, end-to-end AI is improving much faster. Secondly, hardware and the training costs are falling. And thirdly, more well-capitalized players can fund deployment. And last but not least, regulation is becoming clearer.

The leading operators are no longer just demonstrating the technology. They are running fully driverless services around the clock and generating commercial rides. So in our view, the questions has been shifting from can it work to who can expand operating areas, raise utilization and lower costs at a much faster pace.

So that's a very different setup versus the 2018 and 2021 hype cycles.

Andrew, U.S. autonomous miles could rise from 116 million in [20]25 to 16 billion by 2032. But still make up only about 0.5 percent of all miles driven. How can robotaxis become a meaningful business while remaining such a small part of the market?

Andrew Percoco: I would say, you know, obviously the U.S. mobility and transportation market is a massive market. So even with the rapid growth that we expect in robotaxis, it's going to take a long time to make a material impact in the overall market share of mobility.

But if you think about the profit pools in this business, 16 billion miles at $2 a mile can, you know, pretty quickly become a very significant TAM and market opportunity.

And I think, you know, fundamentally, if you think about a robotaxi business, I would argue you're better utilizing an asset... Or if you think about the, you know, car park, the amount of vehicles that are, you know, in the fleet today or in the U.S. today, they're sitting idle 90 percent of the time, right?

So you're talking about taking a smaller amount of volume and driving a higher utilization on that fleet and driving much improved economics. So yes, it's going to take time to displace the, you know, hundreds of millions of cars that you have on the road in the U.S. and displace the penetration of miles driven.

But ultimately, you know, we think that the profit pool and the opportunity in robotaxis are much more attractive for the entire value chain, as it relates to robotaxis. And I'd say there's a few things that we're watching along the way to make sure that, to your point, you know, this is not another hype cycle. And that there's real commercial kinda backbone to this business.

I'd say the first is seeing the rollouts continue to improve, and the density of the rollouts improve across the select cities that we've seen in the U.S. right now. Robotaxis are only available in a handful of cities in the U.S., so we want to see that continue to expand into more cities. But also the density of the fleet increase in the cities where they're currently present.

And at the same time the safety side is still something that gets a lot of questions in making sure that it is truly safer than a human driver, across technology platforms, right? There's various players in this market with different approaches to technology. So, I think seeing that the safety curve is starting to or continues to improve is going to be very important for the viability of this market going forward.

Obviously U.S. is very different from China. What have you seen in China? China has shown some impressive growth and utilization in some of the operators that are on the road in China. So just curious as to your perspective in terms of what you're seeing on the ground there.

Tim Hsiao: I think China shows that there's much in operations and skill challenges as technology challenges. The fleet  in China is above 5,000 vehicles across I think more than 7500 square kilometers in key cities. And some operators average more than 20 orders per vehicle per day.

So, total cost of ownership has fallen roughly 30 to 40 percent, while remote assistance ratios are moving from like one operator for like 20 to 40, even like 50 to 60 vehicles. And we think it will achieve like one for a 100. So that has produced real break-even happens, especially in some major cities like Guangzhou, Shenzhen, Wuhan – the tier one, tier two cities.

So in our view, I think in China, wider operating domains, fleet density and utilization rate, as you just mentioned, reinforce one another. So make it some more like the real commercial case. Instead of just, like trials as we saw a couple years ago.

If more value shifts towards the software, fleet operation, and the data, as well as the customer relations, how does that change the profit pool, across the auto industry, especially in the U.S.?

Andrew Percoco: First off, I think the auto industry in general is becoming, you know, more software focused and aware. You know, it's being led by the robotaxi market where the autonomous driving software and technology is obviously the most important part about getting this technology to market.

That is ultimately trickling down to personally owned cars where you're seeing more autonomous technology being deployed. Auto OEMs are able to charge subscription revenue for this software. So it expands, I'd say, the value proposition of buying a vehicle expands the profit pool for the OEMs.

It changes in some ways the cyclicality, or can change the cyclicality of the industry if you've got more kind of recurring revenues, subscription like business model versus just a hardware focused OEM model, which has been kind of the predominant focus for the OEMs historically.

I'd say the other angle, interesting angle here is, you know, as this business scales, there's gonna be a lot of vehicles on the road. There's gonna be a lot of fleets of vehicles on the road. Those need to be managed by somebody or some company, right? So if you think about, you know, the rental car industry, right? These companies have been in the business of managing fleets and renting out fleets for  a very long time. They know how to do that very, very well.

I think there's an interesting opportunity for that part of the value chain, to participate in aiding these robotaxi fleet operators, in scaling and bringing their business to market. Charging, maintenance, reconditioning, all the things that  take a lot of time and a pretty large amount of physical infrastructure.

That's an opportunity for the rental car industry to come in and leverage their existing know-how to help. And, you know, I think Tim, an important part of this commercialization process is driving down the cost structure of robotaxis. They are very sensor; heavy sensor heavy. They're very compute heavy. I think China is the clear leader on cost and supply chain. I think in China you're seeing robotaxis, you know, around $35,000 to $40,000, which is considerably lower than what we see in the U.S. today.

So, how do you think that that will accelerate adoption in China, but I'd say more importantly overseas as some of these robotaxis businesses look to expand outside of China.

Tim Hsiao: In our view, it could be a major accelerant because as we noticed that the depreciation is still one of the largest fixed costs for robotaxi. So, as we just mentioned, I think, $35000 to $45000 US dollars, the purpose-built robotaxi can lower the breakeven utilization threshold. And make it easier to finance fleets and open cities that could not support the $150,000 US dollar vehicle.

And not only in China, because globally, I think the Chinese cost deflation can be paired with the local ride-hailing platforms in the overseas market that provide demand and regulatory access. But as we highlighted in our previous, the global reports once again, we don't think the cheap vehicle is sufficiently by their self.

So in our views, on top of the competitive cost structure, registration, data localization, insurance, and local operating costs can still delay the margin curve, particularly in Europe, which we think there are still quite a lot of uncertainties.

So Andrew, as we just, as we just discussed, the lower vehicle costs help, but the operating model still has to work, right? So with operating costs expected to fall and the margin potentially moving above 30 percent or even higher at scale, what are the key assumptions investors should focus on?

Andrew Percoco: There’s a handful of key assumptions you need to sensitize to get to that 30 percent or more margin structure in this business. I'd say the first is going to be utilization, right? You need to be running these assets at a high utilization to essentially amortize those fixed costs over a larger number of miles driven.

Number two, insurance today is probably one of the largest buckets of cost when we think about this business. Insurance is, from our perspective, a big unlock for this industry as the safety, as we mentioned before, the safety data continues to improve. We think that will be a reason to, to expect that the insurance costs associated with autonomous driving technology and robotaxis will continue to decline.

It's about 30 cents per mile on our estimate, so it's very significant in terms of the overall cost structure of robotaxis. Drivers or where there's the most sensitivity around the model. Obviously, there's charging costs, there's maintenance costs. Those are, I think, fairly known at this point. But the utilization and insurance, I think, are the two biggest drivers of really getting that margin profile to improve over time.

Tim, I guess when you think about the next, call it 10 to 15 years, I think we will put out a trillion dollar market by 2040 from a TAM perspective.

What do you think the biggest markets are that investors should be watching, in terms of getting us to that trillion dollar TAM? Obviously, U.S. and China are kinda leading now, but what are the next markets people should be watching?

Tim Hsiao: In addition to the major market, as you just mentioned, the U.S. and China, in our views, I think we also need to focus on markets like Europe, the Middle East and Southeast Asia. I think their scale is underappreciated, as we highlighted in our previous report. Because if you think about that, Europe, the Middle East, and Southeast Asia in aggregate have roughly four million taxis together ride-hailing vehicles.

So even with 25 percent conversion, they imply that about one million is the L4s vehicles. The Middle East offers supportive regulators, you can tell, simpler operating environments and higher fares. And if you think about the Southeast Asia, the ASEAN, I think the market has dense demand and strong local platforms.

And of course, Euro markets definitely can't be ignored because Euro will move more slowly, because we think the regulations and the data rules would initially add cost. But the truth is, if you think about the European market, I think the taxis or ride-hailing fares are among the highest globally, even compared to the U.S. and rest of the world.

So in our view, the material margin could be more attractive. And this market, on top of the U.S. and China, in our view, can support several regional winners. So, not only limited to a very, you know, the single one or two markets.

Andrew Percoco: Yeah, it’s great Tim. It sounds like, you know, the robotaxi race, if you want to put it that way, will be won by those who can really bring together technology, and a compelling cost structure while also following the proper regulations and making sure the safety is improving at a rate that's acceptable to regulators.

So, Tim, thanks for taking the time to talk today. 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. 

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of US Public Policy Research at Morgan Stanley. Today, the latest on US Iran tensions, talks, and the path to a deal.

It's Wednesday Aug 12th, at 2 p.m. in New York.

The diplomatic picture in the Middle East has shifted yet again.

Last week, there was growing optimism that the U.S., Iran and Oman could reach an arrangement to improve commercial passage through the Strait of Hormuz. But the two sides have since hardened their positions.  This week, we've seen some bouts of escalation, and headlines have been mixed over the past few days.

At the same time, the energy security picture remains complicated. The U.S. administration says the seven-day average of oil leaving Hormuz has risen to almost 9 million barrels per day. But traffic remains well below normal conditions, and the risks we think are no longer limited to the Strait. We’re beginning to see potential for disruption across multiple regional chokepoints and alternate shipping routes.

That brings us back to the framework negotiated nearly two months ago. The U.S. and Iran signed a Memorandum of Understanding in mid-June. It was intended to create a 60-day window for negotiating a more durable agreement. That framework addressed commercial passage through Hormuz, the US naval blockade, sanctions relief and frozen funds – as well as longer-term negotiations over Iran's nuclear program. But the implementation has proven much harder than agreeing on the framework itself.

So where are negotiations getting stuck?

First, there's the Strait itself. Iran has tied a full reopening of the Strait to a broader package that includes an end to the U.S. blockade, sanctions relief and compensation. Washington, in turn, is trying to preserve economic leverage and appears unwilling to provide those concessions upfront.

Second, sanctions sequencing: The U.S. wants relief tied to clear signs of progress, while Iran is seeking confidence that any relief is durable and not easily reversed.

And third, there’s the nuclear question: enrichment levels, Iran’s existing stockpile, and a longer-term verification framework. These are still to be negotiated. That’s likely to take longer than the 60-day time period.

So, what’s the right framing here for investors?

We think it’s not necessarily a deal or no deal binary. It’s more so a series of partial agreements, implementation tests, setbacks, and renewed negotiations. After the June deal was signed, we flagged several live paths to re-escalation: execution risk around sanctions and Strait control, a potential divergence between the U.S. and Israeli objectives, domestic political pressure in Washington, and the basic challenge of resolving core nuclear questions within such a short time frame. We think those risks are now becoming more visible, but we think both sides have strong incentives to avoid a return to a full conflict, like the type of engagement we saw back in March of this year.

Moving forward, the signposts we laid out in June—maritime normalization, access for the International Atomic Energy Agency, sanctions implementation, military restraint, and rhetoric—all remain the right trackers to watch. But expect the bargaining process itself to be noisy, unstable, and non-linear. Rather than a clean transition from conflict to ceasefire to final deal, the more likely path will have fits and starts.

So what should investors do with that information?

On oil, our commodity strategists remain constructive on prices, given the ongoing supply uncertainty and the emergence of new chokepoints across the region. Altogether, they see those constraints keeping the market relatively tight compared to the levels we briefly saw in June when the MOU was signed.

If there’s another sharp rise in oil prices, our U.S. equity strategists think that could be a key risk to the near-term outlook. Our US economists agree, but also think the Fed would need a bigger shock than markets previously expected to resume hiking. As a result, we expect the Fed to stay on hold this year.

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.

Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. 

Today on the podcast I’ll look at an important shift in what the market wants to see from companies going forward.

It's Tuesday, August 11th at 11:30 am in New York.  

So, let’s get after it.

This week I am going back to our broadening thesis – but with a slightly different twist.

Earlier in the year, broadening was about beta. It was about the market moving beyond a narrow set of mega-cap winners and rewarding economically sensitive areas as the rolling recovery took hold.

In the last few episodes I’ve talked about how that phase is now over. And we’re moving from an early-cycle broadening into a mid-cycle quality rotation. In short, the market is no longer demanding just growth – but growth with durable earnings, strong margins, and free cash flow.

To be clear, the broadening in earnings is still very much alive. Russell 3000 median stock earnings growth is running at 15 percent, the strongest since 2021; while median sales growth is at 8 percent, the best since 2023. At the same time, 87 percent of S&P 500 companies are beating earnings expectations this quarter, and earnings revisions breadth has rebounded to 23 percent, with 76 percent of industry groups showing positive revisions breadth.

However, headline earnings are no longer enough for stock outperformance. The market is saying, ‘Show me the money’— and that’s exactly what should happen in a mid-cycle transition. When companies raise both earnings and free cash flow estimates, they are rewarded. When they only raise earnings and not free cash flow, the market is much less forgiving. Investors are no longer paying indiscriminately for growth. They want cash conversion.

This is also why I think AI adoption remains such an important theme. The market is increasingly rewarding companies that can demonstrate real efficiency gains from AI, not just talk about the open-ended opportunity in abstract terms.

That is a very different phase for the AI cycle. The first phase was about building the infrastructure. The next phase is about who uses it well. Companies that can translate AI adoption into better margins, better productivity, and better free cash flow should continue to be rewarded. In other words, AI is becoming less about the promise and more about the evidence.

That framework tells us where to be positioned. I continue to favor quality and AI adopters. Within Financials, I prefer large-cap Financial Services, particularly Insurance and Capital Markets exposed businesses, where earnings revisions are inflecting and our regime analysis remains supportive. Within cyclicals, I like Discretionary Goods, where the wallet-share shift from services to goods, improved pricing, and better earnings revisions all point to catch-up potential.

In Tech, I continue to prefer hyperscalers over semis. Semis can still participate tactically, especially after recent momentum unwinds, but the hyperscalers offer a better multi-month risk-reward. They have resilient core businesses, attractive relative valuation, and underappreciated optionality around AI-related ROI and adoption. Just as important, they are not only enablers of AI, but they are early adopters. They have the flexibility to spend less if the market becomes more demanding about capex discipline.

In terms of remaining market risks for this year, I’m still watching interest rates and oil very closely. A gradual rise in nominal yields alongside strong economic and earnings data is not necessarily bearish. In fact, historically, that has been one of the better environments for equities because it brings back my ‘run it hot’ theme. Stronger nominal growth supports revenues and earnings. The problem is not the level of rates. It is the pace of change. If back-end yields rise too quickly, the cost of capital becomes a headwind for stock valuations.

Bottom line, the broadening is still happening, but the market is raising the bar. Early-cycle beta is giving way to mid-cycle quality. Earnings are broadening, but free cash flow is also necessary to be fully rewarded. AI is still an important market driver, but the market wants measurable benefits and the leadership is becoming more selective within sectors rather than across them.

This shift may make the market feel less euphoric in the short term, but also healthier and more sustainable in my view. This is not a market that is simply chasing momentum any more.

It is starting to separate the companies that can simply talk about growth from the companies that can convert it into durable free cash flow and longer-term value.

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!

Jeff Adelson: Welcome to Thoughts on the Market. I'm Jeff Adelson, Morgan Stanley's U.S. Consumer Finance Analyst.

Jay Bacow: And I'm Jay Bacow, Co-Head of Securitized Products Research, also working at Morgan Stanley.

Jeff Adelson: Today, how AI could change the way Americans shop for, manage, and refinance their mortgages.

It's Monday, August 10th at 10am in New York.

The U.S. mortgage market is worth more than $14 trillion, and its performance ultimately depends on the choices millions of homeowners make. Today, refinancing still means shopping around, comparing offers, and working through a lot of paperwork. AI could make that process much easier, especially when rates begin to fall.

Jay, you led this work on our AI mortgage blue paper. What's the main way AI could change the mortgage market, and why does the borrower matter so much?

Jay Bacow: So we think the biggest change would be borrower adoption of using AI agents to manage their personal finance. An agent on your phone could just monitor mortgage rates, compare lenders, reduce the paperwork, and make homeowners more likely to refinance when the economics work.

Let's think about what that could be. Historically, only about 30 percent of borrowers that had the ability to lower their mortgage rate by a 100 basis points did so in a given year. When a borrower went to get a mortgage quote, less than half of them asked more than one lender for a quote.

That agent could go reach out to 30 lenders, ask for a variety of different mortgages, could upload all the documents, could do this all effectively instantaneously, present the homeowner with the best option. Allow the homeowner to effectively click a button and refinance. I think this could be pretty transformative for the mortgage market.

Jeff Adelson: Now, as we think about this transformation, Jay, mortgage investors still rely heavily on past refinancing behavior trends. If AI makes borrowers more likely to refi[nance] when rates fall, how could that change the way these investors value mortgage-backed securities?

Jay Bacow: Well, we all know that past performance is not indicative of future performance, and those models are likely to understate future prepayments. If you get a faster response, it's going to make mortgages more negatively convex.

That's going to make the durations shorten. It's likely to widen mortgage spreads by about 10 basis points in our base case. And now, if that base case were to happen and we get, let's call it 100 basis point rally in the future, we think that that could cause something like a 40 percent pickup in refinance volumes versus our current expectations of what refinance volumes would look like in that 100 basis point rally.

Jeff, you cover a lot of the largest mortgage lenders. What does this mean for their business model?

Jeff Adelson: So, it's pretty straightforward. More borrowers refinancing means more loans for the industry to originate. Today, we're still sitting below what I would describe as normalized levels of originations.

We're sitting at about $2 trillion of mortgage originations per year. As we think about normalized, we think that's somewhere in the order [of] around $2.5 trillion. So just that $600 billion alone could get us straight there.

We tend to think about this more in our bull case, where we could see something in the order of $3 trillion of originations or more, still below what we saw during the peak COVID years of about $4 trillion or more. But still pretty meaningful and material for the industry.

Now, for the scaled lenders, that can create meaningful operating leverage. Mortgage companies have historically had to hire aggressively when volumes rise, and then they've had to reduce headcount when the cycle turns. AI could allow them to process more loans with the same employee base, making their cost structures more flexible and reducing the need to rebuild capacity during every single refi[nance] wave.

But the earnings benefit we don't think will necessarily match the dollar benefit from volumes. If AI makes it easier for borrowers to compare offers and allows every lender to process more loans, then competition could intensify and pressure gain on sale margins. So the opportunity is a larger market and better productivity.

The key question for individual lenders is: how much of that volume can they capture without giving too much back through pricing?

Now, as we think about automation, Jay, it could bring in more loans, but could also intensify competition and reduce the profit lenders can earn when they originate and sell a mortgage. So, how should investors in your space weigh those two effects?

Jay Bacow: So, the mortgage investors are short the option to the mortgage homeowner of when they can refinance.

And if the mortgage homeowner is going to be more efficient about refinancing, the mortgage investor is going to need to get paid more for that. They're going to demand wider spreads, and they're particularly going to demand wider spreads where that option that they're shorting is worth more. That's generally how it's going to play out, but there's also other aspects as well.

That duration shortening, because the borrower's more likely to refinance, means that the investors that own that duration will need to buy some more duration against that. You're also going to see more demand for duration as rates rally. So it's going to be a bid for the low strike receivers, as our options experts will pay close attention to.

And then if we get a further rally, you also get a more of an impact across the consumer writ large. You can imagine a world where mortgage rates are substantially lower than they are right now. An agent could sit there and say, "Why don't you consolidate your debt between your credit card, your auto loan payments, maybe your student loan payments and your mortgage?" Allowing consumers to save more and then maybe spend that in the economy.

Jeff Adelson: If we maybe take it a step beyond refinancing, how could AI affect home sales, homeownership, and access to home equity?

Jay Bacow: So let's just go back to thinking about this agent that's on your phone that's looking at all the opportunities.

Traditionally, right now, most people are only calling up one lender, they're getting one quote. If your agent is looking at lots of different lenders and lots of different options, you're probably going to get more ability to take out a mortgage. So you're going to get an expansion of the homeownership rate.

That's going to create more demand for housing. As rates rally, you're going to get home sale activity picks up more than it used to, and people are also going to be more able to take advantage of the equity they have in their house. So, you're going to get more usage of second liens and HELOCs and cash-out refinance activity.

Once again, we think this is mostly going to happen three to five years down the road, but we're not really sure exactly how this is going to play out.

So Jeff, what would be some of the signs that people could look at to see if it's playing out in the three to five-year timeline that we're expecting – or slower, maybe even faster?

Jeff Adelson: Sure. So yeah, I mean, I think it's going to be similar to what we've already observed as consumers ourselves and what we're seeing with all the LLMs and AI tools we're adopting today. You should see some rapid advances in the ease of use and the adoption of these technologies from a forward-facing, client-facing perspective. What we all see in the websites, what we all see in the apps.

It should become easier for us to engage with the mortgage process, compare rates to actually step into the process. Whereas today, you still need to maybe speak with a bank officer, a loan officer, or a mortgage broker to get deeper into the process and actually better understand what your rate means today.

So that would be the first step. The second step would be closing speeds. The average originator today still takes about 40 to 45 days to close a mortgage. The biggest and largest originators that have invested the most in technology and AI today are closing at about, call it, 12 to 20 days. So, half the industry level. So, that should come down over time and make it much easier to actually apply and finish a mortgage.

And then quite frankly, the most obvious answer would just be at the given level of rates that are outstanding today, we should see a step up in the level of refi[nance] volumes. That would be the most obvious one. But that'll be the outcome of everything else we've talked about rather than the actual cause.

Jay Bacow: That makes sense. So faster refinancing, it's likely to make the mortgage market more responsive when rates fall and effects that are going to reach well beyond the borrower.

Jeff Adelson: That could mean higher volumes for lenders, quicker prepayments for investors, and wider swings across housing and rates markets.

Jay Bacow: Jeff, thanks for taking the time to talk.

Jeff Adelson: Great speaking with you, Jay.

Jay Bacow: And thank you all for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.

Today, a look at how government is increasingly determining the future of AI in the U.S. – from where it's built to which technologies US companies and consumers can use.

It's Friday, August 7th at 10am in New York.

AI is rapidly reshaping the economy and society, so this is a pivotal moment for government to consider the rules governing that development. The first area to watch is technology restrictions, particularly in the context of U.S.-China competition.

Now, for much of the past decade, the government's approach has been to restrict a relatively narrow group of technologies with clear national security implications while maintaining broader commercial ties. But as export controls spread across more sectors of the economy and AI moves from software into physical infrastructure, the definition of what qualifies as national security has become broader.

The Department of Commerce could, for example, expand the entity list. That would require US cloud providers, software companies, and model marketplaces to remove or stop supporting models tied to designated Chinese developers.

Congress could then make those restrictions more durable through things like the annual defense bill or other policy vehicles. We're keeping an eye on several legislative proposals, like the AI Overwatch Act, which would tighten controls and give congressional oversight around exports of the most advanced AI chips; and the MATCH Act, which would extend restrictions further upstream to semiconductor manufacturing equipment and seek closer alignment with allied producers.

These measures wouldn't directly ban Americans from using a Chinese model, but they could constrain China's ability to train future frontier systems.

But it's not just the US that could impose a set of restrictions. China has a parallel set of tools focused more on integration and market access. Regulators could block four models or APIs. They could require locally controlled deployment. They could impose Chinese data and content standards or use cybersecurity and entity list authorities to promote domestic substitutes.

The likely result is an increasingly distinct pair of AI ecosystems. That's our two worlds thesis in practice. Over time, we think that means a bifurcated global AI market into separate technology ecosystems.

That looks like the U.S. relying on export controls, allied supply chains, and largely closed frontier model platforms, while China emphasizes domestic hardware, open-weight models, subsidized compute, and localization. Over time, that bifurcation could produce different chips, models, standards, data rules, and distribution channels, while third countries navigate between the competing stacks.

The second area to watch is domestic regulation. Today, the landscape is pretty fragmented. States are moving first on certain specific issues, including automated decision-making and child safety. Now, at the same time, Congress is confronting competing objectives from industry, consumer groups, and national security officials.

So far, we think the evidence suggests that the administration's preference is for a light-touch approach, a largely voluntary national framework rather than a broad new licensing regime. But it's also moving toward more direct oversight of the most advanced models. That includes the possibility to play a more active role prior to model release to ensure that certain protections like cybersecurity and intellectual property are met.

Publicly outlined priorities from industry seem to broadly overlap with that approach: a consistent federal framework, clearer liability standards, access to data, compute, and power, and copyright rules that don't materially limit model training.

But of course, the industry isn't monolithic. There are some important nuances between frontier developers and other players.

So, what does all this mean for investors? The government's reaction function will be critical to the way AI is developed and diffused throughout our society in two key ways.

First, we see regulation altering not only the pace, but also the geography of AI infrastructure.

At the same time, we think these constraints could strengthen the investment case for bottleneck solutions like on-site power generation, fuel cells, storage, and more.

Second, greater technology bifurcation supports investment in parallel supply chains.

The key takeaway here is that the government is no longer simply regulating the industry from the sidelines. It's helping to determine how fast AI develops through domestic rules, where it develops through infrastructure, permitting, and sovereign AI policy, and which technologies are accessible through export controls and market access restrictions.

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.

Manan Gosalia: Welcome to Thoughts on the Market. I'm Manan Gosalia, Morgan Stanley's Head of US Large Cap and Mid Cap Banks Research.

Today: why the bank branch you pass on your commute may matter more than you think.

It's Thursday, August 6th at 10am in New York.

When was the last time you went to your bank? You probably do most of your daily banking online and maybe go to the local branch for occasional transactions, like getting a certified check or talking to a financial advisor.

So, you might think that bank branches are fading into the background. But America's biggest banks are actually accelerating their investments in physical locations.

That shift could reshape the competition for your deposits. In our research, we looked at where 12 large U.S. banks are expanding their footprints, and we identified 57 target markets. 34 of those markets are being pursued by multiple banks, and nine of those markets are being pursued by five or more banks.

Since mid 2025, about 80 percent of these banks' new branches have opened in those markets. Most of the expansion is happening in the Southeast and Texas, with additional activity in the Midwest and several major metropolitan areas. 95 percent of the target markets have either above median projected population growth or they have ranked in the top 10 percent for deposit growth.

That helps explain why Nashville and Atlanta are each targeted by seven of the banks, while Miami, Dallas, and Denver are targeted by six. These are places where households and businesses are growing and where banks see an opportunity to build relationships that could last for decades.

The central question is whether physical branches still attract deposits. The evidence suggests that they do. From 2022 to 2025, 90 percent of the time when a large bank increased their branch share in the market, their deposit share also increased. But to become a real contender, a few scattered branches are not enough.

Banks generally need at least a mid-single-digit share of local branches to compete effectively. At 10 percent or more branch share, deposit share exceeds branch share by a median 3.5 percentage points. So, density, not just presence, is what matters.

Most large banks that we looked at have not reached that level. 60 percent of their positions in expansion markets remain below 5 percent market share. And so, this build-out looks like the beginning of a long competitive cycle.

Even then, the pressure is already visible in what banks are paying for deposits now. The highest offered retail certificate of deposit rates are higher in the South compared to the Northeast. Higher rates do make deposits more expensive for banks to fund.

In fact, evidence from the recent earnings reports suggest that this may already be happening. And we expect higher funding and branch costs to pressure bank margins and lift expenses into 2027. This means the cost of gathering core deposits could move structurally higher. And the lesson is surprisingly old school.

You can do almost everything on an app, but a branch on the corner still carries weight.

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.

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today: Can the Fed hold the line?

It's Wednesday, August 5th at 2pm in London.

The Federal Reserve has a difficult job.

The U.S. economy is a complex and varied ecosystem that covers everything from brain surgery to your burger order. The Fed is asked to keep prices stable and people employed using, for the most part, just one simple tool. A short-term interest rate, and without any control over what government policy or global events might bring.

Currently, the Fed probably feels pretty good about its success with one half of this – in the job market, given that the unemployment rate is near historical lows. But it probably feels less successful about price stability. Over the last five years, overall prices in the U.S. economy have risen over 20 percent based on the Fed's preferred inflation measure. That's roughly double the increase that a goal of 2 percent annual inflation would otherwise bring.

Into this complexity steps a new Fed chair, Kevin Warsh.

He has emphasized two changes for his tenure. First, that inflation is too high and needs to come down. And second, that the Fed has historically communicated too much with the market, which Chair Warshkeep  thinks has helped contribute to investors potentially taking too much risk while also restricting the Fed's options to act.

What markets are now processing is a potential tension between these two goals.

After all, high inflation is an immediate issue. In a world where the Fed is hoping to keep price increases at about 2 percent per year, their preferred measure, PCE inflation, is rising more than 3 percent on an annualized basis over the last three, six, and 12 months. In the latest ISM Manufacturing Survey, [the] measure of price increases among manufacturers is well above normal.

In the face of that, one option for the Fed to combat this inflation would have been to raise interest rates. It didn't do that. Another would be to suggest that it was very close to taking action and likely to move soon. It didn't do that either.

Indeed, our economists think that the market took Chair Warsh's lack of guidance and action at the most recent Fed's meeting to suggest a pretty high bar for rate hikes; and even the potential to redefine the Fed's 2 percent inflation target in favor of something more general and unspecified.

The result was a market reaction that would suggest less focus on inflation. The prospects for rate hikes were reduced, the yield curve steepened, led by a sell-off of long-end yields, measures of expected inflation rose, and the U.S. dollar weakened.

In the days since, markets have settled a bit. But the result is going to be a market that is now going to be much more sensitive to incoming inflation data.

If that inflation data moderates in the second half of this year, as we at Morgan Stanley expect, then the Fed's approach could look justified – as the data suggests that neither action nor more communication about what they're going to do is necessary.

But if inflation doesn't cooperate, the challenge becomes immediate. Christopher Waller, another member of the Fed, recently said that "Sternly staring at inflation until it melts before our withering gaze is not an option."

The market will expect action and expect a framework explaining that action. Until that point, our rate strategists think that yield curves will continue to steepen.

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.

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley.

Michelle Weaver: I'm Michelle Weaver, U.S. Thematic and Equity Strategist.

Sarah Wolfe: And I'm Sarah Wolfe, Senior Economist and Strategist with Morgan Stanley Wealth Management.

Ariana Salvatore: Today: the politics, economics, and market implications of America's AI data center build-out.

It's Tuesday, August 4th at 10am in New York.

AI infrastructure spending is becoming a major force in the U.S. investment cycle. But as you've heard on this podcast in recent weeks, local resistance to data centers is growing, and projects worth hundreds of billions of dollars are being canceled or delayed.

More than 300 local moratoria have passed since 2023, and restrictions now touch 40 states. Now, most are temporary pauses, not outright bans, but the community opposition is tangible.

For investors, the key question is how these local pressures shape the broader build-out. So, I wanted to talk to you both because, Sarah, you've looked at this on the local level, and Michelle, you've been leading some of our thematic work on this topic.

So, Sarah, maybe we'll start with what happens when a data center comes to town. How does a large project ripple through a local economy, especially when so much of the expensive hardware is imported?

Sarah Wolfe: I think we need to look at the data center build-out from two lenses. First, at the national level, and then what's really happening at the local level, county by county.

So, at the national level, the headline investment can actually overstate the contribution to GDP because a lot of the components that go into data centers – think chips, servers, networking equipment – most of that is imported. So, it's actually an offset in the GDP accounting.

But when we analyze the AI build-out at a local level, we see that the town experiences the project very differently. A data center still needs a physical shell, concrete, steel, electricians, construction workers, and then the restaurants that feed the construction workers.

So, the local multiplier depends on how much of that spending around the data center stays nearby. Workers are going to get paid, local suppliers win contracts, and nearby businesses will see more demand. And then importantly, governments may collect more property and business tax revenue. When we look at county-level research on the AI data center build-out, we do see positive effects on employment, business formation, wages, income, and tax returns.

So, these data centers are significant. They do have significant multipliers. But we need to dig a little bit deeper and look at how it affects different counties.

Ariana Salvatore: So, it sounds like there are some local economic benefits. How durable do you think those are?

Sarah Wolfe: Some of the effects are durable and some aren't. The largest and most important effects come through employment in the near term. If we look at the construction phase of these projects, let's look at a data center that's 250,000 square foot, in Virginia. That supports more than 1,500 workers during construction.

But then, if we look at what happens after construction is done, there's only about 50 full-time workers once it's operating. And I will say I think that's a high-end estimate. If you look at how many workers these data centers employ state by state, some numbers are 10, some numbers are 20, and some are 30 employees. So, 50 is maybe on the higher end.

So, the bottom line is that the labor market multiplier actually fades after the facility comes online. What does persist, are the smaller share of data center processing jobs, ongoing supplier and service activity, and then importantly, of course, the property tax base.

But even that fiscal benefit depends on how the incentive package is designed. If a locality, for example, grants a very large, long-lived sales or property tax exemption, it may give away much of the revenue that made the project attractive in the first place.

So, the job story is real, but it's much more front-loaded. And then the tax revenue story is real too, but it really matters on how the locality negotiated the incentive package.

Ariana Salvatore: So, it sounds like there are some benefits and some potential drawbacks. How do you think communities should judge whether a trade-off like that is worth it?

Sarah Wolfe: I think communities should be asking this question of how much spending and tax revenue actually stays local after all the incentives? How many jobs remain after construction? Who pays for new generation transmission, water system, and roads? And who bears the spillovers through utility bills, housing costs, or land use?

The evidence does suggest that data center growth can lift incomes and expand the tax base. But it also raises home prices. And as we know, it raises electricity prices as well. A typical AI data center may use as much electricity as 100,000 homes, so cost allocation is critical. The strongest agreements make benefits durable and costs explicit through transparent reporting, sunset dates or claw backs on incentives, infrastructure cost-sharing, and protections that keep the household from subsidizing this build-out.

The test is really whether the community captures enough lasting value to justify the demands on land, power, water, housing, and public finances.

Ariana Salvatore: Michelle, I want to bring you in here. The local picture that Sarah describes helped explain why the politics can be so uneven.

How are moratoria and other local restrictions changing the pace and the location of the build-out, maybe on a national scale?

Michelle Weaver: I think you have to think about just the different type of moratoria themselves even. So, we're not seeing them uniform across different states in what's been proposed.

However, the majority of moratoria are a pause, not a[n] outright ban on construction. So, they might say, "Okay, we want one year," or "We want three years to do local impact studies and, and think about the way these data centers are going to impact communities."

So, the primary risk is really to the pace of the build-out, and as more and more of these moratoria pop up, you have to start to think about how that could shift the geography and the location of where these data centers will ultimately be built.

We are seeing a shift towards more data centers being placed in rural locations. This also has implications for the international data center build-out. You're seeing more and more of these data centers go up in Canada and in Australia to serve U.S. needs.

Ariana Salvatore: The polling data show us that voters are increasingly skeptical of AI. Specifically, they're worried about electricity prices and local costs. How should investors read that concern?

Michelle Weaver: Well, there's a couple things we have to unpack here. First is really around perception. So, in certain areas where you have both high data center activity as well as unregulated utility markets; yes, it's true, there is some of this raised cost ending up on consumer power bills from data center activity.

But in other areas with unregulated utility markets and lower data center activity, you don't see the same link between consumer power bills and what's going on with data center electricity consumption. But perception is what really drives politics and given that this perception is becoming spread across different states with both regulated and unregulated utility markets, politicians are reacting to it.

And the second thing this gets at is affordability. Consumers have been stressed by inflation for years now and elevated prices. And given that they think that data center costs are now winding up on their power bills, it's not surprising that you're seeing this big reaction, and that anything having to do with affordability has become a huge issue for voters.

Ariana Salvatore: Translating that into how we think things evolve from here, what industry and financing trends do you think matter most going forward?

Michelle Weaver: We recently identified the three main bottlenecks for the data center build-out as power, people, and politics. This whole episode has been about that third P, politics, but let's unpack power and people. On power, we still think there's a potential shortfall of around 38 gigawatts needed through 2028.

So, power is going to remain a huge bottleneck, and as the politics layer gets placed on top of the power layer, you're seeing more and more of an issue there. And so, what that really argues for is for data centers to be off grid. That way they can say, "Okay, there's no way we can potentially impact consumer power bills if we're not even connected to the grid."

The second P, people, is another big bottleneck, and we're seeing a very tough time for data centers to get skilled laborers. It's very hard to find electricians right now and other skilled laborers needed to set up these data centers.

Ariana, that brings us to the policy debate. Why is data center opposition moving from town halls into state houses and Congress? And what does this mean for a conditional build-out?

Ariana Salvatore: Yes, I think the points that you both touched on really explain why we're seeing this sort of pushback evolve, right?

Local communities are concerned about their electricity prices. Again, we see that on more a regional than a national basis. They're concerned about quality-of-life concerns. They're concerned about the environmental impacts. And so, all of that has caused these efforts to sort of cross state lines. We see it in both Democrat-held state legislatures as well as Republican-held.

So, it's definitely resonating with voters, and this is an issue that we think is going to be a key wedge issue into the midterm elections. It started to move into Congress rhetorically, but we still think something like a federal ban or a federal moratorium is very unlikely. And that's because we see a different incentive structure for lawmakers in Congress from the state and local level.

Principally, I'm talking about the U.S.-China relationship. So, when you look at the geopolitical backdrop to this debate, there are certain things that you can't ignore. And one of those things is that the U.S. and China are locked in this race for AI supremacy at the moment. And I think federal lawmakers have more of an incentive to respond to those policy demands and those policy needs, meaning they want to keep facilitating the build-out.

So that's why you're seeing the national level still relatively supportive of this build-out. We're seeing permitting reform. We're seeing Defense Production Act being leveraged by the president. We're seeing still an overall very favorable environment trying to unlock, sort of, that power bottleneck, for example.

So that's kind of what brings us to this conditional build-out.

Now, what does that mean? We think that the hyperscalers in these companies are going to have to offer some concession to local communities to facilitate the build-out. And that could be a number of things. I think it depends on the state's concern or the local community's concern principally, but we see a few different options.

One of those things is behind-the-meter power generation. So on-site power is one of the clear kind of offsets to this debate. Another thing would be improving utilization rates. So, our sustainability analysts found that the capacity utilization rates are actually quite low at some of these data centers in the range of 30 to 40 percent.

So maybe that can be increased. We've got some potential new regulations or transparency requirements around water usage. So, the short of it is, there's not going to be a one-size-fits-all solution here. But we think there's enough on the policy side that these companies can do or offer essentially to local communities. So that the entire build-out doesn't get delayed or doesn't get stopped.

And, and that's kind of why we still expect elevated AI CapEx, not just this year, but next year as well. We think that the risks are skewed to the upside for those numbers.

Sarah Wolfe: Ariana, I want to touch back to the comment you made on low odds of a nationwide ban on AI data center build-out – and tie it to this broader competition between the U.S. and China, with global supremacy in AI.

Can you talk a little bit more about how competition with China is going to prevent a nationwide ban and some of the national security concerns around that?

Ariana Salvatore: This ties into the theme of sovereign AI, which is something that we've been focused on recently, especially with all these discussions of more tech restrictions and controls between the U.S. and China.

And specifically, it's one of the reasons that we think the geographical build-out will be constrained to either just the U.S. domestically or countries that we are closely aligned with. And really the point I want to make here is that there's three geopolitical realities that are going to form, we think, the incentive structure for federal lawmakers and that are slightly different from the things that state and local policymakers tend to focus on.

The first is that we're seeing China leverage its supply chain position to pressure the physical inputs required for AI infrastructure, right? So, we're seeing that tit-for-tat escalation in the context of a broader strategic détente, but there's still a competitive aspect there.

The second is that we know China's accelerating its own physical AI build-out. Reporting indicates they're spending something like $300 billion over five years on its own domestic network, so very much full steam ahead in terms of its own domestic potential.

And the third is that research has identified China-linked influence operations that use an American frontier model to generate social media posts, comments, and political cartoons linking the data center construction to rising energy prices.

So, there's still a little bit of uncertainty as to whether or not those campaigns actually influence public opinion at scale. But in our view, it really underscores the linkage between national security and geopolitics and the AI data center build-out.

All these developments together we think underscore the physical component of the AI race and make something like a national data center ban or federal legislation toward those ends really difficult to reconcile with the growing bipartisan strategic imperative around AI, which is something that we think persists past the midterms as well.

But at the end of the day, the pace of the AI build-out will depend not just on demand, but on how well projects address the concerns of the communities hosting them. That's why we think this conditional build-out is probably the right base case for now.

Michelle and Sarah, thanks so much for taking the time to talk.

Michelle Weaver: Great speaking with you both.

Sarah Wolfe: Thank you, Ariana.

Ariana Salvatore: 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: 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 ongoing transition in the economic recovery from early to mid-cycle.

It's Monday, August 3^rd at 11:30 am in New York. So, let’s get after it.

Following on from my podcasts the past few weeks, I want to reiterate our key call that the economy and the market are moving from early to mid-cycle. That may sound like strategist jargon, but it has very real implications for leadership, positioning, and how one should think about the next phase of this bull market.

For much of the past year, the market was rewarding early-cycle characteristics and behavior. Lower-quality, higher beta stocks, and the most explosive earnings revision stories led the way. That made sense. We were coming out of a rolling recession, operating leverage was improving rapidly, and earnings revisions were accelerating off of depressed levels. But as the business cycle matures, the market typically becomes more discerning. It starts to ask a harder question: not just who can grow, but who can sustain that growth with stable earnings, strong margins, and free cash flow generation. In other words, quality starts to matter again.

That’s exactly where we are now. The rotation towards quality has begun, and I don’t view that as a bearish development for the broader market even if it’s bad for some of the former leaders. The S&P 500 is a very high-quality, large cap index. So, while the market may continue to consolidate in the near term, the quality rotation should ultimately support index resilience and help the S&P 500 work its way toward our 8000 year-end target.

The big market event last week was the capitulation in the historic momentum unwind. Momentum sold off hard, and semiconductors were at the center of it. That shouldn’t surprise anyone who has followed our work over the past several months. We’ve been using the silver-stock analog to think about semis, and remarkably, the semi index bottomed almost exactly where that analog suggested. That argues for a tradable bounce in semiconductors over the next few weeks. However, the more important point is that semis may struggle to reclaim leadership for the rest of the year. Semis are a classic early-cycle group, and this is increasingly becoming a mid-cycle, quality-led market. The silver-stock analog would support the same conclusion. 

The provocative way to say it is this: the AI cycle is not over, but the easy money in the most crowded AI beneficiaries may be. The AI investment cycle still has plenty of runway, but the market is no longer rewarding capex blindly. It’s asking for evidence of return on invested capital, adoption, monetization, and operational discipline. Last week’s performance gap between Microsoft and Meta was a perfect example. It wasn’t random. It was about capex discipline. The market is rewarding more prudent spending and that could translate into a real overhang of the capex beneficiaries and in line with my views for the past several months.

That is why I still prefer hyperscalers over semis, with one important caveat: dispersion within the hyperscalers is rising. The group has already outperformed semis by 30% over the past four weeks, and I think it can continue over the next several months. Hyperscalers have resilient core businesses, exposure to the AI application layer, and an underappreciated ability to use AI to reduce operating expenses if needed. They’re both enablers and adopters. But the market will no longer treat them all the same. The winners will be the companies that can show return on investment, communicate capex discipline, and preserve earnings quality.

This is also why AI adoption is becoming so important. The next leg of the story is not just about who builds the infrastructure. It’s about who can use it more effectively. Our work shows that companies where AI is material to the investment thesis and pricing power is neutral to strong, are already seeing margin expectations improve. Relative net margins for that group have expanded by 50 basis points in just three months and they now sit nearly 400 basis points above the broader market. That’s not hype. That’s operating leverage with a new engine.

The Fed is the other major piece of the puzzle. Chair Warsh stayed on hold last week, but he remains tight-lipped about his reaction function. Markets are still adjusting to a Fed that wants to rely less on forward guidance and more on unfiltered market signals. I think that’s a healthy development over the longer term, but transitions are rarely smooth. The biggest risk to this consolidation turning into a correction is if 10-year yields rise above 5%.  Such a rise could weigh on equity multiples and force the Fed to either change back to its old ways of guiding the markets or provide more liquidity to calm rate markets.

Bottom line, the bull market is not over, but it is changing. As we move from early to mid cycle in this recovery, the equity market wants higher quality. Semis may bounce, but they are unlikely to be the leader again. Meanwhile, hyperscalers will likely continue to trade better with the best ones exhibiting more capital discipline. More importantly, AI adoption is moving from promise to measurable margin benefit. This is what mid-cycle looks like. Less forgiving, more discerning, but still constructive for investors who follow the rotation rather than fight it.

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!

Michelle Weaver: Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's U.S. Thematic and Equity Strategist.

Michael Zezas: I'm Michael Zezas, co-director of the Morgan Stanley Institute and Deputy Global Head of Morgan Stanley Research.

Jessica Alsford: And I'm Jessica Alsford, Morgan Stanley's Chief Sustainability Officer, and also co-director of the Morgan Stanley Institute.

Michelle Weaver: Today: how AI, energy, geopolitics, and industrial investment are competing for scarce resources – and what that competition could mean for markets.

It's Friday, July 31st at 10am in New York.

Jessica Alsford: And 3 pm in London.

Michelle Weaver:

Mike and Jess, as co-directors, you speak with people across the firm to identify the biggest questions facing companies and investors, especially the important ones that may not have clear answers yet. And to understand how those questions are shaping client conversations.

Mike,

Michelle Weaver: What's one of the questions that you think investors are wrestling with the most right now?

Michael Zezas: So, one of the biggest questions is how several major investment cycles can happen at the same time. AI, energy infrastructure, manufacturing, and defense may all be competing for the same power, the same skilled labor, equipment, and capital.

So, investors need to look beyond each theme in isolation and ask where constraints could delay projects, raise costs, or redirect spending, and which companies are best positioned to manage all of that.

Michelle Weaver: Since the institute began, you've examined a number of topics, including AI, energy resilience, and geopolitical fragmentation, just to name a few. Jess, which topic has been the most compelling to you?

Jessica Alsford: It's difficult to pick one because, to be honest, for me, it's really the way that AI, energy resilience, and geopolitics have all really become one story. If you think about the energy transition, which has been playing out for a number of years. But now we also have the AI build-out, and that depends on reliable and affordable power. And then geopolitical shocks, which are demonstrating the need for countries to have energy security.

So, if you put all of this together and you can really see that there is a huge need to scale the global energy system, but using all types of power available to us, including renewables and nuclear.

Michelle Weaver: Mike, how is that intersection that Jess spoke about between AI, energy, and geopolitics altering the way that companies are thinking about investing?

Michael Zezas: So, geopolitical shocks, they're more norm than exception now. The situations in Iran, Ukraine, Venezuela, they all reflect an evolving international order where the U.S. is less interested than it used to be in preserving global security and trade standards.

And that's a particular problem in a world where companies and governments spent much of the last 50 years optimizing to benefit from globalization. So basically, looking for the lowest cost way to produce things, sourcing materials and labor in the most efficient way possible, presuming that the frictions in international goods and services trade would just keep getting lower.

That's obviously not the case now, and whether it's a good idea or not, the trend is toward governments leaning into industrial policy to prioritize supply chain security and protect whatever it sees as their national competitive advantages. And really that's correlated with higher trade barriers.

So, that means that while companies are still focused on efficiency, they have to build resilience through more regional supply chains, greater redundancy, and investment in strategically important capacity. So, the practical message from our teams is to map critical dependencies, diversify where possible, and be realistic about the extra cost of resilience rather than assuming the old globalization model will simply return.

Michelle Weaver:  One of the clearest constraints on the AI build-out is energy. Our thematic research team is estimating a nearly 40-gigawatt shortfall in power needed for data centers. For context, this is multiple New Yorks worth of power.

Jess, how significant of a limiting factor is power becoming?

Jessica Alsford: Power is definitely becoming a strategic constraint. If you think about grid connections, these can take years to set up. And so, access to power really is going to determine where facilities are built and how quickly they're able to come online. And it looks like there won't be one universal solution.

You've got natural gas, nuclear, renewables, storage, microgrids. They're all going to need to play a role. And for companies, that means that they really are going to have to be planning power alongside the site and financing. For investors, it means focusing on reliability, affordability, and permitting, not just headline demand.

Michelle Weaver: So, AI, energy, and geopolitics can no longer be considered in isolation. As countries and companies rethink where they source, build, and invest, where do you see the biggest opportunities emerging?

Jessica Alsford: The opportunity is likely to be broader than any single sector, to be honest. and the institute has shown that capital really needs to be flowing towards more resilient supply chains as well as new productive capacity and also the infrastructure that supports both of these. And this covers power, grids, automation, logistics, as well as data.

I'd also say that location matters, too. And companies need to be able to weigh political stability as well as skilled labor, reliable energy, and policy support. And investors should be looking for markets and businesses that can turn those advantages into durable returns.

Michelle Weaver: The institute has also looked at founders as a source of economic information. Jess, what can their decisions reveal before those changes appear in traditional economic data?

Jessica Alsford: So, founders are often making decisions at the leading edge of growth and capital formation, and so their behavior can provide an early read on both at-risk appetite and also financing conditions.

If we take the current macro environment as an example of this, the institute has shown that many founders are adapting rather than simply waiting, and this means extending fundraising timelines, spawning investor conversations, and considering private credit, structured equity or tender offers.

For companies, the takeaway really is to preserve financing flexibility. And for investors, it's to watch how those choices can reshape private market liquidity.

Michelle Weaver: Mike, to bring this back to where we started, if power, labor, and capital are all becoming more constrained, what should investors be watching most closely?

Michael Zezas: Yeah. I'd watch whether capital spending plans are being delayed or resized or redirected in some way, and I think importantly, the reasons would be for any of those things happening.

Is there a constraint around power or labor or equipment permitting or financing? Those details help distinguish whether you'd be looking at temporary setbacks or a structural shift. So, something that would signal that we've built too much capacity in AI or manufacturing relative to demand. And that's the type of thing that would be a real headwind to the economic outlook and potentially create problems in the credit markets.

But to be clear, we don't see demand flagging anytime soon. And so, for investors, it's less about whether to be bullish or bearish on the outlook for the markets and the economy, and it's more about looking for companies that are durable beneficiaries of these trends. So those are ones with secure inputs, flexible balance sheets, and realistic return thresholds.

Michelle Weaver:  Absolutely. As Mike said, we don't see demand slowing, and we're seeing a lot of encouraging data points around AI adoption. One analysis we did recently shows that around 25 percent of S&P companies are now quantifying the benefits they're seeing from AI adoption. And this diffusion story is only going to continue to grow.

Mike, Jess, thanks for joining me.

Michael Zezas: Thanks Michelle.

Jessica Alsford: It’s great speaking with you both.

Michelle Weaver: And to our listeners, thanks for tuning in. If this is all piquing your interest, you can find the institute's articles, roundtables, and future work on Morgan Stanley's website. And as always, if you enjoy Thoughts on the Market, please leave us a review and share the podcast with a friend or colleague.

Welcome to Thoughts on the Market. I’m Stephen Byrd, Morgan Stanley’s Global Head of Thematic and Sustainability Research.

Today: Are investors misreading the AI infrastructure selloff?

It’s Thursday, July 30th, at 10am in New York.

The recent selloff in AI infrastructure stocks has raised a familiar question: Is the buildout running ahead of real demand? The market is pulling back. And we think that reflects profit-taking, crowded positioning, and forced selling by investors. This is not about weaker fundamentals. But the selloff has brought to light three key concerns, which we think the market is overplaying.

The first concern is how much enterprises are willing to pay for AI. The median enterprise employee currently generates less than $11 a month in token spending. That’s the fee paid when an AI model processes a request and generates a response.

We think there is room for that to increase. From the employer’s perspective the economics are compelling. Across workplace applications, their cost to execute the economic task would be $2-$5. And that could save an enterprise $55. That to us suggests companies are likely to spend more, not less, on AI over time.

The second debate centers on efficient models, including competitive models developed in China.  And here, policy responses both from the U.S. and China can have an impact as well. Some investors worry that better efficiency means less computing demand. But we see the opposite risk. This is a classic example of Jevons paradox: When something becomes cheaper or more efficient to use, people use more of it. In AI, lower costs can attract more users, encourage more frequent use, and make complicated applications more economical. 

The scale is striking. Industry leaders estimate that compute demand could double every six months, which would amount to more than a thousand-fold increase in compute over five years. Hyperscalers could quadruple available power capacity to roughly 120 gigawatts by 2028, from about 30 gigawatts in 2025.

And that leads to the third debate – whether data centers can secure enough power to keep expanding. It’s a valid concern. In the U.S., facilities under construction and contracted grid capacity cover about 30 gigawatts. That’s less than half the 68 gigawatts of power that data centers are likely to need 2026 through 2028. Grid connections can take five to seven years in some regions. Skilled electricians, welders, and pipefitters are in short supply. And local opposition is increasing as communities debate electricity bills, tax incentives, and who should pay for grid upgrades.

These are real obstacles, but we view them as delays rather than dead ends. Onsite generation, fuel cells, energy storage, natural gas turbines, and the conversion of existing high-power sites could close the gap, at least partially.

We believe much of the recent weakness in AI infrastructure has been driven by technical factors rather than a change in the underlying fundamentals. As AI becomes more capable and cheaper to use, demand for intelligence, compute, and power is likely to keep rising. The global market is fragmented as policy decisions in the U.S. and China shape how growth unfolds. But strong economics should support continued investment.

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.

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Martijn Rats: And I'm Martijn Rats, Head of Commodity Research at Morgan Stanley.

Andrew Sheets: Today – talking about the recent volatility and the direction ahead for oil.

It's Wednesday, July 29th at 2pm in London.

Martijn, it's great to talk to you again. We haven't talked for a little while on this program. But oil is once again back in the headlines and it's moving around.

So maybe to just jump right into things, as you look at the lay of the land in global energy markets at the moment, what's been happening? What are you telling clients?

Martijn Rats: Okay. Well, we've had a large amount of volatility, over the last couple of weeks. If you roll the clock back, sort of, to the beginning of June. In the beginning of June, it started to become clear that already some more oil was leaking out of the Strait of Hormuz than perhaps, many of us anticipated at the time.

But that data has been confirmed since then. And then, of course, in the middle of June, we got the memorandum of understanding. And after that, roughly 100-150 million barrels a day or so that was behind the Strait of Hormuz got cleared. And that…

Sheets: These were tankers that were stuck there during the conflict, all came out.

Rats: Absolutely. Laden tankers that were there; had just basically turned into floating storage for a good couple of months. They all cleared out, and that actually created a bit of a glut, in the sense that all of a sudden the refiners of this world had a lot of crude to absorb. And we saw many indications of physical looseness in the market, physical differentials, calendar spreads.

All sorts of indicators pointed that physically there was a lot of oil, temporarily to be absorbed. And the spot price of Brent fell to $70. And that looked to be the new direction of travel. In principle, the world is not short of oil if you take the geopolitics out of it.

So, for a while it, it looked bearish. But then a new set of disruptions came, and the military conflict restarted, and we've had 13 days of overnight bombing. And with that also the flow through the Strait of Hormuz diminished again. And we are back in the last, sort of, week, 10 days to very, very low levels. The same levels we had in March.

The flow through the strait is not exactly zero. But it's sort of 2-3 million barrels a day, sort of, down 80 percent to 90 percent of what it was before the conflict. And with that, prices have rallied. But on top of that, last week it looked like the military activity could really scale up. And for a couple of days, the markets priced that in.

But then we have other choke points to take into account now. Not only Hormuz, but the Bab el-Mandeb, the CPC terminal, the issues in global refining. Altogether, it's been a tremendously volatile period. So, yeah, we're on the whole leaning towards the constructive side because there are so many disruptions in the system. But it's a very hard one to call at the moment.

Sheets: So Martijn, let's talk about those other disruptions besides just the Strait of Hormuz. Because yeah, it's not just the Strait of Hormuz anymore. We have issues in the Red Sea. You have ongoing issues with Russian energy infrastructure that's being attacked by Ukraine. Just what are these other factors that are out there? And how much do they matter relative to, you know, how many ships are passing through the Strait of Hormuz?

Rats: Yeah. They matter a lot, and you can see that expressed in the price of refined product more than the price of crude. If you look at the main global benchmark for the price of diesel, which is arguably the ICE gas-oil contract, which are diesel barges delivered in Rotterdam or in the wider ARA area, it's trading at about $1,200 a ton, which is sort of $150-$160 per barrel.

That's where you see the tightness. And so out of the total end user price, the refiners are capturing more at the moment than the crude suppliers. But what end users pay is not $85 per barrel for Brent crude oil, it's $1,200 a ton for diesel. And that is a very high price. Now, that is a result effectively of four major issues that the oil market has to deal with.

One of them is Hormuz, as just discussed. But then we come to these other three. And these other three are the Bab el-Mandeb, which is the strait on the other side of the Arabian Peninsula that provides entry and exit to the Red Sea. That strait has gained in importance because Saudi Arabia has been redirecting about 4 million barrels a day of crude oil supply that was previously exported via Hormuz. Now through the East-West Pipeline to a terminal near a city called Yanbu, from where it is loaded and mostly sails down south through the Bab el-Mandab to refineries in Asia.

The Bab el-Mandab is a strait that is effectively controlled by the Houthis, which is an Iran-aligned group that controls much of Yemen. And already in [20]24, earlier in [20]25, they've been very effective, controlling tanker traffic through that strait. And in the last sort of week or so, they have said that they will no longer allow Saudi tankers to sail out. And also, that group has drone attacks on Saudi oil infrastructure near the Jazan refinery, near the Yanbu terminal, and overnight also the Abqaiq facility, which is a large oil processing plant.

So, this whole Red Sea situation puts at risk something like an incremental 3.5 million barrels a day of crude.

Then we've had to deal with issues at the CPC terminal, which is again, also a very large oil export terminal. About 1.5-2 million barrels a day of crude is exported from CPC, which is a terminal near the Russian city of Novorossiysk.

Ukraine has been executing drone attacks on tankers that have been trying to load from the CPC terminal. Much of last week, the CPC terminal was out. It's on again, off again. It's a very disrupted flow. In and of itself, a single terminal loading 1.5-2 million barrels a day is very, very large. So, we care.

And then the third issue that the oil market has been dealing with, and this also comes back to this issue about these refined product prices, is very severe tightness in the global refining system. That is an issue of some refineries can't export because they're behind the Strait of Hormuz again.

So, you can say, "Well, isn't that; that's sort of the same problem?" But nevertheless, it expresses it somewhere else. It's partly a problem of, sort of, the Chinese refinery system running very low. But it's recently mostly been driven by Ukrainian drone attacks on Russian refineries. And by now, something like 60 percent of the Russian refining system is out.

And with that, exports of refined products have declined very significantly. There's a gasoline export ban. There's a diesel export ban from Russia. Russia used to be a very large diesel exporter. That is now down to practically zero. And with that, refined product markets have rallied severely on top of the price of crude.

Sheets: And I think that's interesting [be]cause when we think about the economic impact of oil, while, you know, the price of oil per barrel is often the most kind of visible marker that we have – it's often the refined product that we actually use. You know, a truck is running on diesel. It's not running on crude oil.

And, you know, that cost of diesel, of jet fuel, of gasoline, you know, that is the thing that can often really affect business margins. And the ability to operate and move product around. So, I mean, just give a sense like how much have those diesel prices gone up and how much further could they rise if you're operating, you know, a trucking company in Europe?

Rats: Yeah. Look, when supply is inherently scarce, we often ask the question – what is the demand destruction price, right? If you can't supply the stuff quick enough, the physical oil market, be it crude or refined product, must balance.

There are a finite number of molecules in the system, and we can store them for a bit. We can take them out of storage. But when you take storage into account, molecules can't disappear out of nowhere. And they can't create it out of nowhere either. So, the system must balance. And if you can't supply it quick enough, the only way to balance sometimes is through demand destruction.

And then we ask the question, what is the price that effectively causes that to happen? And if you look historically, that is often expressed in crude, something like $140-$150 a barrel. We've seen that before. But those were occasions where refining was not an issue. And then crude needs to do the heavy lifting to drive prices higher.

What we're having at the moment is that refined products need to do it. And so, from experience earlier in the year, back in 2022, some other occasions, the price that destroys diesel demand is probably in the order of $1,400 a ton. In the diesel market, we use tons rather than barrels for historical reasons. Just to make it easy.

But it's about $1,400 a ton, which is about sort of, you know, like $180-$190 per barrel. That really stops diesel demand in its track. At the moment, we're $1,230-$1,240, that sort of level. And so, we are getting close. There is probably a little bit more to go, like another 5 percent, 10 percent, that sort of thing, before you really hit some exceptionally high levels.

But the diesel price, I would argue, is doing exactly that. It's searching for this demand destruction price. It's just if you then take that sort of $160 diesel that we have at the moment, how much do the refiners get versus how much do the crude producers get?

At the moment, the refiners are getting $65- $70 out of that, leaving comparatively little for the crude supplier. But the refined product price is the channel by which the economy is impacted and ultimately also by which demand is eroded.

Sheets: When we're talking about demand destruction, we're talking about at what price does a trucking company not operate, does not drive as much, you know, does not, you know... We're talking about less activity. And inherently that is, I think a risk to growth. But especially risk to growth in Europe where the starting point for growth is already pretty weak.

Rats: Yes. So, we are watching as much, how the Ukrainian drone attacks on Russian refiners are playing out as we are watching, sort of, the Strait of Hormuz.

Sheets: Martijn, the last thing I wanted to talk to you about is, you know, we've been talking about the Iran conflict since late February. And, you know, we're sitting here in late July. And it's clear that, you know, there was a small normalization in flows as you talked about. But we're back to a place where those flows are nowhere near normal.

And I think the question on everybody's mind is how much longer can this go on before there's a much larger shock to energy prices?

Now, again, you've mentioned we're already seeing some of that shock to diesel, but, you know, a much bigger disruption. What's your current thinking on how much runway the energy system still has?

Rats: Yeah. It's an excellent question, and it's turned out to be fiendishly hard to answer. My gut feel based on how the data is behaving, based on what we know from history: If this lasts another, sort of, month or two, three, then it's hard to argue that by then the buffers in the system will not have been completely exhausted.

The reason why I think oil analysts have lost a degree of confidence in forecasting this accurately is that there's a lot of unexplained oil that does require some explanation. If you look at the cumulative amount of supply loss from the Middle East since the start of this conflict, easily over 1.5 billion barrels. 1.5 billion barrels in 150 days is an enormous amount.

And yet, the inventory draws that we can find in observable data, they are at best a third of that, maybe 0.5 billion barrels. And so, there's another billion barrels where you say, "Yeah, we had that last year, but we don't have this this year.”

How did we solve that billion-barrel problem? And you can say, "Well, we were a bit oversupplied going into it," and a few other things. But you, sort of, have to conclude, and I think this is also, you know, talking to clients and investors, other market participants. I think this is sort of collectively we're discovering this is that this system of, like, unobservable inventories has to be way bigger.

That is either inventories like in the supply chain, inventories at customers end, or in countries where we generally just have very little data anyway, like in China. And so the system has been behaving as if already in [20]24 and [20]25 actually, we were putting a lot of oil into these, in storages that are hard to observe – because in that period we had the opposite problem.

We were forecasting large inventory builds, and we couldn't find them all. And now we're forecasting large draws, and we haven't been able to find them all. And so, the system has been behaving as this; the unobservable part of the inventories are way larger.

And… But at some point, they also run out. But because they're hard to observe, we don't know when. And I would guess if we're getting towards the end of the summer by August, September, and we're still in this situation? Yeah, then we're going into the winter. Like, you know, German households objectively have little storage of heating oil.

Sheets: Mm-hmm.

Rats: And they need to be rebuilt. And there are a few examples where we do know what customers are doing with their inventories, and they point to a picture where, yeah, by the end of the summer, like, we're running on fumes. And so, like this, we've been able to patch this up. But it can't go on forever.

Sheets: Well, Martijn, always a pleasure to, to catch up with you and talk energy markets.

Rats: Nice to talk to you.

Sheets: And thank you for listening. If you enjoy Thoughts on the Market, please take a moment to rate and review us. And please share with a friend or colleague today.

Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.

Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.

Matthew Hornbach: Today, will the Fed hold or hike? It's the question in the market right now.

It's Tuesday, July 28th at 9:30am in New York.

Will the Fed display patience, or has it run out of patience? That's the question hanging over the July FOMC meeting currently underway.

We believe the former. We expect the Fed to keep the target range for the federal funds rate unchanged at 3.5 to 3.75 percent. The statement will probably also remain unchanged, reiterating the ample reserve policy, economic activity expanding at a solid pace despite elevated uncertainty.

So, Mike, what's your assessment of the situation beyond that?

Michael Gapen: Our assessment of the July FOMC meeting is actually the case for hikes is not as persuasive now as it was in June. And I think when we say that and when we come to the decision the Fed will stay on hold this week, we're basing it mainly on the data that has come in since the June FOMC meeting. And two important pieces on that front are employment growth moderated.

So, in the June meeting, the three-month average payroll gain was running at about 188,000 per month. And I think it gave the sense that the labor market was really accelerating and there was downside risk to the unemployment rate. The subsequent employment data changed that view. Now it looks like there is much less of an acceleration in hiring and momentum has slowed. So, the labor market doesn't look quite as robust.

Second, there was a lot of information, we think, a lot of signal about disinflation. So yes, recent volatility in the Middle East did push oil prices temporarily higher. We'll see where that goes. But underneath the hood, there was significant softness in goods inflation and services inflation, particularly related to housing.

So, we do think that there was a lot of evidence that disinflation is here. So, with those two things in mind, we think there's less of a case to hike in July than there was in June. So, we think the right thing... Or what we think the Fed will do is to skip July, try and buy a little more time, get a little more information. If disinflation is indeed here, the Fed stays on hold. If not, and inflation stays firm, well, they can move to rate hikes later this year.

But we think the case to hike in July is less compelling than it was in June.

Matthew Hornbach: Well, they certainly will get a lot more information between the July meeting and the September meeting. If memory serves, at least two more rounds of all of the major economic data points…

Michael Gapen: That’s right.

Matthew Hornbach: Payroll, CPI, and so on.

Michael Gapen: That's right. The gap between the July FOMC meeting and the September FOMC meeting is the longest on the Fed's calendar. Of course, in part, that makes room for Jackson Hole in August, which if the Fed were moving to a tightening cycle, could be a venue to lay out the case for that. But you're right, they will see multiple employment and inflation reports before they meet again in September.

Matthew Hornbach: If they really wanted to get ahead of that data and move at this meeting, what is the case for hiking rates in July? How would you think about that perspective?

Michael Gapen: I think you could make a couple of cases to hike now. One is recent volatility and conflict in the Middle East has pushed oil prices higher. Maybe it convinces you – you're in a prolonged oil risk premium scenario, and inflation will not dissipate.

Second, I think you could argue, well, it's a balance of risks argument. And we think risks have just shifted in the direction of inflation, where last year they were in the direction of a weaker labor market. We eased last year. Let's just reverse those risk management rate cuts this year. So, it's not about inflation in hand, it's about your view of risks around inflation.

Another, I think, and to me, this is the most important one, is maybe Warsh wants a regime change in the reaction function. In other words, he emphasizes price stability and achieving the 2 percent target. Well, at some point, words are words and actions are actions. And maybe what he desires is a more hawkish reaction function and kind of a higher interest rate all else equal to guide inflation down to 2 percent more quickly.

So, I think, Matt, if we're wrong this week, I think the main reason we're wrong is I'm thinking under an older reaction function, and Warsh is bringing a new one. And right now, we don't exactly know what his reaction function is. And he could reveal it this week as being in a direction where he really wants to concentrate on the inflation side of the mandate to the exclusion of nearly everything else.

Matthew Hornbach: Well, I don't think that's lost on markets at all. And in fact, I think that the rise in yields we've seen in the bond market concentrated in the real yield component of the 10-year Treasury bond tells you a lot about how investors are thinking the Fed will react to higher energy prices. As energy prices have gone up, so have bond yields.

The relationship between those two asset prices are very strong. And usually what that suggests is if the real yield is going up more than the break-even inflation rate is going up as energy prices rise, it's telling you that investors think the Fed will not look through the rise in energy prices.

If you have the opposite happen, where your break-even inflation rate is going higher, more so than the real interest rate is going higher, that would suggest investors think the Fed will look through the energy price increase. That just hasn't been the case, and so I think investors are very much attuned to what they think is the right reaction function for the Fed.

But I guess we'll see. Only time will tell. And I think in order to help us tell what the right reaction function is – we'll need some communication from the Fed. And maybe that's where I want to go next with you – is on communication.

It does seem like there have been fewer FOMC participants speaking to the public since Chairman Warsh began his tenure as chairman. Is that your impression? How do you think about communication? And since we are in the midst of this FOMC meeting, the press conference… What do you think about press conferences going forward?

Michael Gapen: I do think you're right. I haven't counted up the literal official FOMC communications. I do think there have likely been fewer speeches and/or interviews given recently. And whether or not that's a function of Kevin Warsh as the chairman or it's summer and things move a little slower, I don't know.

I will say, though, that when participants have spoken, I think we're getting the same, say, normal communication that they brought in the past. So far, I don't read participants as unwilling to provide their view about the outlook for the economy and for monetary policy.

On the press conference, boy, would that be a change. I've been of the view that you probably will not get what I'll call a major change to the SEPs or the press conferences in terms of their frequency until the task force on communications has run its course, where I think the deadline is ultimately later this year.

So, I don't think the schedule of press conferences will change until 2027, if it changes at all. But if we don't have them… The way that I would look at that, Matt, is to say, if the Fed's speaking less, there will be a vacuum out there to some degree. So, if the Fed's giving its view on the outlook and monetary policy less frequently, something else will fill that narrative, whether it's markets or the private sector or whatever it is.

Vacuums are going to get filled. The Fed's speaking less, somebody else will speak more. Maybe that drives volatility more. I guess it would depend on the situation, but I think pulling press conferences would be a major surprise. I don't think it's in market expectations, and my belief is it would probably lead to some increase in volatility over time.

How would you read it?

Matthew Hornbach: Absolutely. I think the void has already begun to be filled by investors and how they think about the Fed's reaction function, rightly or wrongly. Which is why I think we've seen real yields move in a very positively correlated way with energy prices. Investors are intuiting a certain reaction function to higher energy prices.

Whether or not that is the correct view, only time will tell.

If we do have a press conference at this upcoming meeting, which looks very likely, investors are going to pay attention to every nuance and every shift in the chairman's tone. How he chooses to address certain questions versus others—or whether he chooses to address them at all—will be important for market participants and how they invest in the bond and currency markets.

With that, Mike, thanks again for taking the time to talk. I look forward to catching up with you again in late August around the Jackson Hole symposium.

Michael Gapen: Great speaking with you, Matt. Thanks for having me on.

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.

Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S.  Equity Strategist. 

Today on the podcast I’ll be discussing the transition from early- to mid-cycle and what that means for your portfolio

It's Monday, July 27th at 11:30 am in New York.  

So, let’s get after it.

Our broadening call for the market has been about moving beyond the narrow leadership of the mega-cap winners and into more economically sensitive areas. That made sense in the context of our rolling recovery thesis, a period when revenue growth returns to lean cost structures, and operating leverage emerges across many sectors of the economy.

But now, I think that early-cycle phase of the rolling recovery is ending, and the market is starting to rotate toward quality. That’s not bearish, but it is different and can affect portfolios at the stock level.

As the cycle matures, investors stop rewarding low quality beta and start focusing more on free cash flow, balance sheet strength, margins, and earnings stability. The market is not abandoning the recovery. It is becoming more selective about the best way to own it.

This setup reminds me of early-to-mid 2021. After the initial post-COVID rebound, leadership shifted away from lower-quality and more speculative areas and toward higher-quality companies. The S&P 500 kept rising, but the leadership changed.

I think we’re seeing something similar today. The S&P itself is already a quality-heavy benchmark, with high-quality cohorts representing roughly 42 percent of the index versus about 28 percent for low quality. That should help keep the index resilient, even as the market continues to digest this transition.

Could we still see near-term volatility? Absolutely.

If the war escalates further or the Fed surprises us with a rate hike this week, the market can continue to correct. I continue to think 7000 on the S&P 500 is important support if investors remain uneasy about the Fed transition or the geopolitical backdrop. However, the bigger message is that leadership is changing, not that the bull market is ending.

One of the most important drivers of this shift is AI adoption. Earlier in the cycle, margin expansion was about classic operating leverage: sales recovering faster than costs. From here, margin expansion will depend more on companies using AI effectively, running leaner, and turning productivity into revenue growth as well.

This is why quality matters. Companies with strong pricing power, strong balance sheets, or the ability to translate AI adoption into real growth are likely to be rewarded disproportionately.

Companies where AI is material to the investment thesis and pricing power is neutral to strong are seeing forward net margin expectations improve nearly 400 basis points above the median stock. Our transcript work also shows that roughly 25 percent of S&P 500 companies cited measurable benefits from AI adoption in the second quarter, up from 14 percent a year ago. That’s operating leverage with a new engine.

This also feeds into the AI leadership rotation. I still think semis are likely to underperform hyperscalers from here, even if both can be under pressure during the next leg of consolidation. Semis are a classic early-cycle group, and they’ve already seen a peak rate of change in earnings revisions. The hyperscalers, by contrast, have high quality core businesses, exposure to the agentic application layer, and an underappreciated ability to take costs out through AI-driven efficiencies. 

In terms of the overall S&P 500, the two variables I’m watching most closely are interest rates and oil. The bond market is pricing a meaningful probability of a Fed hike, but my base case remains that the Fed stays on hold. A hike would be a hawkish surprise and a risky maneuver, but I think even that would delay rather than derail a positive finish to 2026 with earnings growth remaining strong. 

Oil is the other wildcard. A sustained rise in oil is not priced into equities, and just another reason to move one’s portfolio up the quality ladder.

Bottom line, the broadening is not over, but it is changing shape and leadership. We’re moving from early-cycle beta toward mid-cycle quality as the market seeks not only growth, but companies that can convert that growth into durable free cash flow and margin expansion.

The recent elevation of quality factors has been evolving for the past month and now it’s time to fully embrace it. 

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!

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, what can Odysseus teach us about investing?

It's Friday, July 24th at 2pm in London.

Like many of you, this week I saw The Odyssey. The enduring appeal of this story more than 2,700 years after it was composed is a reminder that some themes are universal. Pride, resourcefulness, determination, self-control, or the lack thereof, mattered to both an ancient Greek dinner party and resonate with anybody investing today.

But drawing lessons from the past is also tricky.

We do not have that much financial history, and markets contain too many variables for the same combination to align twice. Some judgment, art, and dare we say storytelling is always involved in deciding which historical periods best describe the present.

Those disclaimers aside, we've argued in our year ahead outlook that 1997 to 1998 and 2005 to 2006 are some of the most useful templates for the current backdrop.

That remains our view.

They suggest a cycle that has further to run, equities outperforming credit, and a preference to own volatility. Both of these periods were defined by a sharp rise in corporate activity. That is certainly what we're seeing today.

We forecast U.S. capital expenditure to rise 23 percent in 2026, and 26 percent in 2027. AI is the biggest driver of this spending but build-outs in energy infrastructure are also playing a role. And increased corporate CapEx is certainly a global story, especially in Asia.

Then there's M&A, which also rose significantly in these two past historical periods. As recently as early 2024, global M&A volumes were unusually depressed, some of the lowest levels in over 30 years, adjusted for economic size. But that's no longer the case. And more recently, M&A is currently running up 64 percent relative to a year ago.

Important current macroeconomic data also looks somewhat similar to these past two periods. The current levels of U.S. core PCE inflation, the unemployment rate, and the 10-year yield are pretty close to the averages seen in 1997, 1998, 2005, and 2006.

And the U.S. 2s10s yield curve, well, it broadly flattened then, and it has broadly been flattening today.

A third similarity, maybe less obvious but no less important, is deregulation. Both 1997 and 1998 and 2005 to 2006 saw significant financial deregulation. And we're seeing that again now. From the Basel Endgame to NAIC risk weights to Solvency II changes to savings reforms in Europe, Korea, and elsewhere, the current trend appears to be on a firmly deregulatory path.

Even more simply, 1997 and 1998 and 2005 to 2006 provide interesting narrative bookends to two ways that I often hear the current environment being described.

The late '90s? Well, that was defined by rising excitement around a transformational new technology – then the internet – and the prospect of a more productive future. Sound familiar?

And the mid-2000s? Well, that was defined by a very unequal economy and rising consumer stress – but growth that was still supported by a seemingly inexhaustible investment demand from a rising market force. Then that force was emerging markets. Today, it's AI. Again, somewhat familiar.

If these periods serve as a guide, the cycle probably has further to run, and corporate aggression should favor equities over credit.

But if we learn anything from the trials of Odysseus, the journey can throw up plenty of surprises along the way.

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.

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley.

Today, I'll be talking about why we still expect robust AI capital spending in spite of some rising political pushback.

It's Thursday, July 23rd at 10am in New York.

It should be no surprise to our listeners that data center pushback, a topic that we've been following for some time, has been growing louder. But in 2026, it's accelerated meaningfully. Data we track suggests that an estimated $156 billion of projects were canceled or delayed in 2025. This year alone, in just the first quarter, we've seen almost that same exact number.

The opposition is coming from several directions.

Communities are raising concerns about rising electricity bills, environmental pressures related to water use, and the local quality-of-life effects of large-scale construction. But it's also coming from lawmakers across the aisle. State legislatures with both Democratic and Republican lawmakers have been advancing this type of policy.

At the same time, we're forecasting a little less than a trillion dollars of AI CapEx this year alone, and we think it's an increasingly important component of the macroeconomic growth outlook.

So how do we square that circle?

First, and most importantly, we think this is primarily a supply-side risk rather than a demand-side one. Said differently, we don't expect the backlash to materially reduce projections for compute demand. Instead, it could widen the gap between that demand and the industry's ability to bring new capacity online through things like permitting delays, grid interconnection constraints, and local opposition.

Despite that more difficult political and infrastructure environment, our internet team, led by Brian Nowak, remains constructive on AI capital spending. Our broader thematic estimate for total AI CapEx, including the neo-cloud providers, stands at approximately $870 billion in 2026, and we actually see risks skewed even higher from here.

So why is spending still increasing as the environment for building data centers becomes more challenging? There are a few reasons.

First, the AI ecosystem remains compute constrained. The urgency to invest has not diminished. In fact, growing social opposition and political uncertainty ahead of the 2028 presidential election may actually be encouraging hyperscalers to begin projects earlier, which our credit strategists outline as a potential scenario—a pull-forward of demand before the political and execution risk grows even louder.

Second, the timelines associated with data center construction have become longer. From groundbreaking to operational launch, projects can now take as long as three years or even more. That gives companies a strong incentive to begin developing future capacity well in advance, even if the political pushback is strong.

And third, the underlying demand signal is not slowing. Global weekly token usage, which our analysts view as an important proxy for compute demand, has increased since early January. It's rising and continues to do so throughout the course of this year.

So, in short, the pushback is real, but it appears to be reshaping the buildout rather than stopping it.

That's why our base case is for a conditional buildout. We think projects are likely to face greater scrutiny, longer delays, and more requirements related to environmental impact and community benefits.

But ultimately, we still think they cross the finish line. That could mean higher costs, longer development timelines, and greater geographic dispersion of projects away from the largest existing data center markets.

It could also accelerate the shift toward on-site and behind-the-meter power generation. Fuel cells, turbines, and energy storage are becoming increasingly important as operators look for ways to reduce their reliance on lengthy grid interconnection processes, and that can benefit companies that are able to bring those solutions to the forefront.

Meanwhile, our U.S. equity strategy team maintains a relative preference for hyperscalers over semiconductors over the next several months. As you heard our CIO and Chief Equity Strategist Mike Wilson explain yesterday, that's because the team sees the hyperscalers as early in discounting the market's renewed focus on CapEx discipline.

Further, they retain compelling AI optionality through strong core businesses, leadership potential at the agentic application layer, and an underappreciated cost-efficiency lever.

Putting it all together, we see the growing pushback against data centers as representing a genuine risk to the pace, cost, and geography of the AI infrastructure buildout.

But again, this isn't just a demand story; it's a supply story. And somewhat paradoxically, the scarcity and uncertainty created by these constraints could actually end up pulling capital spending forward rather than reducing it.

As we've said before, the AI race is increasingly moving beyond the question of who can build the best model. It's becoming a competition over who controls the infrastructure, supply chains, and energy systems required to scale those models.

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.

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.

Today on the podcast, I will explain why the recent volatility in markets makes sense.

It's Wednesday, July 22nd at 2 p.m. in New York.

So, let’s get after it.

The broadening trade is back and it’s gaining steam. We established this thesis last week. Importantly, there’s a key reason this broadening trade is likely to continue. One of the more crowded areas of the market—semiconductors—has lost its momentum.

As I’ve also noted before, this is not a call that the AI cycle is over. However, stocks do trade on the rate of change in growth, and expectations often reach a place where they can no longer surprise on the upside.

Earnings revisions tend to get too stretched, and capital starts looking for the next place where fundamentals are improving but positioning is still light. This is no different than what happened to other leadership groups earlier this year in areas like precious metals and energy stocks.

Remember, I first made the call for market broadening in our November outlook. My view is that the economy had moved into a new expansion after the rolling recession ended in April 2025. Markets were starting to catch on before the Iran conflict interrupted that trend. Investors piled back into the AI trade—especially semis—as oil prices jumped and Fed expectations shifted more hawkish.

Back in June, I noted that those earnings revisions were likely nearing their peak. Hyperscale stocks starting to lag was the first indication. Since semis ultimately depend on hyperscaler spending, that divergence usually doesn’t last. It doesn’t mean the buildout is ending. However, the spenders may be moving from blind enthusiasm to a more disciplined phase as a means of addressing the market’s concerns about falling cash flows.

We’ve seen this pattern before. Since ChatGPT launched, this ebbing and flowing between the hyperscaler and semiconductor stocks has happened three times. This is the fourth such adjustment, during which the hyperscaler stocks are likely to outperform the semis. Since a few weeks back, hyperscalers have outperformed semiconductors by almost 30 percent.

Another consequence is that the major averages may trade lower in the near term. When a crowded, large-cap leadership group is unwinding, the index can look choppy even as the market underneath is improving.

That’s the key distinction. The index may struggle, but the broadening can still work. Over the next month, don’t be surprised if the S&P 500 trades as low as 7000 before it makes a move to 8000 by year-end. Use this weakness to add to equity positions.

I continue to like Consumer Discretionary Goods, Transports, and Biotech.

Discretionary Goods remains one of the cleaner expressions of the broadening thesis. Wallet share is shifting from services back toward goods, goods pricing is improving, and earnings revisions are strengthening. Transports continue to show improving revisions as volumes stabilize and pricing gets better. Biotech is one of the more attractive lower-rate beneficiaries, especially if policy expectations are too hawkish, as I think they are.

On that last point, the Fed backdrop matters. The June FOMC meeting told us forward guidance is going to be limited, and the inflation path is going to drive policy. The softer-than-expected inflation data last week should allow the Fed to stay on hold rather than hiking. It may take the bond market a few more data points to fully re-price this view.

Bottom line, the broadening is in gear, but it may not feel comfortable because it’s happening while the crowded momentum trade unwinds, a process that is likely unfinished. That’s usually how rotations in market leadership work.

Like spring, it’s often: in like a lion and out like a lamb.

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!

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research.

And once again today, I am joined by Morgan Stanley's chief regional economists: Michael Gapen, the Chief U.S. Economist, Jens Eisenschmidt, our Chief Europe Economist, and on the other side of the world, Chetna Ahya, our Chief Asia Economist.

Yesterday, we talked about what's supporting growth around the world, especially AI spending in the U.S. and some government spending in Europe, and Asia's role in making all of this happen. Today, we're going to try to dig deeper and go into policy.

It's Tuesday, July 21^st at 10 am in New York

Jens Eisenschmidt: And 4pm in Frankfurt.

Chetan Ahya: And 10pm in Hong Kong.

Seth Carpenter: Since the last time we did this in mid-April, I will say the debate around central banks has probably become more complicated. Global growth has held up, probably better than many people expected. And inflation, which picked up a lot, started to recede. But it has not gone away. And some of the forces helping to shape the economy, the AI spending, government spending, that possible upswing in manufacturing, that could keep demand strong, and it might keep pushing inflation higher.

So, the question today is, if growth remains resilient, how much room really do central banks have to navigate?

Mike, let me start with you because your call for the Fed here in the U.S. is out of consensus, or at least at odds with where the market is pricing things. We talked about the demand going from AI. You pointed out that imports are actually limiting how much domestic demand there is.

So, what is the underlying story for inflation in the U.S.? And what does it mean for the Fed?

Michael Gapen: So, our view is that inflation will come down in the U.S. So, we think disinflation will be driven by some payback in energy prices. Some payback from tariffs, which have pushed up goods prices over the last year. And some further diminishment in housing-related inflation, namely shelter.

So, we think on a broad-based perspective, inflation has already peaked and will start moving lower. And we think we've seen evidence of this in recent inflation prints.

A risk to that, though, is from the demand side of the economy and AI-related inflation in two parts. One, higher software prices, chipflation. So, the pass-through of some of the AI pricing components. Fortunately, here, they're about less than 1 percent of the consumer basket. So, we don't think that there's a great risk, a strong risk, a high risk of AI-related inflation in the consumer bundle.

I think the real risk is that maybe we underestimate broad-based demand, animal spirits. And so, you might just see a broad-based increase in inflation from stronger demand. That'll be a little bit harder to see in real times. But our expectation is that inflation moves lower to about 3 percent, by the end of this year and closer to 2.5 percent next year.

Seth Carpenter: All right. Thanks, Mike. And in fact, the most recent inflation report that we just got confirms your perspective that inflation should be coming down. And so, I guess the question then remains: What would it take for the Fed to hike this year if inflation has come down like we've seen?

Michael Gapen: Well, I think that the answer there is that inflation wouldn't come down in line with our expectations. So, if the view is that energy prices, tariffs, and shelter inflation should provide plenty of offset and bring inflation down, I think the answer is you don't get payback.

Explicitly, core goods prices stay elevated. Maybe we get ongoing disruptions in the Middle East that push energy prices higher and create second-round effects. So, I think inflation just lingering at elevated levels could mean the Fed gets brought in to raise rates in September or later this year.

We think if they're patient enough, they'll see enough disinflation to keep them on the sidelines. But the risk is disinflation forecast is too optimistic, inflation stays firm, the Fed needs to raise rates.

Seth Carpenter: All right, Jens, what about for you and the ECB? They've already raised interest rates once this year. I think you've got a forecast for them raising interest rates again in September. What could make you wrong about that forecast? What's going to make you convinced that you're right about that forecast? And is there a similar tension that the ECB is wrestling with that Mike talked about for the Fed?

Jens Eisenschmidt: Yeah. I mean, starting with the last part of your question, I think no doubt, very similar tension. Just that, of course, it's less obvious. It's essentially a nuanced European version instead of the loud American version that we always stereotypically think the world looks like.

So, essentially, we have here clearly not an AI boom. That, I mean, there's no question. And we have discussed that yesterday. Still, there is certainly the notion that the world demand is not really weak, and some of this will also arrive in Europe. And so, you have that tension between maybe there's more resilience than we had thought, and so inflation will not come down through to slack as much. And so, we might actually add something here in terms of monetary restrictiveness.

Now, the other thing that is often forgotten, even though it's blatantly obvious, the starting point is just different. The ECB is running neutral monetary policy by all accounts. I mean, you could say 2 percent is neutral, and now they are 2.25. But, you know, there are ranges of uncertainty around any estimate. And the latest that they published runs – goes from 1.75 to 2;2.5.

So basically, even if they were to increase rates to 2.5 in September, you could go with the microphone around the governing council, and you would probably find a lot of people saying, "Well, this is still a neutral policy." That's probably not the case for the U.S. So, I guess this matters here for that debate too.

Seth Carpenter: All right. Yesterday we talked about lots of different things, but for Europe, we brought up fiscal policy. How do you think about fiscal policy and how it affects monetary policy? And so, I'm thinking about two channels.

One, how much does the ECB care that if they keep pushing up interest rates, they're going to increase the debt service burden for countries that are already facing high debt costs?

And second, is fiscal policy going to be the extra impetus for inflation that forces even more rate hikes from the ECB?

Jens Eisenschmidt: I guess it depends on who you ask. Certainly, more concerned members in the governing council that would point to exactly that fiscal stimulus as a reason why interest rates have to be increased further from here.

The other answer I would give is – probably for now at least, the view on fiscal policy is really model-based. You look at what type of increase in interest rate gets you essentially more fiscal restraint because there's an increase in interest rate bill and so less spending somewhere else. And that gets you basically less stimulus or less growth, I mean, very roughly speaking.

I don't think it's a major concern for now. We haven't reached yet interest rates where this would start to play a role. I guess, again, Europe being fragmented as it is, with all the political risk that's around the corner. Think about the elections in France and Italy and Spain next year. That will very likely find itself expressed in spreads. And so, the higher the interest rates are, the larger the spreads could become.

Seth Carpenter: So, for each of you, there's clearly a role for inflation. One of the risks we'll talk about maybe is inflation expectations and how maybe there's a big shift in what's going on with inflation.

But Chetan, that brings me to you and Asia, because one economy where there unquestionably has been a fundamental shift in inflation and inflation expectation over the past several years is Japan.

The Bank of Japan is on this normalization path where they're raising interest rates. Interest rates had been negative and then zero, and now they're gradually raising things up. Inflation has come back to Japan. Markets are looking at what the Bank of Japan is likely to do. Can you tell us a little bit about what our view is for the Bank of Japan this year and next? And what might make them hike interest rates faster than we think?

And is there any risk that in fact they hike interest rates slower than we think?

Chetan Ahya: Yeah, Seth. So, we are expecting BoJ to hike twice from here. The first rate hike is coming up in December of this year, and then another one coming up in June of next year. And then we think that, you know, the underlying inflation trend in Japan is not really that strong.

So, while market pricing is for about three more rate hikes instead of two that we are building in our base case. And some of the macro investors are even talking about four more rate hikes. We think the underlying inflation trend warrants a caution and BoJ to go slowly than what the market is pricing in and what the macro investors are saying in.

And the key part of our framework on thinking about Japan's inflation is that bulk of the explanation to inflation rise in Japan lies in currency moves. And secondarily, you can look at also the other drivers are more from supply side, which is higher energy prices or food prices. Whereas it's not driven so much by demand.

To elaborate further on why it is not driven by demand, when you look at Japan's consumption trend, and if you index it to hundred at pre-COVID levels in September [20]19 then it's currently about 101; i.e., that it's just about 1 percent up over the last seven years.

So that's a very tepid trend of consumption demand. And therefore we don't think that BoJ needs to rush into hike in a more aggressive pace going forward.

Seth Carpenter: So, there is this fundamental shift, but boy, it's not on a tear, and so the BoJ can take its time. You know, Chetan, it's hard to wrap up a conversation about the global economy without talking about China.

I get the sense that there's not a lot going on with monetary policy, but we did just see a soft Q2 GDP print. So, against that backdrop, what should we be expecting in terms of policy? Is there any monetary policy coming? Or is there going to be some fiscal expansion? Or is China just sort of stuck in this lower gear?

Chetan Ahya: Yeah, Seth. So, we were also surprised by the soft GDP print. But when you look into the data, actually, it was interestingly doing well on exports.

And I mentioned earlier about how the global CapEx trend is helping Asia. It's definitely helping China too. But at the same time, China's domestic demand turned out to be quite weak. And particularly in the areas where we think that the policy response can be providing some help, i.e., infrastructure spend, was also very weak.

And therefore, we are expecting that in the back half of the year, you will see the government taking up some fiscal expansion. Not new stimulus announcement, but whatever they had budgeted. They have enough room within that to utilize that budget and actually increase that fiscal spending towards infrastructure.

We have about 2 trillion RMB worth of funds available for the government to go ahead and spend in the second half. And then lift that growth trend, which has dipped to 4.3 percent in second quarter to back to 4.6 percent in the back half of the year.

Seth Carpenter: You know what? Maybe that's a great place for us to leave it. We've gone around the world again today, but this time focusing much more on policy.

In the U.S., the Fed is facing this interesting situation. We think inflation is coming down. The last CPI print went in our favor. And so as a result, our forecast is that the Fed doesn't change policy at all this year. But it's going to come down to the data, and in particular, whether or not Mike and his team are right in terms of where inflation is going.

In Europe, the ECB has already raised interest rates once this year. Jens and team are looking for another interest rate hike. The ECB really does seem more sensitive to inflation coming from the energy shock, but there are lots of other crosscurrents that they're paying attention to as well.

And then the other major developed market central bank, the Bank of Japan, is on this normalization path. They are in the process of raising interest rates, but Chetan pointed out to us that the growth rate is such that they don't have to be in any sort of hurry, and they can take their time.

So, with that, Mike, Jens, Chetan, thank you so much for helping us connect all of these dots. And to the listeners, thank you 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 a colleague today.

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research.

Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.

Chetan Ahya: And I'm Chetan Ahya, Chief Asia Economist.

Jens Eisenschmidt: And I'm Jens Eisenschmidt, Chief Europe Economist.

Seth Carpenter: And today is going to be our third quarter economic roundtable taking a wide-angle view on the global economy and all the key forces shaping our outlook and the economy.

Seth Carpenter: It's Monday, July 20th at 10am in New York

Jens Eisenschmidt: And 4pm in Frankfurt.

Chetan Ahya: And 10pm in Hong Kong

Seth Carpenter: Since our last roundtable in April, the global economy has continued to face all sorts of shocks, a mix of resilience and friction. Inflation pressures have not disappeared. Energy and geopolitical risks have come up, they've receded, they've come back, they've receded all over the place

But there is one underlying source of momentum that we have to talk about. A nd that is the AI-driven CapEx cycle.

Michael, let me turn to you because the U.S. is a real focal point of all of this. Tell me a little bit about where Morgan Stanley Research is thinking about hyperscaler CapEx. How big it is? And then for you, when you think about the U.S. economy, just how big of a driver is it for what we're looking for in the U.S.?

Michael Gapen:  

Yeah, we continue to revise higher our estimates for hyperscaler and AI-related CapEx in the U.S. economy. We were thinking a little over a trillion for 2027. Now we're more like 1.2 - 1.3 trillion, maybe as high as 1.4 trillion in 2028. So, the level of hyperscaler spending continues to keep rising.

The growth rate and its effect on the economy is likely to slow. But as you noted, it's still a major driver of momentum in the U.S. You would look at that headline number and think, "Wow, that's, you know, 3.5 percent or so of GDP. Must be a massive source of momentum for GDP growth."

But roughly about 60 percent of that hyperscaler CapEx spending goes to items like computers and peripherals, equipment spending categories that have a very, very high import content.

We still get a significant number that AI CapEx is probably contributing around 40 basis points to growth this year. Be a similar-sized amount perhaps next year.

So, for an economy that's growing somewhere a little bit above 2 percent right now, maybe closer to 2.5 percent next year, that's a non-trivial amount.

We just have to remember it's fueling growth around the world, just not here in the U.S.

Seth Carpenter: Yeah, that's a really great point because I have seen some estimates where people say, "Well, if it wasn't for AI CapEx, the U.S. economy wouldn't have grown at all." And that's clearly wrong, as you point out. ,

But U.S. imports are necessarily exports from somewhere else. And, Chetan, if I can pull you into the story then, U.S. firms are buying a lot of AI-related equipment from Asia. What does that mean in your part of the world? And in particular, I'm thinking about Korea, Taiwan, and maybe some other economies in Asia.

What's the critical story there?

Chetan Ahya: So, for Asia, this has definitely been a big boon. If you look at Asia's exports, they have been booming, and particularly for the ones which are exporting semiconductors to the U.S. They are seeing semiconductor exports growing by 90 percent. And when we go back in time and compare Asia's semiconductor exports, it's very tightly linked to the U.S. IT CapEx. And it's not surprising when Mike Gapen mentions about the imports going up. It's on the other side, helping Asia's exports quite meaningfully.

So, so far, we've seen this benefiting Korea, number one, Taiwan, and also Japan. All these three are big beneficiaries of U.S. AI CapEx. And of course, also not just U.S., but the other countries which are doing any little amount of CapEx on AI front, that's also helping these three economies in the region.

Seth Carpenter:

You've been doing a lot of work, Chetan, recently about how much the story can actually broaden out, that the AI CapEx cycle has really contributed to Asian growth, but it doesn't tell the whole story that there's a broader industrial cycle.

Can you give us a little bit of a flavor of that story?

Chetan Ahya: That's right, Seth. So, we are actually highlighting that there is a CapEx and industrial super cycle that is underway in Asia, and there are four components to this story. AI and semiconductors CapEx., which we just briefly discussed.

Number two is energy. Number three is defense. And number four is industrial supply chain onshoring related CapEx. I know that everybody still thinks that AI is the most important part of this story, but when I give you the numbers and the breakup of that... So, for Asia, AI and semiconductor companies CapEx is about $380 billion in 2026, but energy CapEx is going to be $900 billion.

So, this is a far broader story than just AI for Asia.

Seth Carpenter: Mike, let me come back to you and to the U.S. then. So, isn't the growth story also broader than that as well domestically?

So, what's going on in terms of consumer spending in the U.S., and is there a broader CapEx story in the U.S. as well?

Michael Gapen: I would say, is it broader than that? I think maybe you could argue also it's narrower than that. Here's what I mean by that. As I noted AI CapEx contributing about 40 basis points to growth, it's certainly underpinning equity valuations in the U.S. and underpinning strong wealth creation.

So about [$]180 trillion in household net worth in the U.S. About [$]55 trillion of that has been created in just the last five years alone, underpinned in part by AI-related spending and optimism about future profitability. That's really supported spending by upper income households. So, I think it's both investment-led and consumer-led, but they're inextricably linked.

So, the positive for the U.S. is that it's providing a lot of resilience.

The negative component of that is it feels like momentum in the U.S. is narrowly driven.

Jens Eisenschmidt: Let me maybe jump in here from Europe to provide some perspective from the other side. So, I think it's a fair summary to say that AI investment is not yet, or maybe will never get there, dominating the business cycle.

What we do have instead is an unusually consumption-driven expansion. That has to do not so much with an extraordinary strength of consumption, but more of an absence of other factors. Now, prospectively looking forward, we think the fiscal expansion might help lifting us a little bit. And then it is really the debate how much AI investment can arrive in Europe.

For now, I would say it's probably a factor of 20 that separates European investment plans from the plans we know that exist for the U.S.

Seth Carpenter:

Let me stick with you then in Europe because you brought up fiscal as one of the factors going on here and where it's going… You and your team recently wrote a blue paper talking about what the outlook is for fiscal policy in Europe, and in particular, we had this era of cheap debt. Interest rates in Europe were low, at times negative. It was super easy to borrow. Not as much happened then.

There's been a shift towards more fiscal expansion at the same time that interest rates have gone up, causing the cost of debt to go up. Feels like there's a lot of push and pull going on. Can you unpack for us a little bit what was in that paper you wrote, what's going on with fiscal policy in Europe, especially in Germany? And what it might mean over time for Euro-area countries?

Jens Eisenschmidt: Yeah, so I think fiscal policy in Europe really is looking at a regime shift. So, there is this very famous, probably in the U.S. even more so than here, notion that the Europeans have built a very comfortable welfare state. And that's true if you just look at the accounting from a GDP perspective. It's close to 50 percent that, you know, budgets are actually extended on welfare spending.

And now you have three structural headwinds for any type of fiscal spend. So, one is aging related costs, you mentioned it already. Defense spending has to increase significantly, and the interest rate costs will also rise significantly. All of that means there will be very hard choices to be made.

The one thing that actually could help here is growth. Growth is the one thing that's, for now at least, missing, at least in comparison to the U.S. It's probably half what we expect, what the U.S. colleagues think is in stake for the U.S., and a quarter or even less than that of what is there in Asia.

So, growth is really the key, the solution, the answer to everything in Europe. More growth than just 1 percent, which is potential, would help solving that fiscal challenge. For now, it looks really, really like an uphill battle. Returning to Germany, it's the one country that has a very good fiscal starting position.

They are pushing a lot but they're to some extent pushing a string. So, even with the German huge fiscal package, given that private sector investments so far are absent, doesn't get us a ton of growth.

Seth Carpenter: Chetan, maybe I'll come back to you before we close part one of this roundtable. The AI CapEx cycle started with AI, broadened out further. How long do you expect this cycle to last? How durable can it be? And how might it compare to previous CapEx cycles?

Chetan Ahya: Yeah, Seth. So, we think this will be a multi-year CapEx cycle. And when we are thinking about the duration of the cycle, there are two things that I would keep in mind.

Number one is that most of the drivers that we just discussed – the CapEx on AI, energy, defense, and industrial supply chain onshoring related investments – these are all structural drivers. So, we think these are going to continue for some more time. At this point of time, we have the visibility for this cycle to be lasting for three-four more years.

And then the second point of framework that I would keep in mind is that the corporate balance sheets are in a pretty good shape. So, when you are thinking about the leverage in the private sector, you can look at both households and the corporate sector balance sheet. But since the cycle is CapEx driven, we are looking at the corporate balance sheets, and they are in a pretty good shape.

Across the region, corporate debt to GDP is below where it was in 2019.

Seth Carpenter: . Mike, let me, let me wrap up quickly with you. We talked about AI, AI CapEx. For now, that's a very strong demand story.

When are we going to see a supply side of things coming from AI? Are you already seeing a big contribution to GDP and growth from productivity coming from AI?

Michael Gapen: We are, but not outside of the high-tech sectors, and we're seeing limited, what I'll call labor market restructuring of tasks and occupations beyond high AI-exposed occupations.

So right now, everything is still very isolated I think maybe as we get into 2029 and beyond, so as Chetan says, we probably have a three to four-year super cycle here around a build-out phase. Then we might see some of that broader-based diffusion to other non-tech sectors in the economy.

Seth Carpenter: All right, Jens, for you, let's wrap up here. So, what is the state of play for the build-out in the CapEx cycle for AI in Europe?

Jens Eisenschmidt: Yeah, it's very early stages. As I said before, we really; we connected to all the industry experts or analysts covering the sector and the total plans are a factor of 20 below what we see in the U.S. by just the seven hyperscalers. So, I would say very fragmented, very small, in general. Not only AI.

I think the one thing I would be looking at for any type of sign of revival, sign of growth is investment. The second would be investment. And you can guess what the third would be… Investments in the core countries. That's really what we need to see, and we haven't seen much in Germany or France on this front.

Seth Carpenter:

That's a great place for us to stop today. We talked about the real side of the economy, AI, CapEx, trade. Tomorrow we're going to come back, and we'll talk about how that growth outlook affects inflation. And once you start talking about growth and inflation, you got to talk about policy, and that's where we'll be tomorrow.

Mike, Jens, and Chetan, thank you for joining today. And for the listeners, thank you for listening. Be sure to tune in tomorrow for Part 2 of our conversation. And I have to say, if you enjoy this show, please leave us a review wherever you listen, and share Thoughts on the Market with a friend or a colleague today.

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Mark Schmidt: And I'm Mark Schmidt, Head of Municipal Strategy at Morgan Stanley.

Andrew Sheets: And today on the program, a discussion into one of the biggest mysteries in one of the biggest sectors of the economy. We're talking about healthcare costs.

It's Friday, July 17th at 2pm in London.

Mark Schmidt: At 9am in New York.

Andrew Sheets:  So, we're talking today about healthcare, which represents roughly a fifth of the U.S. economy, the bulk of job creation over the last several years, and in my view, honestly, one of the biggest inflation paradoxes that we see in the market.

On the one hand, the high cost of healthcare is taken as a given, and it's something that many Americans still struggle with financially. But if you look at the official inflation data in the U.S., healthcare costs have been lower than normal, and that's been true now for a number of years.

So, what's going on? How do we tie this together? And Mark, you just wrote a report that tries to do exactly that. So, what did you hope to accomplish with this report?

Mark Schmidt: You're absolutely right. It's hard to underline enough just how large healthcare is to the U.S. economy overall. Americans spend nearly $6 trillion on healthcare. That's more than the GDP of the entire country of Germany. And if we think about prices, Americans pay more.

A knee replacement, for example, costs $25,000 in the United States. That same procedure costs just $6,000 in France. Common heart treatments that would cost $3,000 in Germany or $10,000 in Australia cost $34,000 in the U.S.

It also matters for everyone's local community. Healthcare jobs have been growing twice as fast as the rate of job growth in the economy overall. And those are good jobs. They pay above average wages. For many Americans these days, the most secure path to the middle class is a career in healthcare.

Now, this may seem a little bit arcane, but it probably hits close to your portfolio as well. Earlier in the year, when we took a look at how equity separately managed accounts invest, they typically have a core overweight to healthcare. And even though American prices may seem like an American issue, many of the largest and most profitable healthcare companies in the world are actually headquartered in Europe.

So, whether you're sitting in New York or sitting in London, the price of American healthcare probably matters to you.

But as you noted, Andrew, it does feel like a paradox because although Americans cite healthcare costs as one of their top concerns, and although healthcare spending is growing at 6 percent a year or more, the official inflation data says that healthcare prices are in check. And at one point earlier in the year, healthcare inflation, according to official data, even dipped below 3 percent.

It just didn't make a lot of sense, and that's why we got together with our colleagues across equities, fixed income research, public policy, and economics to dig into what was actually going on.

Andrew Sheets: So, Mark, let's dig right into that. I mean, it seems like a perfect encapsulation of the so-called Main Street versus Wall Street perception of the economy.

So, what's going on? How does one kind of square those two numbers?

Mark Schmidt: The easiest way to understand it is that you can't walk through a grocery store and figure out the price of a knee replacement. And that's true both for you and me. It's also true for the government. They have to survey hospitals and health insurance companies.

The trouble is that the prices that health insurance companies pay hospitals, well, those are trade secrets. So, at any given point in time, even for the best government economists, it's not entirely clear what the price trends are. And that's why when you look at the official data, healthcare inflation typically has relatively lumpy jumps in the series.

 You could see several months of 0.1 or 0.2 percent official growth in healthcare inflation. Or as earlier this week, you could see certain categories jump to 0.4 or even 0.8.

Andrew Sheets: Another element, Mark, that you talked about in the report is that people are also consuming more healthcare. So, talk a little bit about that. How that factors into this dynamic, and again, is that just going to be the new normal as the population ages and we tend to spend more on healthcare as we get older?

Mark Schmidt: That's right. The good news is that we're living longer lives. The bad news is that means that we have more chronic healthcare conditions to deal with. The good news is that more procedures can be done in outpatient settings, and those, generally speaking, are cheaper. The bad news is that inpatient care, inpatient prices go up as the complexity of procedures that actually happen in a hospital setting increase significantly.

When you balance it all out, it's a situation where, thankfully, the United States and most Americans have the means and the wealth to pay more for healthcare. The flip side of that is that they are paying more for healthcare, and that's why we think that the recent softness in healthcare inflation is actually too good to be true.

Andrew Sheets: Something that jumped out at me from this report, Mark, was just how important hospitals are in this equation. And the experience of the patient and the experience of the hospital can be different economically. And that difference can also matter for how this shows up in official inflation and government statistics.

So, you know, it would be helpful maybe just to walk the listener through. If I go into the hospital and I need knee surgery. You know, how does that look like from my perspective in terms of paying for it, assuming I have health insurance through my employer? How could that look like to the hospital? And how could that look like coming out the other end into the official government statistics?

Mark Schmidt: Well, of course, Andrew, the first thing that you do when you break your leg is you call six hospitals and shop around for the cheapest price, right?

Andrew Sheets: [Laughs] Of course.

Mark Schmidt: So that's actually the problem because when you get care, you're not in a place to ask about the price. And frankly, even if you asked your doctor or nurse what the price is, they probably wouldn't know. Not only is it not their job to know the price, but all of those negotiations happen after the fact – with the prices that the insurance companies negotiate with the hospitals.

After COVID, hospitals had a lot more costs to spread out among the people who were coming in the door, and so they raised prices across the board, not just for procedures that were related to respiratory illness. Naturally, insurance companies noticed that, and they started to push back.

So long after you get a cast for your broken leg – and by the way, I wish you a speedy recovery – insurance companies end up going back and forth negotiating with your doctors for exactly how much they should pay you. And although these prices were loosely set well before you walked in the door, the exact way it gets billed and coded? Well, let's just say there's a lot of back and forth.

For a well-run hospital, the cost of talking to and ultimately getting reimbursement from your insurance company, that alone could be 2 to 4 percent of revenue. And in especially complex cases, that whole negotiation can eat up 5 to 7 percent of the total bill.

You're also right to flag that hospitals really are still the central point of the U.S. healthcare system. Americans spend $2 trillion in a hospital setting. And hospitals overwhelmingly coordinate care for both primary, specialty, and pharmacy services.

 Andrew Sheets: Mark, another issue I wanted to ask you about was the Affordable Care Act, Medicare, Medicaid, and how those programs fit into the story?

Mark Schmidt: The One Big Beautiful Bill Act included a variety of measures to slow the overall growth rate of healthcare. Now, for all the reasons we just discussed, that's probably warranted. The Affordable Care Act is another wrinkle. Enhanced subsidies, which were already set to expire – did in fact expire at the end of last year. And as a result, more Americans are now uninsured.

It remains to be seen how that impacts overall costs. In the United States, when you have a health emergency, a hospital is legally obligated to treat you because of a 1990s law called EMTALA. Even if you can't pay, the system eventually does.

Historically, uncompensated care costs have been passed on to individuals and companies with insurance. For now, however, it remains to be seen whether these changes in law and in the overall number of people with insurance will cause healthcare prices to rise or fall.

 Andrew Sheets:  And Mark, just for the broad-based implications of this, right? It's fair to say that in any health insurance system, there are some people who consume a lot more healthcare. They're unhealthy or they're unlucky. And there are some who consume a lot less.

And, you know, this is something where that overall coverage question matters. Because if you have things that reduce the number of otherwise healthy people who are in those healthcare pools, it can raise the cost for everybody else. Those people who were in some ways subsidizing the higher consumers of healthcare are no longer there.

Is that a fair way to frame it, do you think? And are there potential changes given some of these legislative actions that could lead to changes of what the pool looks like – and what overall costs could look like?

Mark Schmidt: That's a great point. And healthcare is probably the only part of our economy where you would say, "Thank goodness I did not get my money's worth." As we think about it…

 Andrew Sheets: [Laughs] Very true. Very true.

Mark Schmidt: As we think about it, most young and healthy people are going to be paying more for their health insurance than they receive in healthcare. Again, that's a good thing. Because American healthcare prices are so much higher than anywhere else in the world, paying in more than you get back? Well, that hits the wallet harder in America than it does in other countries.

And that's why for many people – choice – choosing how much health insurance to have and how much to pay for it, really is central to keeping the American economy dynamic. The flip side, however, is that as Americans get older, more people have Medicare.

Now, Medicare is pretty good if you have it. But the catch is that Medicare prices, according to most independent estimates, do not fully reimburse for the cost of care. So, as more seniors take up more beds in a hospital, that means that commercial prices, the prices for people who have private insurance through their employer, are likely to rise even faster.

Andrew Sheets: So, Mark, I think a good place to close it out and kind of bring this all together is a really important conclusion of this report – is that hospitals have been absorbing a number of these rising costs of healthcare through lower margins for the hospital. And that has resulted in lower ultimate inflation because the inflation is measured out the other side, out ultimately what the hospital earns.

And if you could just maybe talk a little bit more about that. To what extent have those margins been compressed? And what that might mean for things going forward?

Mark Schmidt: That's right. We dug into the finances for hundreds of not-for-profit hospitals in the United States. They are facing higher costs and shrinking margins. Historically, hospitals have partially passed on expense increases of this magnitude.

Now, in their conversations with insurance companies, the biggest benchmark setting of prices happens once every two to three years. So, we're not going to see hospital prices show up in the inflation data overnight. But when we look at hospitals across the country, their budget information and their guidance is consistent with firming prices.

Andrew Sheets: Great. Thank you so much, Mark.

I've really enjoyed the conversation.

Mark Schmidt: Thanks for having me, Andrew.

Andrew Sheets: And thank you for listening. If you enjoy Thoughts on the Market, please share it with a friend or colleague today. And rate and review us on wherever you listen. It helps more people find the show.

Lindsay Tyler: Welcome to Thoughts on the Market. I'm Lindsay Tyler, TMT Credit Research Analyst at Morgan Stanley.

Anish Shah: And I'm Anish Shah, Global Head of Debt Capital Markets at Morgan Stanley.

Lindsay Tyler: Today, how issuers and investors are approaching the rapidly evolving world of AI financing.

It's Thursday, July 16th at 10am in New York.

As AI demand accelerates, credit markets are being asked to finance infrastructure on a scale that used to be associated with utilities, telecom, or energy. That raises a central question for issuers and investors: How much debt can the AI ecosystem absorb? And at what price?

Anish, can you walk our listeners through the key products in your purview?

Anish Shah: Certainly, in my nearly twenty years at Morgan Stanley, this is probably the most incredible time period I've ever seen in the credit markets. I've had the privilege of working across a number of different roles in capital markets and lending. And a couple of years ago, we integrated the debt underwriting business across both investment-grade and leverage finance franchises in recognition of how interconnected the whole credit ecosystem has become.

In addition to our core activities helping clients raise capital for their strategic priorities, two of the big focus areas that we've had have been finding ways to harness the power of the private credit universe and also delivering best-in-class capabilities in funding this incredible growth in AI spend.

Lindsay Tyler: AI financing has certainly been a theme we've also been focused on in research. Our equity research colleagues project that a handful of key players could add more than 30 gigawatts of capacity over a two-year timeframe, driving around [$]2 trillion of aggregate cash CapEx in that period. And to put that into context, a single gigawatt of data center capacity can require roughly $12 billion for the shell, and then often more than double that for chips and racks.

So, from your vantage point, what inning are we in? And what gives you confidence that credit markets can continue funding this opportunity at scale?

Anish Shah: I mean, Lindsay, the numbers certainly are staggering, as you note. And if you just observe the CapEx estimates for the hyperscalers and broadly for AI infrastructure, we're certainly in the early innings.

Lindsay Tyler: Mm-hmm.

Anish Shah: The largest tech companies have historically, as you know, raised very little debt. In fact, many of these companies have not even needed a credit facility. As CapEx projections were materially increased in the second half of last year, we saw the beginning of scaled capital raises. Hyperscaler issuance has quickly gone from less than one percent of the investment-grade market to more than 10 percent of the market.

You know, as I look ahead, based on what we're seeing on the ground, we think that AI-related funding, whether it's for data center development or financing compute capacity, could top 15 percent of the total issuance across all credit products.

This has been an unprecedented test for the capital markets, both in terms of the depth of capacity and the breadth of product. The teams have been on the forefront of deep investor dialogue and product innovation.

This spans corporate investment grade, first of their kind financings in high-yield and leveraged loan markets, and new takes on asset-backed financing. And each of these areas has seen material issuance both in public and private markets.

Lindsay Tyler: Great backdrop. Let's dig first into investment-grade corporate debt, an area you know well from your time previously leading the investment-grade team.

Can you help frame the scale and the significance of this financing bucket and how AI-related debt is scaling within it?

Anish Shah: Well, you know, as you know, the investment-grade bond market, specifically in dollars, is the deepest, most liquid pool of capital in the world. Volumes have grown materially over the last few years and are likely to eclipse $2 trillion in issuance this year.

Hyperscalers are among the very best credits in the world, and they have the ability to come in and out of markets with relatively quick twitch, little to no pre-marketing, and in fairly large size. You know, $20 billion-plus deals used to be rare in the investment-grade market, now happen multiple times a quarter.

This is why we've seen the predominance of AI-driven capital raising take place in the investment-grade market. For the most part, investors have digested that supply very well. While we've seen some modest widening credit spreads for hyperscalers and some of the other tech issuers, I'd say it's de minimis relative to their expected ROI.

Lindsay, I've talked a lot about supply dynamics and issuance. What other factors are you and investors considering when assessing fair value for investment-grade rated technology bonds?

Lindsay Tyler: Sure. It's prudent to really weigh a mix of technicals, fundamentals, and relative value. You know, as you discussed on the technical side, and related to my discussions with debt and equity investors, I've been focused on scale of buildouts, market capacity, digestibility across currencies, positioning along the curve, implications of equity issuance, and whether AI financing could crowd out other areas of TMT credit.

But moving more to the fundamental side of things, you mentioned ROI, and for the players that are scaling compute capacity, there are a handful of key monetization and return questions that keep coming up. How quickly can these companies bring new capacity online? Once it's live, how does it translate into durable revenue and cash flow?

Is that capacity supporting internal products, proprietary models, broader cloud offerings, or compute leased to third parties? And then how fungible is the capacity across those use cases if demand or returns shift?

Further on the fundamental side, we've done some differentiated work around growing long-term commitments. We've seen that high-quality hyperscalers and a few of the semis companies are anchoring the AI ecosystem through leases, guarantees, other obligations. These commitments really extend beyond vanilla bond issuance.

So, I encourage investors to look beyond the funded debt and really understand the accounting and the ratings implications here of some of those commitments.

And this ties nicely into the next topic that I wanted to raise, which is project finance debt. I've noticed that, you know, a lot of the commitments that we're seeing from IG players support another layer of financing. Lease commitments can underpin project finance debt, an area of sizable issuance and innovation.

The public high-yield market has emerged as a new funding source in this way for data center construction, with more than 30 billion priced across 15 deals, since fall 2025. Can you walk us through, Anish, the innovation behind these structures, and how are these high yield deals different than other ways to, kind of, raise project finance debt?

Anish Shah: Yeah, it's incredibly interesting. I mean, the bulk of the issuance, as I noted has come in the investment grade market, but I would say the bulk of the innovation has come in the sub-investment grade market.

You know, historically, for very capital-intensive sectors like energy and power or real estate, the project loan market was the most efficient source of initial funding. The developer would tap banks to underwrite a highly structured construction loan. Once the project is up and running, you could then refinance that loan with the predictable cash flows into a more institutional financing, like the investment grade bond market or the term loan B or securitization markets.

That product may still be very viable in many sectors, but we felt early on that bank-provided construction loans would not meet the capacity needs of the AI investment cycle. The market really needed an institutional credit product that bypassed the need for construction loans.

The key innovation came in the form of first-of-its-kind high-yield bonds that funded the development of a new data center complex. Given the relatively short construction period and the "offtake" supported by some of the highest quality credits in the world, we felt like this financing structure would be incredibly well-received in the high-yield market.

The win here is that the developer accesses fixed rate long-term capital and maintains flexibility to call the bonds and refinance at a lower cost. Judging by how these financings have gone, there's a strong level of investor enthusiasm.

I think that they've only scratched the surface, and I would expect that we see much more of this. And potentially even expand it to other products in the leverage finance markets given the tremendous level of investor demand.

Lindsay Tyler: Yeah. It's certainly been exciting to follow many of those deals. Beyond the public space, we're also seeing a wave of innovation in private credit and asset-backed finance. Anish, how do companies decide whether capital is best raised in the public or the private markets?

Anish Shah: Well, I'm glad you raised the whole avenue of private markets because it may be the most significant change in the credit markets over the last few years, broadening the scope of private credit from directly lending into leverage buyouts to now financing large investment-grade projects.

There are great examples in the world of GPU and TPU financing, where we structure loans secured by the asset and the cash flows, or in data center development.

Lindsay, from your perspective, what are investors focused on when these private structures intersect with public credits?

Lindsay Tyler: Sure. Many of these asset-backed private financings have prompted investors to look more closely at any of the public companies involved, whether as issuers, tenants, customers, or support providers. This ties back to the point I raised earlier. Where does the risk reside, and who ultimately is on the hook?

These financings have also sparked broader discussions around circularity, vendor financing, and technology obsolescence risk, even when amortizing structures are in place. I do think those are fair concerns to weigh, and they really speak to how quickly the AI financing trend is evolving and how much credit work there is to do.

So, Anish, with that balance in mind, relatively strong demand, rapid innovation, but also some real credit questions, let's end with a quick lightning round.

Anish Shah: Lindsay, let's do it.

Lindsay Tyler: First, what is the biggest risk that could test investor appetite for AI-related debt?

Anish Shah: I would say investors are acutely focused on construction delays. Don't underestimate the level of diligence being done by the breadth of capacity you're seeing in the markets. Investors are doing their homework, and we're spending a lot of time trying to mitigate any of their concerns with structural protections.

Lindsay Tyler: Got it. Second, beyond data center shells and chips, what is the next potential AI financing opportunity?

Anish Shah: It most certainly is energy and power. We're going to see a ton of capital being raised in utilities. It's going to be a little different than what the hyperscalers are doing, just given the nature of their balance sheets. You're going to see more junior capital. We've seen a wave of junior subordinated debt issuance out of the utilities.

We're also seeing a lot of activity from our project finance and tax equity team, just given all things energy infrastructure.

Lindsay Tyler: Great. And third, if we're sitting here a year from now, what do you think could be the biggest AI financing story we're talking about?

Anish Shah: Well, we certainly underestimated the level of financing activity that we saw in the past year. I think when we look back a year from now, we will probably see that the AI labs were much more ready to finance on their own on a standalone basis. That's going to alleviate some of the pressures in the market, but I think it's going to create a whole new set of considerations and structural innovation.

Lindsay Tyler: Well, it's certainly been remarkable to watch this financing theme take shape in real time, and the next chapter sounds like it could be even more interesting to follow. Anish, thanks for joining us and sharing your insights.

Anish Shah: Great to join, Lindsay. Thanks.

Lindsay Tyler: 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 colleague today.

Welcome to Thoughts on the Market. I’m Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.

Today: Why sovereign AI is becoming a policy priority around the world.

It’s Wednesday, July 15th, at 10am in New York.

The AI controls debate used to be focused on chips. Cutting edge semiconductors are essential to train large AI models, after all. But over the past year, the debate has moved well beyond that narrow focus. The policy conversation has broadened beyond things like which advanced semis can be sold to China.

The bigger question now is who controls the full AI stack — chips, cloud infrastructure, frontier models, data centers, cybersecurity standards, and the energy systems that support all of it.

That’s what we mean when we talk about sovereign AI. At the simplest level, it's a country’s ability to develop and deploy artificial intelligence using its own infrastructure, data, workforce, and technology ecosystem. But sovereign AI is also about reducing strategic dependence on foreign platforms and foreign-controlled supply chains.

That echoes a trend toward multipolarity that we’ve been writing about since back in 2018. Countries around the world are prioritizing national security over economic efficiencies. We see that theme applying to AI as well.

So, what does this all mean for markets?

First, sovereign AI turns AI infrastructure into a matter of national industrial policy. Data centers, power availability, and grid reliability are just a few examples of components that are becoming strategic assets. That means governments are likely to play a larger role in deciding several aspects of the AI buildout. Where it’s is built? Who finances it? And which countries get access to the most advanced parts of the stack?

Second, sovereign AI reinforces the shift toward derisking and a more fragmented international order. The U.S. is trying to promote the export of an American AI technology stack to allies and partners. At the same time, it’s preserving national security guardrails around the most sensitive capabilities. Meanwhile, we see China trying to indigenize as much of the technology as possible, from chips to cloud to model deployment. Other countries are navigating between the two.

Third, and importantly, sovereign AI is also an energy story.  Who gets to build and benefit from AI increasingly depends on access to low-cost, reliable power. That makes energy availability a competitive advantage — and it also makes energy affordability a political constraint.

That dovetails with one of our thematic predictions heading into this year: the politics of energy. We see rising power costs as a more visible political issue. That’s led to backlash against data center development. There’s more local opposition to new projects, and greater pressure on policymakers and utilities to make sure that existing ratepayers are not subsidizing AI-driven grid investment.

We think that could push AI infrastructure in a few directions. One is toward a conditional build-out. Here, offsets like large-load tariffs and other cost-allocation mechanisms are designed to protect households and small businesses.

Another direction is  policy support for the lowest-cost sources of energy, even where that might create tension with emissions objectives. And the third direction is more off-grid or behind-the-meter power solutions. That would include things like fuel cells, storage, and other time to power strategies — so data center developers can secure electricity without intensifying local affordability concerns.

The pursuit of sovereign AI comes with many questions around inflationary impacts: compute & power are both constrained, regulation remains uncertain, and there could be more limitations on things like tech transfers if the government sees a national security edge. So to the extent that countries want to reduce their dependencies, it may cost more to get there. There are, however, companies that can benefit in this environment.

But there’s also a policy risk. We are left with a more reactive policy environment. Selective access in some areas, tighter controls in others, and ongoing uncertainty around how Washington will treat advanced chips, cloud infrastructure, and frontier model deployment. Now that uncertainty matters because it affects corporate planning, cross-border investment, and the shape of global AI alliances.

So what does this all mean for investors?

More and more, governments view AI capability as a source of economic power and geopolitical leverage. That means the AI race is moving from a question of who builds the best model to who controls the infrastructure, standards, supply chains, and energy systems that allow those models to scale.

In our view, that means sovereign AI is one of the most important themes to watch in the next phase of the AI buildout.

And we’ll be coming back to this topic soon. In the coming weeks, Stephen Byrd and I will talk  about sovereign AI in more depth, particularly around what it means for power demand, data center investment, energy affordability, and the broader infrastructure required to support the next stage of AI adoption.

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.

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 our broadening thesis and the near-term risks to monitor.

It's Tuesday, July 14th at 11:30 am in New York.  

So, let’s get after it.

The broadening trade is now playing out. It’s showing up in stock prices, relative performance and earnings revisions. It’s also making investors question the sustainability of the most crowded areas of the market, and consider other near-term risks. 

I first made the broadening call late last year based on my view that the economy had entered a new expansion after completing the rolling recession in April of 2025. In a new expansion, earnings growth tends to be much better than expected because revenue growth returns to companies that have already become more cost efficient.

That’s classic operating leverage. The market began to anticipate that dynamic late last year, but then the Iran conflict interrupted the move. Oil surged, rate-cut expectations disappeared, and investors crowded back into the most obvious AI capex beneficiaries led by semiconductors and memory, in particular.

Since mid May, that interruption has faded with oil prices falling sharply and the broadening trade has begun to work again. Importantly, the market is not abandoning AI. It is simply rotating within AI and beyond AI. And that distinction matters.

Semiconductors have had a historic run, supported by earnings revisions. But even great stories get exhausted in the short term. When earnings revisions breadth is pressing against historical highs and the trade becomes one of the most crowded areas of the market, the bar for upside gets very high. At that point, the issue is not whether the story is good. The issue is whether the rate of change can keep improving. That is a very different question.

The underperformance of the hyperscalers was probably the first warning sign. Semis depend on hyperscaler capex. So when the spenders start lagging the beneficiaries, that divergence usually resolves one way or another. And now we’re starting to see it. Meta’s decision to sell excess capacity to outside customers may not mean the AI capex cycle is over. But it does tell you the market is beginning to ask harder questions about the path and pace of that spending.

Credit spreads and stock prices of these hyperscalers provide the feedback loop to managements that maybe they should curtail the pace of spend.  We’ve had multiple corrections inside this AI cycle already. This looks like another one – not the end of the cycle, but a reset.

That reset is what gives the rest of the market room to work. Our preferred ways to express the broadening remain Consumer Discretionary Goods, Transports, and Biotech. These are not the areas investors have been excited about. In fact, positioning and sentiment remain subdued. But that’s exactly why I like them.

The risks to the story in the short term are two-fold.  First, uncertainty about the full re-opening of the strait remains high, with pivots on both sides.  This is keeping oil prices volatile in the short term even if the primary trend remains lower. 

Second, interest rate volatility is picking up again with the entire curve shifting higher in both nominal and real terms.  If this doesn’t stabilize, it will have a negative impact on stocks both at the index level and even for stocks that should benefit from our broadening call. With the inflation data coming in today softer than expected, this should reduce some of the recent upward pressure on rates. 

However, the new Fed Chair and board remain resolute to make sure inflation doesn’t rear its head again.  In the end, dealing with this risk up front is a good thing in my view even if it means uncertainty for markets. 

Bottom line, equity markets have been consolidating and correcting for the past several months. This is the result of the peak rate of change in earnings revisions and a reaction function shift at the Fed to focus more on the inflation mandate than growth. 

With the recent rollover in semiconductors, heavy supply of equity and credit issuance, and a transition of leadership at the Fed, expect more volatility and corrective activity in stocks before the next leg of the bull market resumes. 

Don’t chase momentum.  Instead, add to risk on down days to areas that will benefit from a broadening in the economy and earnings growth. 

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!

Terence Flynn: Welcome to Thoughts on the Market. I'm Terence Flynn, Morgan Stanley's U.S. Pharma and Biotech Analyst.

Thibault Boutherin: And I'm Thibault Boutherin, Morgan Stanley's Europe Pharmaceuticals Analyst.

Terence Flynn: Today, how cheaper GLP-1 obesity medicines could reshape access, pricing, and supply chains; and what the first generic markets may signal for Europe and the U.S.

It's Monday, July 13th at 10am in New York.

Thibault Boutherin: And it's 3 pm in London.

Terence Flynn: Around one billion people live with obesity worldwide, including over a 100 million in the U.S. Right now, the introduction of the first lower cost generics of semaglutide, a GLP-1 medicine, in some international markets, could have consequences on affordability and demand.

Thibault, what are the first countries seeing the introduction of sema generics? What are the current dynamics, and why should global investors pay attention?

Thibault Boutherin: Sure. So, so far generics are being introduced this year in three countries: in India, Canada and Brazil. And if we look at India, this is the first market where the generics are being introduced. The patent for semaglutide expired in March 2026, and 13 companies have launched 26 generics across different formulations: autoinjectors, vials, and pills, which price is lower than the branded drug.

And because the India market was quite under-penetrated for GLP-1, we are seeing affordability driving volume expansion. In Canada, two generics have been launched so far. Four other generics are waiting for approval, and more are being filed. And finally, in Brazil, one generic was approved last month, and we are expecting these generics to be launched in Brazil in July. And 17 other generics are in different stage of regulatory review in Brazil, and we would expect more to enter the market by the end of this year.

And the reason why we focus on these markets is because we believe they could provide a blueprint for what could happen later in the U.S. and in Europe; in particular for Canada, which shares some characteristics with Europe and the U.S. And the patent for semaglutide will expire in Europe in 2031 and in the U.S. from 2032.

Terence Flynn: Great. Maybe on the India front, I know that's at the leading edge. What happened with patient demand when price came down?

Thibault Boutherin: Sure. So, what we saw in India is a surge in volume when generics were launched, and the volume in April 2026 were already six times higher than the volume in February. And that expansion has been driven mostly by these generics launch, which captured 80 percent of semaglutide volume in April. And our India team expect that the GLP-1 market in India will actually expand in value from $125 million in [20]25 to more than $1 billion by 2030, despite lower prices as we see better, you know, greater volume and greater adoption of GLP-1s in India.

Terence Flynn: The other thing, you know, you and I have discussed is the supply chain, and one of the questions is the ability of some of the generic manufacturers to scale semaglutide. So, maybe talk to us about the current capabilities. And could we see bottlenecks in the supply chain formation here?

Thibault Boutherin: Yeah, sure. So, there are three key elements to watch on the supply chain. The first is the active pharmaceutical ingredient or API, and that's the semaglutide molecule itself. The second element is the device and the device components, and the third element is the fill and finish, which is basically putting all of these things together.

On the API side, so semaglutide molecule, we believe there will be no bottleneck in supplying for generics as we see a handful of large Chinese companies, out of China, building multi-ton capacity for semaglutide. So, we believe there will be no shortage of API to supply the generic supply chain for injectables.

On the device, these are the same device companies that are supplying the branded version of semaglutide, and other GLP-1s for the device that are also supplying the generic makers. And we are seeing meaningful investments being made, so we don't believe there will be a bottleneck here.

Where we could see a bottleneck emerging is on the fill and finish side. Fill and finish requires highly controlled clean room space to minimize contamination. It requires regulatory approval, and it takes up to three years to build fill and finish capacity. And so, that's where if there is not more investment being made over the next few years, there could potentially [be] a bottleneck emerging for the generic companies.

Terence, while semaglutide generics will definitely represent a challenge for the existing branded version of this GLP-1, there are some insights in these emerging dynamics that suggest that tirzepatide, the other GLP-1, could be less at risk. Can you touch a bit on some of these dynamics?

Terence Flynn: Absolutely. So, just to remind listeners that semaglutide targets a pathway called GLP-1. Tirzepatide actually targets two pathways. The first is GLP-1, and the second is GIP. And there are some data comparing these molecules, both in Type 2 diabetes and obesity. And tirzepatide gives not only better efficacy but also improved tolerability.

And so, what you're seeing in some of the ex-U.S. markets is segmentation, where there are some consumers that are willing to pay a premium price for tirzepatide. Our team in Brazil has done a lot of work on this front looking at this dynamic and, you know, we expect that to play out in many geographies.

So, despite the entry of lower-cost generic versions, we think you will still see segmentation of the market between differentiated brand and the lower-cost generics. And that as a result, you will continue to see branded growth.

In the U.S. right now, market share is about 60 percent in favor of tirzepatide. And so again, you're seeing a differentiation between these two molecules.

Thibault Boutherin: And beyond the introduction of generics GLP-1s, there are other dynamics in the industry that are driving this market. And the introduction of oral drugs this year has been a big topic. Terence, what are your views on the role that orals could play on the market?

Terence Flynn: Yes, as a lot of people are probably aware, the many of the existing GLP-1 medicines are injectable. And so those are delivered once a week with a needle. But there are now additional oral options of these GLP-1 medicines. They started off first for Type 2 diabetes, but they have now broadened into obesity as well, following some recent FDA approvals.

And what we're seeing is that the introduction in the U.S. so far is expanding the market. So, the majority of people that are taking the oral versions of these medicines are new users to GLP-1s. So again, you're getting market expansion.

When you think about the orals as well, one of the other questions is capacity. I know, Thibault, you were talking about the supply chain. There are similar questions for these oral medicines because not all of the oral medicines are the same. Some are easier to manufacture than others, and as a result, that's another variable to consider.

So, some of these are what's called peptide-based orals, and some of these are non-peptide-based orals. And the non-peptide-based orals are much easier to scale, for a larger global market. And so that's definitely another variable that we're monitoring and that I think investors need to consider.

Thibault Boutherin: And beyond the pill versions of these GLP-1s, we are seeing more innovation in the drug pipeline of the industry, which could be a key driver of differentiation against the competition from the generics. So, what are we seeing emerging today from diabetes and obesity pipelines, which could be exciting for the future of the category?

Terence Flynn: So, as we see time and time again in pharmaceutical markets, the key players continue to innovate to try to improve profiles of the existing medications. So, there are, you know, kind of two areas. One would be efficacy; another would be safety tolerability.

And so, there are a number of players that are working first to develop longer acting medication. So, as I mentioned, the existing injectable drugs are dosed once weekly. But there are a number of companies that are working to develop potentially monthly or less frequent injections. So, that's one area that we're monitoring closely.

And then the second, and again, this plays into what I discussed on tirzepatide, is additional pathways that are involved here in diabetes and obesity, and a number of players are working to target additional pathways beyond GLP-1 and GIP. And so, some of the leading pathways that are being studied are something called amylin and glucagon, and there are a number of medications that are in the late-stage pipeline that are coming along, which have some pretty interesting data. And so that's another area that we're watching. And again, the goal there would be to either improve efficacy and/or improve tolerability versus the existing medications.

Thibault Boutherin: Great. And maybe we can also take this opportunity to talk about some of the short-term drivers in the market that are not facing generic today, like the U.S. So, what could be, you know, the key drivers for growth of GLP-1s and the overall obesity and diabetes category over the next five years?

Terence Flynn: Yeah, obviously the key one is seeing additional uptake of these medicines. I think right now we estimate, again, obesity in particular, there's about low double-digit percent uptake. And so obviously seeing increasing uptake of these medicines.

The orals, as I mentioned, are already driving market expansion.

And then the third is access. So obviously in any market, that's very important. In the U.S., I think about 50 percent of employers cover these medications right now. We expect that to increase in the years ahead as the data continues to build.

But then this year starting very shortly, the patients in the Medicare program in the U.S., so those people over the age of 65, will be able to access these medicines for $50 per month. And so, we think that is another driver of growth – is this will broaden access to about an additional 18 million people, starting this summer.

So, the next phase of the diabesity market comes down to execution, lower cost and scaled supply in the mass market, and innovation and differentiation to compete in the premium segment. Thibault, thanks so much for taking the time to talk.

Thibault Boutherin: Great speaking with you, Terence.

Terence Flynn: 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.

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy at Morgan Stanley Research.

Today, I'll be talking about the USMCA review – what happened on July 1st, what it means for North American trade, and how investors should be thinking about the road ahead.

It's Friday, July 10th at 10am in New York.

Last week, the six-year review deadline for the USMCA came and went. And as we'd anticipated, the U.S. declined to extend the agreement for another sixteen-year term. U.S. Trade Representative Greer stated that the U.S. did not agree to renew the USMCA in its current form, pointing to shortcomings and trade deficits with both Canada and Mexico, much of which echoed his testimony in front of Congress in December of last year.

So, what happens next?

This decision triggers an annual review process that could continue until the agreement's scheduled expiration in 2036. So, that means effectively the new deadline for negotiations is now July of 2027. And if we get to that point and see a similar outcome, this procedure repeats until the deal is terminated in 2036.

Now, importantly, the agreement itself remains fully in force during this period. The current tariff regime, rules of origin, investment protections, and dispute settlement mechanisms are all unaffected for now. That's actually in line with the expectation that we laid out earlier this year. In short, we anticipated an outcome in which negotiations stall and the deal moves to annual reviews. We thought that was becoming more likely than an ambitious expansion of the agreement in its current form.

That being said, there are some important implications of this outcome.

First, we think North American trade is being reshaped by a transition from a rules-based framework – where tariff schedules and preferential access anchored trade decisions – toward a more discretionary, sector-specific approach tied to industrial policy objectives. That, of course, increases uncertainty around exemptions, sector treatment, and consequently investment decisions for corporates.

Second, we think two bilateral deals may not be off the table. While it's still our base case that the trilateral framework remains intact, reporting seems to suggest that negotiations are progressing much more substantively with Mexico than with Canada. A third round of U.S.-Mexico negotiations is scheduled for the week of July 20th, while substantive text-based negotiations between Canada and the U.S. have not yet begun.

That asymmetry could mean that bilateral issues between the U.S. and Mexico are resolved more easily, while outstanding frictions like Canada's dairy market quota system could prove to be an overhang in those bilateral talks.

Third, the structural divergence between Mexico and Canada is accelerating, which is something my colleagues have highlighted in their recent work. If we think about Canada's manufacturing export base – autos, metals, machinery, energy, and transportation equipment – that actually overlaps with the areas that the U.S. government is increasingly defining as strategic. And therefore, necessitating more government involvement through, in things like Section 232 tariffs.

Canada accounts for only a negligible share of U.S. imports across computers, semiconductors, communications equipment, and advanced electronics. Those are actually the sectors where Mexico has become deeply integrated, particularly through assembly and re-export activity linked to AI servers, electronics, and industrial hardware.

Mexico now supplies roughly 35 percent of U.S. IT hardware imports and nearly 50 percent of U.S. server imports. And the North in particular has emerged as a vital interconnection hub between Latin America and the U.S. That's been driven by nearshoring trends, AI adoption, and multi-cloud strategies, as my colleagues Nik Lippmann and Fernando Sedano highlight. That means the scope and the objectives of the bilateral talks between the U.S. and Mexico and the U.S. and Canada may diverge even more from here.

So where does that leave us?

The USMCA is still intact, but the annual review process means North American trade policy is now a recurring negotiation, not yet a settled framework. And that will likely remain the case if policymakers agree next July to punt the issue yet another year.

The primary risk, in our view, stems less from the possibility of a full USMCA collapse and more from the prolonged uncertainty around implementation details, sector-specific trade measures, and Section 232 tariffs.

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. 

Robert Feldman: Welcome to Thoughts on the Market. I'm Robert Feldman, Senior Advisor at Morgan Stanley MUFG Securities in Tokyo.

Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist

Robert Feldman: Today, we'll discuss why the U.S. and Japanese economies may react differently to the AI productivity test.

It's Thursday, July 9th at 8 am in Tokyo.

Michael Gapen: And 9 am in New York.

Robert Feldman: AI is the biggest theme around the world right now, but AI will play out differently in different economies. Take the cases of the U.S. and Japan. In the U.S., it's already a catalyst in investment, imports, productivity, and the labor market outlook.

But here in Japan, it's seen as a savior for an economy with an intense labor shortage, low unemployment, and very little room to raise labor force participation.

Mike, in the U.S., AI's contribution to real GDP growth will rise from about 0.05 percentage points in 2024 to an estimated 0.43 percentage points in 2027.

What does that mean for markets?

Michael Gapen: Well, Robbie, I think it, it means a number of things, but, you know, I'm an economist, so the answer is always, "It depends." I think the real crux of the issue over time in the U.S., and therefore what it means for financial markets, is ultimately whether AI is labor replacing – and pushes the unemployment rate higher. Or it acts like a more traditional general-purpose technology that's labor augmenting.

So, if, that's the case, meaning it looks similar to the internet and digital era, then it would mean faster output growth, stronger productivity growth, but still an economy that's running at or near full employment. That would be very beneficial in our estimation for risk assets, equity markets, credit markets, and it would probably mean that we stay in an interest rate environment that's certainly higher than it was during the post GFC period.

But if – AI is a very different technology than we've seen in the past, and it displaces labor, and we get increases in the unemployment rate as AI diffuses through the economy. Then it could be very different for markets. Maybe returns to capital and equity markets are supported, but that might be more narrowly for technology stocks and not broader, say, consumer discretionary stocks.

So, the answer, of course, is it depends. We don't know. And I think, ultimately, we come down on the side of thinking that AI will not create dystopian outcomes in the labor markets, that employment will hold up.

So, we have a fairly constructive view, perhaps an optimistic view. And we think, ultimately it'll benefit markets greatly, similar to what we saw from the mid-90s to the early 2000’s.

Robert Feldman: Well, in your model, you have a particular variable that captures the speed of diffusion. But your baseline has AI spreading twice as fast as the internet did. But without that rise of employment. Is that really manageable? And if it's not, what economic indicators would warn us, if we're crossing into the danger zone?

Michael Gapen: This is really the tricky part as, as you know. We have a new technology. We have to model how it diffuses through the economy. And I would say I think there's an argument here that penetration rates and usage rates are very different than what economists think about diffusion, which is how the production process is reshaped because of this new technology.

And so most economists look at the internet and digital era and think it took 20-25 years to fully diffuse. Mass penetration in maybe 10 years, but full diffusion in more like 20-25 years. And so, each innovation cycle tends to happen more rapidly.

So, I do think AI will spread more rapidly. And even by saying it spreads twice as fast as the internet did still means that it'll take roughly a decade, maybe 10-12 years for this to fully diffuse. So, our argument here would be that that is enough time for a flexible economy and a flexible labor market, like we have in the U.S., to rebalance labor.

But if we're wrong, then Robbie, what I think you will see is that as AI rolls through, it diffuses faster. And what we would see then is increases in rates of job separation and layoffs that would overwhelm the labor market's ability to reallocate workers.

So, I think we would see two things – or three things: scale layoffs, a rise in the unemployment rate, and probably a significant amount of underemployment. Those who get rebalanced may be rebalanced into work that's not, say, consistent with the skill of that worker. So, I think we would see a very disrupted labor market in the process.

But if it takes a decade, maybe 10-12 years, we think ultimately the U.S. economy is flexible enough to rebalance labor without large scale layoffs.

Robert Feldman: Now, people are afraid of a lot of things, but one other thing is that AI might create new kinds of jobs, new kinds of tasks, have different impacts on people's wealth, and different responses from policymakers as well.

How do these knock-on effects change the AI labor story?

Michael Gapen: Yeah. That's right. I think you make a very good point there that I think it's easy to fall into what an economist would call a partial equilibrium trap. So, for example, we look at occupations exposed to AI task replacement, and we say, "Wow, if all these tasks are replaced, we might lose 10 million workers or 20 million workers."

But that's too simplistic, in our view. Because as you note, AI may destroy some tasks or replace some tasks, but it's also going to create new ones. So, it may eliminate some types of occupations but create others.

And in addition, if people are, say, laid off because of AI, you get a loss in labor market income for the economy. But AI will likely create returns to capital, say, stronger equity performance, and that's an indirect wealth effect.

So, our model kind of, looks at, say, three wedges or three horse races in the economy then. It's about the speed of diffusion of AI against the ability of the labor market to rebalance. It's task destruction or task replacement versus new task creation. And then third, it's we might have weakness in labor market income in the short run, but there are indirect wealth effects.

So, thinking about it this way in a richer general equilibrium context, these feedback effects matter a lot. So, the combination of if the labor market's disrupted, we get easing in monetary policy, maybe a fiscal response. There are new tasks, new jobs that are created for workers to rebalance to over time. And overall demand in the economy gets held up because wealth effects can offset some lost income.

All of that is extremely important in our view that ultimately the U.S. economy can rebalance and handle the AI diffusion in a manageable way.

We could be wrong, of course, but our main point here is you have to think about this in a richer context. You can't just simply, say, stack up workers and occupations and say, "Oh, we're going to lose a lot of employment." That's not the way innovation waves have worked in the past. We don't think they're going to work that way in the future.

Robert Feldman: Mm-hmm. That's fascinating because the situation in the United States is so different from that in Japan, largely because of the demographic situation.

Here in Japan, the key element is how much AI can ease the labor shortage. In fact, in some labor-intensive jobs now, we're seeing 6 percent wage increases, and that's great. As long  as productivity rises fast enough that price hikes aren't necessary.

Michael Gapen: So Robbie, in your scenarios for Japan, the same 10 percent productivity gain can lead to very different outcomes. Deflation and weaker employment in one case. More inflation, higher wages, and more employment in another.

What do you think drives the difference?

Robert Feldman: Mm-hmm. Well, the crucial element really is the flexibility of goods and labor markets. With high flexibility, you get higher GDP, higher employment, and moderate inflation. With low flexibility, you may get a bit higher GDP, but employment plunges, and there's deflation of both prices and wages – more in wages.

Now, in Japan, over the last two decades, we've seen monopoly power in key markets go down. For example, agriculture and energy. Labor markets are more flexible too, but lifetime employment system still applies to about two-thirds of the economy. And that deters people from trying to find better jobs and even from acquiring the skills needed for a new job.

Michael Gapen: What conditions are needed for AI to be additive to Japan's economy?

Robert Feldman: We need more reskilling. Japan is lucky because people are healthy, and they want to work into their 70s and beyond. But acquiring the skills to remain productive is a challenge, even though Japan's workforce is well-educated and still has a strong work ethic.

So, to sum up, in the U.S., the race is between diffusion and absorption. But in Japan it's between labor scarcity and productivity. Is that fair?

Michael Gapen: It is fair, and we come down on the side of optimism. We think diffusion will happen fast, but it'll happen at a pace that the U.S. economy can handle.

So, we come down having a positive view overall. We do not lean in the direction of dystopian labor market outcomes.

Robert Feldman: Mm-hmm. I agree with that as well for Japan. So, Mike, thanks for taking the time to talk.

Michael Gapen: Great speaking with you, Robbie-san.

Robert Feldman: And thanks for listening, everyone. 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.

Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, discussing three things that could disrupt a quiet summer.

It’s Wednesday, July 8th at noon in New York.

As markets turn the page toward the second half of the year, there are lots of reasons for optimism. Global growth remains solid. Earnings growth is strong, and broadening across more companies. Capital markets remain open and deal activity is robust. We continue to think that the best analogy for current conditions is something like 1997 through 1998 or 2005 through 2006 – periods where corporate aggression was increasing, and had further to go, leading to equities outperforming credit.

Even more immediately, July also happens to be one of the best months of the year for markets. And while one should never base their entire investment strategy on how far the earth has travelled around the sun, this month has been the best month for the U.S. High Yield returns, by far, over the last 15 years. The last time the S&P 500 fell in the month of July was 2014.

So given all that, what could go wrong? Well, here are three things that are on our mind.

First, a key part of our most optimistic view is that U.S. inflation will be lower than the Federal Reserve expects in the second half of this year, leading them to leave interest rates unchanged, rather than raise rates as the market expects.

The risk is that this assumption is just wrong, perhaps soon. There is certainly an argument that, if the Fed is worried about inflation, it shouldn’t wait to act, and the market is currently placing roughly 1-in-3 chance that the Fed hikes rates on July 29^th. If that happens – and again, our base case is it does not – it could drive volatility.

Second is earnings season, which kicks off next week. While the general trend of earnings is important, the bigger focus is likely to be on the results of large U.S. tech companies, and in particular, how much they plan to spend building out AI infrastructure.

Over the last several quarters, almost like clockwork, these spending estimates have been revised higher and higher. And that has helped boost confidence in AI – as the spending is a sign that the technology holds promise – as well as boosting the broader earnings outlook; since  all of this spending is becoming other company’s revenue.

Our base-case remains that this AI spending cycle has further to run, with capex from the major U.S. hyperscalers rising from over $800bn of spending this year to roughly $1.2 trillion of spending next year.

But the risk would be that second quarter earnings now show more hesitation to spend, maybe because the share prices of some of these big spenders have been recent underperformers. And given how much the current growth and earnings story is linked to AI, and how popular AI exposure is with investors, that would create a risk.

Finally, there’s Iran. Our base case assumes a gradual renormalization of flows through the Strait of Hormuz, and we forecast Brent oil at about $75/bbl in 12 months time, which is pretty similar to current levels. But as of this recording there were reports of renewed hostilities, and the ceasefire may be fragile.

The U.S. has already drawn down its Strategic Petroleum Reserve to its lowest-ever levels, potentially reducing some ability to absorb shocks if the conflict re-escalates.

Historically, July tends to be strong, and markets have a number of helpful tailwinds at their back. But an unexpected rate hike, an unexpected reduction in Hyperscaler Capex, and a resumption of the Iran conflict are three factors that are not in our base-case – and could disrupt that.

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. Also tell a friend or colleague about us today.

Thomas Wigg: Welcome to Thoughts on the Market. I'm Tom Wigg, Morgan Stanley's Head of Americas Specialty Sales.

Stephen Byrd: I'm Stephen Byrd, Morgan Stanley's Global Head of Thematic and Sustainability Research.

Ariana Salvatore: And I'm Ariana Salvatore, Morgan Stanley's Head of Public Policy Research.

Thomas Wigg: Today, the rally in AI CapEx beneficiaries has taken a breather in recent weeks on concerns of competition from open-source models, backlash to token-maxxing, and growing political opposition to data center builds.

It's Tuesday, July 7th at 10am in New York.

Let's start with you, Stephen. There's a lot of discussion recently around a backlash at token-maxxing. Essentially, enterprises trying to curtail their high spending on AI tokens from the frontier labs, and, in many cases, shifting to cheaper open-source China models.

Can you first offer some perspective here on the value of tokens for enterprises? I know you have a popular token factory model that walks through the economics of agents.

Stephen Byrd: Yeah, Tom, we do have this model that really walks through token economics, both from the adopter side as well as the hyperscaler side. So, let's do the adopter side.

So, there's a study out that shows a whole range of enterprise use cases of AI, and the average single use case that they identify would save a company about $55 or provide that much benefit. And while we don't know exactly how many tokens it will require, we can make some educated guesses as to a typical token usage to achieve that $55 outcome.

And we know that a typical American model, though this varies a lot, you can think of as the cost per million tokens being in the range of $5 per million. Some will be lower, some will be higher. So, for a few dollars of token cost, an enterprise can generate benefit of $55.

So that doesn't make me overly concerned about token spend and concerns about token-maxxing. I know we're going to get into that, but the foundation here is really good in the sense that enterprise use cases are very much in the money.

Thomas Wigg: How do you think market share ultimately shakes out on tokens? Do the cheaper models overtake the frontier AI labs? Do tokens bifurcate based on the complexity of workloads? How do you think this plays out?

Stephen Byrd: What we continue to see is this relentless pace of innovation and cost reduction. So, the frontier keeps going out – meaning model capabilities continue to increase, and, with that, we see enterprise adoption growing quite a bit.

Long way to say there is a role for both the frontier as well as these open-source models, and we'll continue to see both flourish. What I see is a lot of tokens will be spent on open-source models. A lot of the value will be in the higher end models because that's where enterprises are going to go. Let me give you an example.

I was speaking with one of our programmers about a recent project, and he used a very high-end coding tool, an American coding tool. And for him, that incremental cost of the tokens was very much worth it. And here's a very practical example as to why it makes sense for many enterprises to use the higher end models.

If a coding tool gets one of the thousands of lines of code wrong, the cost to remediate is very, very high. In other words, that incremental cost – in this example I'm thinking of, it's a few dollars incremental cost – is so worth it.

And that's true in a lot of enterprise use cases, but not in every use case. And what we are seeing is these open-source models that are cheaper will be very good for a variety of more mundane use cases that are still very valuable. That said, what we've seen in data from places like OpenRouter is dollar-weighted, meaning valued by enterprise spend, the vast majority is still the proprietary models.

But even within proprietary models, we could have more expensive and less expensive models. You do not need to go to the frontier. Where I come out on all this is that I'm very confident that the demand for compute is going to exceed the supply. What is difficult to exactly know is who are the winners, what is the exact mix. But the fundamentals of the demand for compute look extremely strong.

Thomas Wigg: So, I think you just gave me the answer, but I do want to bring this all back to AI CapEx. Now, last year, when the market sold off on Deep Seek concerns, the concept of Jevons paradox ultimately prevailed, where the cheaper pricing led to even greater demand and CapEx went higher.

Do you think the same plays out here?

Stephen Byrd: It does look that way very much. And the Jevons paradox dynamic is what we still see today in the sense that as the models get better, what we can do with the models increase, the cost of tokens will keep dropping, the cost of compute will keep dropping.

But let's talk about what might derail that, just to make sure we're thinking about all the risks. If somehow commoditized models could perform at the same level as proprietary models in all situations, then I would feel differently. But I don't see that. What I see is that these newer models really do have capabilities that are fairly breathtaking and that are worth that extra money.

But if somehow, we hit a wall where these models aren't getting better and therefore the sort of the open models are going to catch up, then I'd feel differently about that. This is where Ariana will, will come in in terms of policy and, you know, this comes up a lot when we think about U.S. versus China. How do we think about, you know, access to different models? How do we think about the cost of different models?

What about the risk of appropriation of capabilities by the Chinese firms, for example? That comes up a lot in policy circles. But the base case that I have is this just looks more like Jevons paradox, and there's going to be continued innovation, continued reduction in the cost of producing these services from these models. That looks like more of the same.

Thomas Wigg: Let's shift to Ariana to talk about the political angle here. The cover of Barron's over the weekend was a guy wearing a no data centers T-shirt. And this does seem to be one of the few bipartisan issues of agreement heading into the midterms.

The stat that the article gave was that 75 data center projects worth $130 billion were blocked or delayed in 1Q26, which is equal to the total number for 2025. This is according to Data Center Watch.

Now, most of this is in blue states like New York, Michigan, Illinois, Minnesota considering a statewide moratorium, but you're also seeing Pennsylvania, Arizona, Ohio, parts of Texas restricting tax incentives here.

So as this gets louder into the midterms, how do you think this plays out?

Ariana Salvatore: So, this is definitely one of the big wedge issues, not just for the midterm elections, but for 2028. And to your point, it's expanding into something that's got bipartisan momentum behind it.

Our view is that as long as the Trump administration is in power, something like a federal ban is unlikely to come to fruition. That's because we think the administration is still broadly supportive of the AI data center build-out. And I think even if you were to see a Democrat in office further down the road, that position is the same. And the reason is, it's just too difficult to imagine the U.S. giving up that strategic imperative relative to China.

So, while it is true that voters are against AI, while it is true that you are seeing these sorts of local efforts pick up steam, it's also the case that China is accelerating its own AI build-out – not just domestically, but around the rest of the world too. It's also the case that they are kind of tweaking some export restrictions on inputs for some of these data centers, and those geopolitical realities, I think, are hard to ignore.

So, at the end of the day, there is a broader strategic imperative here that both Democrats and Republicans kind of recognize and get behind. Now, what does that mean in the near term for the build-out? I think it's not that you're going to see a real pushback or moratorium so much as a conditional build-out.

That means you're going to see data centers have to incorporate things like grid modernization in their contracts, agree to longer term investments, for example. Do something that benefits the communities or give it back in some way. And I think that's kind of the policy trajectory in addition to the administration continuing to lean on tech companies to basically, you know, square the circle here and find some way to make this more affordable for, you know, local constituents.

Thomas Wigg: Stephen, let me get your take on this too, because I know you live in the D.C. area, and you have a lot of political conversations like you referenced earlier. How do you think this plays out? Is it a red state versus blue state dynamic?

And if what Ariana says comes to fruition, where it's a conditional build-out in terms of either giving back to the community or ensuring certain prices or certain technologies behind the meter, in front of the meter, does that have implications for certain areas of the market?

Stephen Byrd: Yeah. First, I think Ariana's points were all spot on. I just want to, kind of, build on that and, and dive into it a little more detail.

A few things. The politics are, from my perspective, not being the expert that Ariana is, I find them a little strange – in the sense that at the federal level, we have one dynamic, and at the state and local level, we have a bit of a different dynamic. And what I mean by that is, at the federal level, I think it's becoming increasingly clear just how geopolitically important AI supremacy is.

As these models get more capable, I think it's pretty clear that the Trump administration really sees just how potent these tools are from a geopolitical point of view. So that points in the direction of wanting to support AI and wanting to ensure that the United States has a leading and dominant position in terms of AI capabilities.

Pause there, and then go to your point about, sort of, the local and state level.

Building on what Ariana said, what I see are basically two approaches to data center development. In states where the utility is vertically integrated, meaning they control everything, like Louisiana, I do see a path where – in those kinds of states where the politics are a bit more favorable – you could develop a data center connected to the grid, where the data center developer is paying full freight and then some. Meaning that they are providing back to the community, they're providing sort of net benefits, and there should be plenty of capital to make that work and really support all constituents.

That can work – in a state where the politics work – because utilities are really weather vanes from a political point of view. So, if their state supports data center development, they will more likely support a data center development.

The other approach, though, in many states, whether it's deregulated or it's in a state where the politics are a little less favorable. Which, to your point on the cover of Barron’s, it's a lot of states, what I'm increasingly seeing is that the developers are going to go off grid. And they just don't want to show any impact to the community that could be considered negative.

So, no use of water, no use of power, and hopefully have a, you know, low or zero emissions profile to show no impact at all. Even then, you want to give back to the community. But the view there is, look, we want to sidestep all of these concerns that we might be causing impacts to the grid by just not being connected.

So, I think we're going to see a whole lot of off-grid data center projects. That's mostly natural gas turbines and fuel cells, that general approach. Energy storage will be required in a big way.

That's not easy to do. So, in the context of delays there, the Bitcoin players who do have grid access today are clearly seeing a lot of demand for their products.

So, I would say politics is now a huge issue that's showing up.

The other thing I'd flag is often local communities and states are rejecting projects and using permit requests as a way to do that. So, for example, if your data center needs an air permit because your turbines are going to emit some kind of an, you know, sulfur dioxide, et cetera, into the air, you can run into trouble there. If your data center requires water and you need a water permit, you can run into trouble.

So, that's causing these developers to try to find approaches that really minimize or eliminate the need for those kinds of permits.

Thomas Wigg: Stephen and Ariana, thank you for taking the time. And to our audience, thank you 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.

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 discuss why I think the broadening out in equity markets can continue.

It's Monday, July 6th at 11:30 am in New York. 

So, let’s get after it.

Let’s talk about a market dynamic that’s becoming harder to ignore. The broadening trade is back, and it’s gaining momentum partly because one of the most crowded areas of the market – Semiconductors – is finally starting to lose some of its own.

To be clear, this doesn’t mean the AI cycle is over.  However, trends don’t move in straight lines, and leadership can ebb and flow; especially if there are fundamental reasons supporting it. In fact, we’ve seen this happen several times already over the past couple of years with the hyperscalers and semiconductors ebbing and flowing. This is based on positioning, the rate of change on expectations for capex and the returns on that capex. 

Meanwhile, our broadening call goes back to last November . Back then, we argued the economy had entered a new expansion after the rolling recession ended in April 2025. That view was based on a classic early-cycle setup where revenue growth returns to companies that had become cost efficient. That is the definition of operating leverage and that always leads to better than expected earnings growth – the core differentiation to our original outlook this year. 

The market started to discount that broadening late last year and into early this year. Then, the Iran war interrupted it. Oil prices surged, the bond market went from pricing Fed cuts to pricing hikes, and investors crowded back into the obvious AI capex winners – especially Semiconductors.

That made sense for a while. The revisions in Semis were spectacular. But when earnings revisions breadth gets pressed against historical extremes, the question becomes less about whether the story is good and more about whether the rate of change can keep improving. That’s a much higher bar. And over the past few weeks, the market seems to be asking that question with semiconductor stocks fading.

The underperformance in the hyperscalers was probably the first signal. Semis depend on hyperscaler capex, so when the spenders start to lag the beneficiaries, that divergence can’t last forever. It usually ends up reconciling with hyperscalers’ tempering capex guidance or indicating they are more focused on getting a return on that investment. META’s announcement last week that it would begin selling excess capacity to outside customers fits right into that discussion. It doesn’t kill the AI buildout, but it does change the market’s perception of how linear that buildout will be.

What matters for investors is how they should trade it.

First, the market should continue to broaden out. Second, we continue to favor Consumer Discretionary Goods, Transports, Regional Banks, and now Biotech as part of that rotation. Discretionary Goods remains the cleanest expression, in my view, because the wallet-share shift from services back to goods is underway, goods pricing is improving, oil prices have fallen, and earnings revisions are strengthening. Transports are also showing better revisions, and Regional Banks still benefit from the broader recovery, improving loan growth dynamics and our call for a re-steepening of the yield curve.

Biotech deserves more attention here, too. It is also  one of the most rate-sensitive areas of the market, and our work shows it has historically done very well in falling-rate regimes. If the market’s policy expectations are too hawkish – and I think they are – then Biotech offers an attractive risk-reward setup, particularly with an M&A cycle that continues to build.

The Fed is part of this story as well. Chair Warsh’s comments last week that inflation risks have come down should matter, especially after the weaker labor data that came out Thursday. The market had become too hawkish on policy. If falling energy prices and contained core inflation allow the Fed to stay on hold rather than hike, that should help lower rate expectations and further support broader leadership in equity markets.

Bottom line, the major averages may stay choppy because Semis are a large part of the index and crowded. But, the message is improving beneath the surface. The broader market performance indicates a broader economic and earnings recovery may just be beginning. The best news is that this view is still out of consensus, which means the opportunity for investors remains significant. 

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!

Serena Tang: Welcome to Thoughts on the Market. I'm Serena Tang, Global Head of Cross-Asset Strategy Research at Morgan Stanley.

And today, I'm bringing you a debrief from my investor meetings across Europe and Asia, and the key debates around AI and the Fed.

It's Thursday, July 2nd at 10am in New York.

The last two weeks, I have been traveling in Europe and Asia to meet with investors to discuss Morgan Stanley's latest views. Two themes dominated nearly every room I walked into.

The first is the Federal Reserve and monetary policy path in the U.S. Many investors had interpreted Chair Kevin Warsh's June FOMC meeting, his first at the helm, as unambiguously hawkish. What market investors at my meetings pointed out is that [the] Fed's Summary of Economic Projections – commonly shortened to SEP, which details policymakers' forecasts for macro metrics like GDP growth, inflation, and the federal funds rate – added a hike in 2026 and pushed out rate cuts, implying more restrictive policy.

Now, Morgan Stanley's economists think that hikes implied by SEP at the June FOMC meeting should be interpreted with caution. The projections appeared conditioned on elevated near-term inflation and may not capture the disinflation from a straight reopening. We actually anticipate a lower path for core inflation given a combination of a reversal in travel-related inflation and tariff payback, which lead to our call that the Fed remains on hold through 2026.

The second recurring theme in meetings with investors across regions is, unsurprisingly, AI. While in every single meeting investors believe firmly in the secular story of ongoing AI CapEx cycle, there was some unease – especially since AI is now also becoming an inflation story on the macro side and a funding story on the micro side.

Chipflation is a new word in town, with markets still debating whether it can be one of the things that derail the AI CapEx cycle. In our economists’ and sector analysts’ views, it's more nuanced. While memory price is up sixfold over the past year, we think chipflation is more likely to reprice and ration AI infrastructure than derail the cycle.

AI demand is scaling across three layers at once, more memory per chip, more chips per system, and more systems per cluster, while hyperscalers remain first in the allocation queue. Now, the key risk is CapEx efficiency. Memory is becoming a larger share of the AI system cost, but the cycle, we think, remains intact.

As for AI funding needs, the debate with investors has been how much more can it accelerate? It's worth noting that the majority of corporate bond issuance quarter-to-date has been related to funding construction of data centers.

Hyperscale’s have been broadening their investor base through non-dollar issuances. They have collectively issued around $25 billion of debt in other currencies like euro, Swiss franc, and the [Japanese yen] in May.

Our credit strategy colleagues forecast nearly another $600 billion of AI-related global issuance in 2026; meaning for U.S. IG corporate bonds alone, we expect one trillion of net issuance, a reason for our view that the asset class can underperform this year. With our equity colleagues estimating hyperscaler cash CapEx to surpass $1 trillion in 2027, we expect issuance to accelerate.

Bringing it all together, investors globally are all grappling with the same uncertainties around the Fed and AI CapEx, which will likely continue to be key debates to come. But Morgan Stanley's base case view of lower inflation driving the Fed to stay on hold and a strong AI CapEx cycle that remains intact means we recommend investors should still stay constructive on risk assets.

Thanks for listening. Let us know what you think by leaving a review. And if you enjoyed the podcast, please share Thoughts on the Market with a friend or colleague today.

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's Head of Public Policy Research.

Michelle Weaver: And I'm Michelle Weaver, Morgan Stanley's U.S. Thematic Strategist.

Ariana Salvatore: Today, we'll be talking about the consumer and what recent data could imply for the midterm elections.

It's Wednesday, July 1st at 10am in New York.

Last week, Mike Zezas and I caught up on the consumer while he was down at our Consumer Captains Conference. This week, Michelle, I want to talk to you about what your data are saying and get into the implications of all of this for the midterm elections.

So, maybe we start with the AlphaWise data. What are our surveys picking up when it comes to how the consumer feels about the outlook in the aggregate?

Michelle Weaver: We run a monthly proprietary survey of around 2,000 U.S. consumers, and it's diversified by age, gender, and region, and we ask questions around sentiment, spending plans, and other special topics. Our survey recently showed a continued gradual recovery in consumer confidence in the U.S. economic outlook.

We're not off to the races by any means, but we did see the net outlook score improve to -10 percent, up from -14 percent a month ago and a low of -18 percent two months ago, when concerns around oil prices were at their peak.

Overall, more consumers feel negatively about the economy versus positively, hence that net score is negative. But we are seeing signs of improvement, so things are improving on a rate of change basis.

Ariana Salvatore: That makes sense given the MOU that was signed between Iran and the U.S. Now, looking forward, what does the survey tell us about spending plans?

Michelle Weaver: Broadly, consumer spending plans remain stable. They expect to spend more on essentials categories. This includes things like groceries, gas, and household items, while they're expecting to spend less on discretionary categories. We saw the weakest spending intentions within the consumer electronics category, and consumers are not likely to see much price relief in that category. Many consumer electronics makers are now taking their prices up because of the high price of memory chips that goes into those products.

Ariana Salvatore: One of the most important components of the survey is the question that you ask on top areas of concern. What are you guys seeing there?

Michelle Weaver: Inflation is still the number one concern for consumers, and we actually saw the percent of consumers citing it among their top concerns tick up again last month. So, now that's at 60 percent, up from 59 percent last month, and a low of 53 percent in January. People are also worried about the U.S. political environment. That was cited by 42 percent of consumers, up from about 39 percent last wave. Concern around geopolitical conflicts rounds out the top three, but that level's been pretty stable around 25 percent.

But Ariana, can consumers expect any relief on prices from the policy front? Consumers got a nice boost from tax refunds. Is there anything else in the pipeline?

Ariana Salvatore: So, we've gotten this question a lot into the midterm elections, and our view is basically that there are a number of obstacles in the way of something like another reconciliation package to give direct stimulus to consumers, whether that's procedural, whether it's the political perception.

One of the most important is actually the deficit concerns, right? So, we don't expect something additional for the consumer through the legislative angle, aside from what we've already seen, like the Road to Housing Act. And that's also against a backdrop of what we've been seeing on the economic side and what your data is reflecting, which is that the consumer sentiment metrics are actually ticking up slightly from their lows. And that, of course, maps directly onto what our U.S. econ team has been saying.

Their view is that the consumer story in 2026 has turned more neutral. Real consumption growth is still expected to decelerate to about 1.7 percent. That's below last year, but again, not falling off a cliff. The core dynamic is that the One Big Beautiful Bill Act had this fiscal boost from last year, tax refunds running about 17 percent higher year-over-year, but the oil shock basically mitigated that and essentially neutralized the fiscal impulse.

But that's not hitting everybody equally. Goods spending tends to bear the brunt. Our econ team estimates that the oil shock takes 30 basis points off consumption entirely from goods rather than services. Low- and middle-income households are most exposed since energy makes up over 8 percent of spending for the bottom income quintile versus under 5 percent for the top.

And that broadening out story from just the high-income consumer driving spending is probably going to be a little bit delayed just given the oil shock.

But maybe let's drill in a little bit more on that income bifurcation. How does that manifest in your view across spending intentions?

Michelle Weaver: Mm-hmm. Overall, short-term spending intentions – so spending plans over the next month – are net +20 percent this month. That's still above the historical average of around +16 percent, but it is down somewhat from 23 percent last month. And the divergence is really driven by income. Upper-income consumers remain meaningfully more optimistic, while lower-income households are still under stress.

So, we're still seeing the K economy very much in place. And the economy and inflation are almost always top issues for voters. How are you expecting the dynamics we've been talking about to impact the midterms?

Ariana Salvatore: So, data are showing an uptick, obviously, which should on net benefit Republicans all else equal, albeit off a low base. And that's because there are other data points to consider here. So, things like the generic ballot, things like historical precedent, things like the presidential favorability ratings – all of those things are painting a more constructive backdrop for Democrats heading into November.

But also, to put a finer point on it, we're seeing the AlphaWise data that you're citing reflected across other surveys as well. So, we saw the UMich data from last week show the year ahead inflation outlook drop to 4.6 percent from 4.8 percent. And of course, that's a reflection of the expectation that gas prices are going to moderate into November too.

Now, on that front, it's about rate of change, right? So, not the absolute level. But again, I would just remind our listeners that this is one factor in the context of many.

So, net-net, we definitely still see a slight advantage for Democrats heading into November, especially when we drill into some of the trends that we've been seeing across the primaries.

Michelle Weaver: And what are some of those trends you've been picking up from the primaries?

Ariana Salvatore: So, the first thing I would say is that we're cautious to extrapolate too much from primaries to the general election, but really maybe two key points here. The first is turnout seems to be an early indicator in favor of Democrats. So, enthusiasm is up. We're seeing more participation and more engagement relative to prior elections.

The second point I would make is that the primaries have been showing a mixed bag in terms of candidates for November. So, in some states like New York and Colorado, you saw more progressive candidates win their races. And all else equal, that could translate to more of what we call a fragile instead of a cohesive majority come November.

So, think more political noise around fiscal deadlines, things like appropriations and the debt ceiling. But of course, we still have less than 50 percent of the primaries, so plenty to watch heading into the fall.

Michelle, thanks for taking the time to talk.

Michelle Weaver: Thanks for having me.

Ariana Salvatore: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

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 changing equity market leadership.

So, let’s get after it.

Something is happening in plain sight but still isn’t fully appreciated by investors. The market’s leadership is changing. And as usual, by the time everyone agrees that it’s happening, the easier money will probably have already been made.

Putting those together, the setup looked like a classic early cycle. Revenue growth returning on top of lean cost structures leads to strong operating leverage and well above trend earnings growth.

Fast forward to today, and that’s exactly what has happened. The median stock in the S&P 1500is now growing earnings at a double-digit pace, the fastest since the post-COVID boom. Revenue growth has returned, with the median stock growing its top line by 7 percent .  That is not a narrow growth story. That is a rolling recovery showing up where many investors still aren’t looking.

For much of this year and particularly the past few months, most investors didn’t want to hear that story. The Iran conflict pushed oil sharply higher. Rate-cut expectations turned into hike expectations. Faced with these headwinds, investors crowded back into the AI trade especially semiconductors and memory in particular. To be clear, the earnings revisions in semiconductors have been spectacular. The move wasn’t irrational. But when something becomes the most owned, most loved, and most obvious area of the market, it becomes harder to surprise on the upside.

That’s where I think we are now. The hyperscalers have started to underperform, and that may be an early warning sign for semis, which are the key beneficiaries of the AI spending boom. Earnings revisions breadth for semis is pressing against historical extremes. Again, this does not mean the AI cycle is over. But it does mean that the rate of change may be peaking, and when price momentum starts to fade in a crowded trade, it can lead to significant set-backs. It can also give other parts of the market room to breathe. In short, the broadening trade is back!

The equal-weighted index and small caps are outperforming again. More importantly, the groups we have been recommending – Consumer Discretionary Goods, Transports, and Regional Banks – have already started to show relative strength over the past six weeks, even though positioning and sentiment remain neutral to negative. That’s the kind of combination I like: better price action, improving earnings, and investors still skeptical.

One reason I’ve been more constructive on the consumer than others is that I’ve also been more bearish on oil. That view was not dependent on a grand deal between the U.S. and Iran, although that obviously helps. The signals were already there. The Brent-WTI spread narrowed, and energy stocks began underperforming from the day the conflict started. The market was telling us something before the headlines confirmed it. And longer term, I think the conflict has put the world on notice: this choke point around the Strait of Hormuz must be solved. It’s no longer a risk the world is willing to tolerate. New routes, new supply, and new energy strategies are likely coming. Necessity is the mother of invention, and I would not underestimate the world’s ability to adapt.

A less problematic oil backdrop helps the broadening trade. So does the Fed, at least on rates. The June FOMC meeting told us two things: forward guidance is going to be diminished, and the reaction function is now focused more squarely on inflation. My view is that falling energy prices, peaking tariff-related inflation, and contained services and housing inflation keep the Fed on hold rather than hiking this year. If that’s right, lower than expected real rates could be a positive surprise for equities and another tailwind for the broadening of performance.

The key variable to watch at this point is liquidity. This Fed is unlikely to be as proactive with balance sheet support, just as the real economy needs more capital for capex and markets are dealing with more equity and credit supply. That’s the near-term real risk, especially for popular momentum trades.

Bottom line, the market may look choppy and even weak at the index level, over the next month, but the message underneath is improving. Earnings are broadening, oil is falling. The shift is already under way with crowded momentum trades wobbling, and the under-owned areas of the market starting to lead. Investors can either wait for it to become more certain – or position before it becomes obvious and fully priced.

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!

Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's Head of Research Products here in Europe.

Marina Zavolock: And I'm Marina Zavolock, Chief European Equity Strategist.

Paul Walsh: And today, we're looking at whether European equities have more room to broaden – as markets assess the implications of a potential U.S.-Iran deal and a reopening of the Strait of Hormuz.

It's Monday, June the 29th at 10am in London.

Marina, it's always great having you on. And for our listeners out there, I think they'd be interested to hear that if we look at Europe's performance year-to-date, it's now on a par to the S&P. So, both indices are up somewhere between 7 and 8 percent year-to-date. So, Europe is starting to stage something of a comeback from the conflict lows.

And so, what's driving this? And are we beginning to see inflows into Europe again?

Marina Zavolock: So, I'm going to give a two-part answer to this.

Firstly, Europe has a lot of the same exposure as the U.S., so that is part of the reason… I know that Europe has this kind of reputation for not having a lot of tech exposure; but we do have tech exposure…

Paul Walsh: We do.

Marina Zavolock: Not to the same degree as the U.S., but, let me just give you some numbers here.

So, we have a number of sectors heavily exposed to the AI CapEx boom. These are led primarily by the semis sector in Europe, tech hardware, cap goods, and metals and mining; specifically, copper has a link to AI as well. And those sectors, let's say roughly they make up at this point about 15 percent weight of our index. And if you look at that year-to-date performance that's on par with the U.S., almost 90 percent of it is made up from these sectors.

Paul Walsh: Yes.

Marina Zavolock: So, these sectors have moved just as aggressively as many of the AI pockets within the U.S. That's the answer that's kind of similar to the U.S. The answer that's a bit different is that we get from time to time, over the years actually, but we had a very big one earlier this year. We get these waves of interest in Europe because investors start to think about diversification. So…

Paul Walsh: That’s right. The broadening.

Marina Zavolock: Yes. So, they... And we've called for broadening recently on the back of this, Iran-U.S. MOU. But this broadening has other drivers as well. So when we felt this wave of interest in diversification, and we saw the flows coming into Europe earlier this year, the driver was initially because the Mag7 was kind of going choppy and sideways. So, that just drove diversification out of Mag7 and into equal-weighted S&P, but that also always benefits Europe. Or tends to benefit Europe.

But also, we had this wave of interest in real assets earlier this year; and Europe has a higher share of real assets than the U.S. Now, at this moment, I am sensing that we are getting that pickup in broadening interest once again from my feedback with investors.

You had this MOU, which was the initial trigger. You have oil prices, broadly, they're falling. That's helpful as well. But I think the biggest driver of what's driving this diversification interest at this moment is actually the volatility that we're seeing in the AI complex.

Paul Walsh: Mm.

Marina Zavolock: So, what a lot of the feedback I'm getting these days from investors that are coming back to Europe after focusing primarily on the U.S. is, ‘Look, I have a lot of AI in my portfolio. I like my AI exposure. I'm not looking to get rid of it or to sell it, but incrementally, I'm a little bit worried about this volatility. And I'm looking to broaden my exposure. What do you like in Europe to help me diversify away from this kind of volatility that we're seeing now?’

Paul Walsh: And I think that's a great segue, Marina, to my second question, because with Europe having really kept pace with the S&P year-to-date, the question that really is going to be asked is the sustainability of that relative performance. And when we think about a backdrop here in Europe of pretty low economic growth, the market continues to be worried about rate hikes given recent inflationary dynamics.

And as you've articulated there, tech has played a very significant role here in Europe as well in terms of driving markets higher. So, you've alluded to it in a few of your comments already, but how sustainable do we see this as being?

Marina Zavolock: It depends on AI, to be honest with you. So, if AI starts to really move up at an aggressive pace like it was earlier this year, then it's hard for Europe to outperform given our exposure. But if that starts to move up at a more moderate pace, Europe has a chance to do very well.

Paul Walsh: Mm.

Marina Zavolock: I think there's a lot of misperceptions when it comes to European equities. And outside of AI, actually there's quite a lot of strength. So, misperception one, you've mentioned it, which is basically: Oh, look at our PMIs, look at our GDP growth. Why bother with European equities? I think this is maybe what some U.S. investors may think.

But just like in the U.S., the equities market, and maybe even more so, the equities market in Europe – it is not the economy.

Paul Walsh: Mm.

Marina Zavolock: So, we just published our global exposure guide over this past weekend, which Morgan Stanley has been running 29 iterations of this guide.

Europe's exposure to Europe is pretty much at historical lows over decades. Europe's exposure to Europe as a percent of revenues is now 45 percent of revenues … 

Paul Walsh: Yeah.

Marina Zavolock:  ... is European exposed. The rest is very global, including the U.S. Um, Europe, uh, Of that 45 percent domestic, a lot of that is banks, some defensive sectors. Only a very small sliver is actually consumer-oriented sectors that would see earnings downgrades on the back of ECB hiking, for example. So, I think people may also be surprised to know that consensus earnings growth for Europe this year is over 16 percent.

Paul Walsh: Mm.

Marina Zavolock: It's really healthy.

Paul Walsh: It’s pretty healthy.

Marina Zavolock: I know the U.S. is over 20, but Europe is over 16 percent. These kinds of ideas of, you know – we have a shortage of energy and therefore our earnings are going to be down – they're misperceptions. Because actually, as long as oil doesn't spike to, I don't know, [$]150. If it stays within a healthy range, call it [$]70 to 90, that's actually a very good environment for Europe because we have a lot of real assets.

We have the banks which benefit from higher inflation because they trade on the steepness of the curve. And we have some AI exposure. If you add up those three things, which all benefit from inflation, that's 60 percent of our earnings pie.

Paul Walsh: Right.

Marina Zavolock: Hence, Europe's actually doing really well. And I'll just mention one other thing. Earlier this year, we broke out of a structural downtrend discount; that range that we were trading in versus the U.S. So, for almost 10 years, Europe's discount was just going wider and wider and wider and wider. And as of January 1st, this year, on a like-for-like basis, so sector neutral excluding Mag7, we broke out of that structural downtrend, and we keep seeing a narrowing.

Paul Walsh: Yeah.

Marina Zavolock: So, if you're going to broaden, it actually makes a lot of sense to look at Europe, where we have these discounts, and we have value, and we have growth.

Paul Walsh: Yeah. So, the point there being the relative valuation discount of Europe to the U.S. has been actually closing a little bit more recently. Final question from my side, uh, please, Marina.

You have obviously recently refreshed your sector model. We have talked about the broadening in our conversation today. What are you advocating to your clients out there in terms of relative sector preferences?

Marina Zavolock: Yeah. So, we run a data-driven model. Just briefly, we look at things like earnings revisions breadth – works really well as a leading indicator in Europe; a leading indicator for future earnings as well.

Consensus price target revisions breadth, balance sheet measures. We look at a number of different things, AI exposure. And basically, I'll just give you the top sectors in our model now. Semis number one, metals and mining number two, led by copper.

Paul Walsh: Mm-hmm.

Marina Zavolock: Banks number three. I think banks, for me, it's a key diversification play.

Paul Walsh: Yes.

Marina Zavolock: A big differentiator. And trading on 10 times PE with very high distributions, buybacks and dividends, low teens earnings growth upgrades. Front of the line on AI adoption and seeing that ROI coming through. Cap goods, number four, that's also led by AI exposure.

Paul Walsh: Yeah.

Marina Zavolock: And then I'll just mention lastly, utilities is an overweight as well. That's also a little bit AI linked, but very, very under-owned; lagging the trends we've seen in the U.S. And broader based in terms of the positives there because we also have this drive for renewables, which is coming back.

Paul Walsh: Marina, always, we value your insights highly. Thanks as always for taking the time to talk.

Marina Zavolock: Great speaking 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 please do share the podcast with a friend or colleague today.

Jay Bacow: Welcome to Thoughts on the Market. I'm Jay Bacow, co-head of Securitized Products Research at Morgan Stanley.

James Egan: And I'm Jim Egan, the other co-head of Securitized Products Research at Morgan Stanley.

Jay Bacow: Today, the glow has maybe worn off the championship of the Knicks, so we can talk about the impact of Warsh on the mortgage and housing market.

It's Friday, June 26th at 10am in New York.

James Egan: If we have to stop talking about the Knicks, we can stop talking about the Knicks. But Jay, I think one of the things, if we take a little bit of a step back in mortgage markets, in housing markets, in fixed income markets more broadly – from the beginning of the year to now, we've gone from the market pricing in 2.5 cuts from the Fed by the end of 2026, to the market pricing in roughly 1.5 hikes. 100 basis point difference in market expectations over the course of the past five and a half months.

Now, that's happened at different times, with different levels of velocity and severity. But one of the key talking points we have now is – we have a new Fed chair. We had the first FOMC meeting and his press conference after that last Wednesday.

What do you think that means for mortgage markets, for volatility? How are you thinking about this?

Jay Bacow: look, Jim, it's a great question, and we've got asked that by a number of different investors. Chair Warsh has been pretty clear that he thinks people should do more of what they're good at and less of what they're not good at.

And so, he's felt like the Fed should keep their communication on future guidance relatively short. And so, with less forward guidance from the Fed, the market has more uncertainty, and more uncertainty translates into more volatility.

And more volatility is generally bad for the mortgage market, given that investors are short the option to the homeowner to refinance. Furthermore, shifting from expectations of the Fed cutting to expectations of the Fed hiking generally makes it a little bit less favorable environment for investors like banks and overseas investors to come to the mortgage market.

Given the valuations are pretty snug, we don't think this is a great opportunity right now for investing in agency mortgages. 

James Egan: Alright. Now, we've been on this podcast several times this year where we've talked about, you mentioned banks... We've talked about deregulation. We've talked about Fannie Mae and Freddie Mac, the GSEs – them buying mortgages, that being constructive for our mortgage view.

Is that still the case, or how are you layering that into your thought process?

Jay Bacow: now? That's definitely still the case. Those things haven't changed. The deregulation is still flowing through the markets. That longer term should be supportive of bank demand in aggregate, although obviously there are a number of different regulations going through. The GSEs are still forecasted to buy 200 billion mortgages on behalf of President Trump's initiative.

So, that's why we're just sort of tactically negative – those technicals are very strong in an environment where there really has not been much supply. Now, some of that supply is because mortgage rates are still in the context of 6.5 percent. Some of that is because with mortgage rates at 6.5 percent, there hasn't been that much housing activity.

So, Jim, turning it to you, what is the outlook for the housing market in a world where they are expecting the Fed to hike and rates to stay elevated?

James Egan: Right. So, the main thing that we focus on from a housing market perspective is less specifically Fed action and more the 5- and 10-year part of the curve.

So, when you start to say something like you're tactically negative mortgage-backed securities here – how can I interpret that from a mortgage rate perspective?

Jay Bacow: If we're tactically negative, it's more of a small move than some massive move. And as you said, and we've talked about on this call beforehand, realistically, the mortgage rate is a little bit less dependent on the Fed policy rate and more around the belly of the Treasury curve. And, you know, what's going to happen with the belly of the Treasury curve is going to be dependent on sort of market expectations along with what's happening in the geopolitical situation.

So realistically, if you've written down that the mortgage rate is 6.5 percent right now, our view probably doesn't change things too much.

James Egan: And if that's the case, then affordability in the housing market, as we've been talking about, is going to continue to be challenged. And what we think that means from a housing activity perspective is any upside that we really thought would have been there gets pretty significantly capped. But the same side of this token – or the other side of this token, if you will, we do think that the current level is well-supported here.

There's some level of housing activity that has to occur regardless of where affordability is, and we think we found that. We're at 40-year lows from a turnover perspective. From the fourth quarter of 2023 through now, we've been roughly at the same level. That's 11 consecutive quarters now.

We think this is the kind of base level for people that need to transact regardless of where mortgage rates are. So, the more that the rate environment remains challenged, the more that we kind of hang in this low to mid 6 percent mortgage rate environment. We just think that that continues to curtail upside.

So, it's a housing market and a housing activity space that continues to very much just remain stuck in neutral.

Jay Bacow: Alright. So, if we're in this new environment and the Fed might be hiking, it's not great locally for mortgage valuations. Housing market more broadly, probably kind of stuck in neutral here. Jim, always a pleasure speaking with you.

James Egan: And always great speaking to you too, Jay. And to all of our regular listeners, thank you for adding us to your playlist. 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 go smash that subscribe button. 

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public Policy Strategist. 

Michael Zezas: And I'm Mike Zezas, Deputy Global Head of Research. 

Ariana Salvatore: Today, we'll be discussing the consumer outlook, policy catalysts, and what it could mean for the 2026 midterm elections.  

It's Thursday, June 25th at 9am in New York.  

Mike, you're on the road, obviously not in New York City this week. Why don't you tell us a little bit about the conference that you're at, and then we can get into some of the topics that have come up in your conversations.  

Michael Zezas: Yeah. I'm down in South Carolina at Morgan Stanley's Captains of the Consumer Industry Conference, where we put together investors and leadership of key consumer companies in the U.S. to learn about each other in a more informal way, brainstorm… And it's been really interesting. 

We've had a lot of meetings with leadership from different prominent consumer companies throughout the U.S. And it's been really fascinating to hear how the consumer's been quite resilient. But in general, one pattern that sticks out is rising concern about lower-income consumers' behavior starting to lag in meaningful way higher-income consumers' behavior.  

You're starting to see substitution and sort of more selectivity amongst lower-income households, a pattern that began a bit last year as a lot of these companies would report with higher tariffs. That seems to have continued with higher gas prices driven by the conflict in the Middle East.  

So, there's a lot of discussion and concern about how durable it is. And in particular, if there are some policy choices here that might alleviate some of that pressure and bring some fundamental strength to what is a challenged segment of the consumer market right now. 

Ariana Salvatore: Let's talk a little bit more about tariffs. It's our economists’ view that we've mostly gotten through the tariff pass-through. Is that the sentiment that you're hearing from corporates and the clients that you're talking to? 

Michael Zezas: It is. Well, it's certainly the hope. And I guess the follow-up questions here are: once some of the temporary tariff authority that was put into place after the Supreme Court struck down the use of IEEPA, will there be a restoration of those tariff levels? And will the USMCA negotiations create higher tariffs? 

So, Ariana, what's your thoughts there? Is there any concern for companies that they're going to start needing to deal with a re-escalation of tariff costs relative to what we experienced, say, last year?  

Ariana Salvatore: Yeah, I think to answer that question, we need to dig into this under the surface a little bit and understand what types of tariffs that we're talking about. 

So, to your question on the USMCA, we see that largely as a story of continuity, right? So, the USMCA exemption has been in place since the deal was signed, right? And since Trumpimposed those Section 301 tariffs, we think that's likely to stay the case. That means the vast majority of the goods trade between the U.S., Mexico, and Canada is right now not subject to the 301 tariffs.  

Now, on the other hand, we have existing Section 232 tariffs in place on not just sectors like steel and aluminum, but a bunch of other goods, too, and we're supposed to get more of those investigations wrapped up in the next week or so. 

So, on that front, I do think there could be some potential room for escalation, but more broadly speaking, we think the direction of travel is relatively stable, if not slightly lower, because, as you mentioned, the IEEPA tariffs that were replaced by the Section 122s have to get replaced again end of July, right? 

So that Section 122 authority was a temporary authority. The president is going to have to replace that with a mix of Section 232 and 301. It's been our view that when that happens, there could be some alleviation for very specific pockets of goods that fall into really neither bucket, right? So,they're not necessarily critical for national security, and they're coming from countries that are difficult to maintain a Section 301 investigation on. 

So, it's actually very nuanced under the surface. I would say in the aggregate level, what we think is that you're going to see the tariff rate stay somewhere around 8 to 9 percent on a headline basis; if not directionally, maybe a little bit lower throughout the course of this year.  

Michael Zezas: Got it. And I think that message has been music to the ears of a lot of these companies. And I’ve been doing these meetings with our chief economist, Michael Gapen, who has said that that's contributing to what he forecasts as being a meaningfuldeceleration in inflation into the end of the year. Certainly an inflation level lower than what the aggregate Fed forecast isat the moment. 

Another question that comes up is whether or not the recent decrease in oil prices, which should feed through into lower gasoline prices, is durable. If that's something that could be counted on, because obviously these companies are thinking about it being a potential tailwind to demand going into the second half of the year. 

How do you think about that, Ariana?  

Ariana Salvatore: The MOU that the U.S. and Iran signed, I would say was a welcome development for markets. But that being said, there are a number of paths to re-escalation, in our view. Really four things to keep an eye on, kind of outstanding questions or uncertainties.  

The first is on execution risk of the MOU itself. It's very light on details. We need to see more about how exactly the Strait of Hormuz is going to reopen, if there's going to be a servicing fee, a tolling regime, et cetera. That was a red line of the United States. But again, implementation there is a big question.  

The second is on the calibration or divergence between the U.S. and Israel in terms of their objectives. We identified that early in the conflict as a potential indicator of how long this could possibly last, and I think it's equally as important in assessing how long the ceasefire or the MOU could stay in place.  

The third thing I would say we need to learn more about is the role of Congress in all of this. So, some Republican lawmakers actually pushed back against the MOU, saying it didn't go far enough to advance U.S. interests. Now Congress has a more limited role when it comes to the actual MOU implementation itself. Remember, the JCPOA, the Iran nuclear deal in 2015, didn't go through Congress either. 

But Congress can exert some more power come the fall when we start talking about defense appropriations, right? The Pentagon is asking for $1.5 trillion. [$]300 billion of that is supplemental war funding. And so, I think if you see Republicans push back, that's going to be an easy forum for them to do so.  

And the last point is on the negotiations themselves. So, the MOU is a 60-day ceasefire throughout which both parties are supposed to be discussing the nuclear question. Now, looking back at historical context here, the JCPOA took about 20 months to negotiate start to finish. This is a very compressed timeframe, and again, obviously potential risk for escalationas we see these negotiations go on the next few months.  

So, Mike, I would say, like I said before, markets are definitely seeing this as a welcome development, but that doesn't mean it's without execution risk. Across the board, our outlook actually expected a normalization of flows by the end of June, so we're kind of pulling things up by about two weeks.  

That means that the outlook basically remains intact, but with marginal upside as this is a slightly more constructive outlook. 

Michael Zezas: Got it. So net net, there's still plenty of execution risk going on, but the trend is at least towards easing of some of these policy pressures that have been impacting the consumer. And it's also been interesting that a lot of the conversations have led to questions about artificial intelligence.  

Now, at this conference last year, a lot of the discussion about artificial intelligence was around how these companies were implementing it to create new marketing opportunities, create efficiencies inside of their operations. 

This year, a lot of the discussion is actually about the macro trend around artificial intelligence, the acknowledgment of the industrial build-out around this new technology and how that is buoying investment and employment – and therefore consumption. And so, the policy concern or consideration from some of these companies is whether or not there are upcoming electoral issues, either in the midterms or in the next election cycle, that might change the dynamic around the AI industrial build-out. 

Are there signs that would show that a tougher regulatory regime? Data center construction bans that these things might take on a bipartisan flavor? And so right now, I think that's a very difficult question to answer.  

There is obviously some level of concern about if policy might change this dynamic around the AI industrial build-out that really has kind of helped the economy deal with some other external shocks from policy, namely what's going on in the Middle East and trade policy changes before that. 

Ariana Salvatore: Yeah, to that point, this question around AI pushback, especially on data center build-out, has been a big theme in the elections. Thus far, it's really been dealt with on more of a state and local level. But our view is that it's been kind of bubbling up to the national level. Efforts there are nascent, but I don't think they're going away anytime soon. 

So obviously something that we're going to watch heading into November because it matters a lot for corporates and for investors alike. Mike, maybe we'll leave it there. Thanks so much for taking the time to talk.  

Michael Zezas: And thanks for taking the time to talk to me. 

Ariana Salvatore: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen. And share Thoughts on the Market with a friend or colleague today. 

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, why the Fed could do less than expected and why that could still lead to more volatility.

It's Wednesday, June 24th at 2pm in London.

Last week saw the first meeting of the Federal Reserve under its new chair, Kevin Warsh. It didn't disappoint.

The Fed’s Summary of Economic Projections saw significantly higher inflation than the last iteration in March, and in turn, a much stronger case to raise interest rates, perhaps multiple times. The Fed's statement, which laid out its views around the economy and its reasons for action, was changed dramatically – and also significantly shortened.

We don't think the Fed will ultimately follow through on the interest rate rises that were flagged in this meeting and will choose instead to remain on hold this year. But we think this scenario of them staying on hold can still lead to more volatility.

I'll try to address each side of this apparent contradiction.

First, the Fed is clearly worried about inflation, which has been elevated for a considerable period of time. But working through the numbers, Morgan Stanley economists forecast lower inflation over the rest of this year than the Fed now expects. And so, while we think it would be entirely reasonable for the Fed to expect to raise interest rates based on the high inflation that they have penciled in, we think they could reach a different conclusion if our lower estimates are ultimately correct.

Supporting our case, at least in our view, is that energy prices have fallen significantly in recent weeks since some of these Fed forecasts were set, as markets have moved to believe not only would existing oil production resume in the Persian Gulf, but Iran could increase exports materially under its new agreement with the United States.

That would greatly reduce a source of underlying inflationary pressure in the U.S., Europe, and Asia. With inflation set to come in lower than feared, we think the Fed's most natural option will be to remain on hold this year rather than raise rates.

But if the Fed's not doing anything, how exactly is that going to drive volatility?

Our answer to that question lies in another thing that it's not going to be doing – providing as much information about where it thinks monetary policy is going next. Indeed, since the financial crisis, the Fed often went out of its way to give so-called forward guidance and significant detail about when and how they may change policy in the future.

Proponents saw this as a way to avoid surprises and smooth the transmission of this policy, but critics saw it as limiting and potentially giving markets a false sense of certainty. The new Fed chair, Kevin Warsh, is one of these critics and has promised to give a lot less forward guidance. That lack of handholding by the Fed about what they might do next is a big change.

Coupled with the potential for a smaller Fed balance sheet and big questions around the path of inflation and the impact of AI and productivity, every data point now has more potential to shift the market's thinking. My strategy colleagues think that this will lead to higher volatility in two-year interest rates, as well as more volatility in currencies.

I'd also note that here in the UK, this paradox is not nearly as puzzling. Here, the Bank of England's target rate has been the same level since mid-December.

But that hasn't stopped the UK two-year bond yield from trading in an over 100 basis point range.

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.

James Egan: Welcome to Thoughts on the Market. I'm Jim Egan, Morgan Stanley's U.S. Housing Strategist and Co-Head of Securitized Products Strategy.

Sarah Wolfe: And I'm Sarah Wolfe, Senior Economist and Strategist within Morgan Stanley Wealth Management.

James Egan: And today, why first-time homebuyers are facing a tougher path to ownership.

It's Tuesday, June 23rd at 10am in New York.

Buying a first-time home has always been a big step, but for a growing number of first-time buyers today, the goal can really seem insurmountable.

Mortgage rates might be down from where they were in the second half of 2023, but they're significantly higher than they were for the several years before that. Monthly payments have roughly doubled for a median-priced home. And my colleague Jay Bacow and I have talked several times on this podcast about how many homeowners feel like they're locked into those lower rates.

And they're staying put because they just don't want to give up a two or three-handle mortgage rate for something that has a six in front of it. But Sarah, as we know, this is bigger than just first-time buyers. Now, they often start the housing transaction chain, and when they can't buy, current owners may not be able to sell and trade up.

That slows turnover across the market, and it also reduces activity tied to housing – from mortgages and renovations to moving and furniture. And it can keep would-be buyers renting for longer, which adds pressure to rental demand.

So how do you see this situation? Is this just another affordability squeeze, or has the housing market reset to a higher barrier to entry?

Sarah Wolfe: I do think that we're on the upper bound of affordability pressures. This is about as bad as it's going to get. But as we discussed in our recent publication of The Economy Explained, unfortunately, we do think that the housing market is resetting at a structurally higher barrier to entry. There's a lot of reasons for that.

The first is higher interest rates. Yes, mortgage rates are sitting around 6.5 percent, and they should come down from here, but maybe not better than 5.5 percent, right, in an optimistic scenario. The second is demographic pressures. Remember, we have this tremendous aging population of baby boomers. All of their children are now entering their prime home-buying years, so there's a lot of demand for ownership.

The third and fourth ones are land regulation and permitting, which is at the state and local level, really hard to change. And the last one is climate risk. It's just raising insurance pricing and making it much more difficult to buy a home.

So overall, we see a world where, yes, mortgage rates come down a bit, improve affordability marginally, but we think neutral and other interest rates at the longer end of the curve are going to be higher than the post-financial crisis period. And what we're going to see is that those forces are going to widen the divide between who can own a home and who cannot. And who gains from that wealth accumulation and who does not.

James Egan: Right. So now, you mentioned where mortgage rates are today, above that 6 percent rate. Rates did briefly, in February, we got below 6 percent before they bounced back up here. Why did that short-lived relief matter so much?

Sarah Wolfe: I think that short-lived relief showed us that moves in the mortgage rate make a difference, but things are so unaffordable that it didn't make that much of a difference.

So, the dip below 6 percent was very exciting. It happened this past February. It was the first time that mortgage rates fell below 6 percent since 2022, and we saw a few things happen. First, it lowered the monthly payment for first-time homebuyers from about two point two thousand dollars a month to one point nine thousand.

So makes a bit of a difference. And it lowered the share of income that goes towards monthly mortgage payments from about 26 percent of income to 22 percent, from peak to trough. So, that is a notable improvement. But what we saw in the new home sales data and the existing home sales data, that it did not drive people back into the housing market.

I want to turn it back to you though, Jim, because you've actually done a lot of interesting work on this. And how this change in mortgage rates has changed the monthly cost that people have to pay for a median-priced home. Can you tell us a little bit more?

James Egan: Sure. So, we talk about the lock-in effect a lot, and it's kind of easy to point to. Well, there are a lot of people with mortgage rates that are around 3 percent or 3.5 percent, and the prevailing rate's at 6 percent, and that's a lot higher, so they're locked in.

But when we look at the actual numbers in terms of what we're asking a homeowner to do – to list their home for sale and move to another home today, pay off that existing mortgage, take out a new one. When you take into account how much higher home prices are today?

You bought a home in 2016, for instance, right? Let's assume you refinanced in 2020 or 2021 if you still live there, right? Most homeowners did. So, you've actually taken your monthly payment, and it is lower today than it was when you bought your home in 2016. If we assume that your income has risen alongside just median household income over that time period, your monthly payment as a share of your income today is probably sub 8 percent.

If you bought over the past three years, your monthly payment is a share of your income. You mentioned some numbers earlier. It's low to mid 20 perecnt. From a dollar amount perspective, if you were to pay off that 2016 mortgage, as an example, and take out one today, your payment is probably [$]13[00] or $1400 higher. It's like a 200 percent increase. That's very difficult economically for a lot of households, and that's the kind of physical manifestation of that lock-in effect.

Now, Sarah, given this significant change in housing math, what does that mean for who is actually able to buy in this market?

Sarah Wolfe: It's making who's able to buy into the market a lot more selective. So, what we're seeing is that first-time home buyers today are actually not meaningfully older. They're still about 36 years old, but they are a much more selective group financially. The Federal Reserve Bank of New York put out a great analysis on this recently, and they basically found that the first-time home buyer profile today is taking out a mortgage that's nearly $350,000, compared to $240,000 in 2019 and $200,000, a decade ago. So, significant increase in mortgage balances.

At the same time, credit standards have tightened significantly, so that average credit score to get a mortgage has risen quite a bit over the last 5 to 10 years. And what this is doing is it's shifting who can buy and also where they can buy. So, we're seeing higher-quality home buyers moving to lower-income zip codes. So, buying cheaper homes in lower-income metro areas, and so it's wealthier buyers in lower-income areas.

And that's the really big shift that we're seeing. It's a demand resorting story. And what we're also seeing, and we hear this a lot when we talk to our financial advisors and their clients, is that family is increasingly helping their other family members put that down payment down; in particular, parents helping their children buy that first home.

So, we're seeing that first-time buyers may be feeling this pressure, right, when it comes to rates. How much of this affordability issue, though, is being driven by the locked-in effect specifically?

James Egan: So, look, it's clearly playing a role. We just talked about some of the math behind that. But then when you look at what that means on a nationwide basis when it comes to inventory, when it comes to so many other aspects of this, that homeowner who's unwilling to give up that lower mortgage rate, that lower payment, right, their homes are off the market.

Existing inventories for sale, they've picked up from historic lows in 2023, but they're still very, very low on a long-run basis. The fewer homes there are for sale, the more upward pressure or the absence of downward pressure that's going to put on home prices, right?

We saw affordability plummet in 2022 and 2023 when rates backed up. We saw existing home sales really, really come down as a result. But home prices remained at record highs. They continued to set new record highs. For home prices to actually come down, right, you need people who are willing to sell at lower home prices.

Sarah, you just mentioned that lending standards themselves remain incredibly tight.

Sarah Wolfe: Mm-hmm.

James Egan: Those forced sales, those tend to be distressed transactions. We don't see that distress in the market providing the inventory and the motivated inventory to lead to softer home prices. So, it's really that lack of inventory which we think is in large part driven by the lock-in effect that's kept home prices. And as a result, that piece of the affordability equation kind of stuck at these higher levels.

Sarah Wolfe: I mean, it's really this vicious cycle, the locked-in effect making it difficult for entry-level buyers to get into the market – and then fewer existing homeowners sell or trade up or relocate. So, on and on it goes.

Are there broader implications of this freeze?

James Egan: Right. So, we just talked about what that means from an inventory perspective. And then if you think about affordability remaining challenged, lending standards themselves remaining tight, inventory remaining as low as it is, you could argue that we're at one of the more difficult times that we've seen for renters to exit rentership and step into homeownership.

Now, there's a lot of different things that drive rent growth, and the fact that you have a stuck renter is just one of them. The other side of that equation can be the supply of rental units, right? So that's just a piece of the equation.

But those are some of the externalities that we think about when it comes to how the tightness of the housing market – what the lock-in effect and what affordability is doing there. But outside of the housing market, Sarah, the wider economy, like how do these housing costs play a role there?

Sarah Wolfe: Massive effect. Some of the work that we've done shows that housing affordability is the number one driver pushing down fertility rates in America. The number one driver. Above childcare costs, above finding a partner, finding a good job. It's housing affordability. So, you could see how that could pretty significantly ripple through the broader economy.

But there's other components, right? So, as we discussed earlier, it's driving migration from unaffordable areas to more affordable regions. That has significant implications. And then putting my consumer economist hat on, as we discussed earlier in the podcast, when people buy a home, they tie themselves to that home. They spend money on couches, on beds, on TVs, right? Durable goods. And if we're going to have more people as renters for longer, that's going to expand the services economy at the expense of the goods economy.

All right. Let's take a step back and think about where this is all going. It hasn't been a very optimistic conversation. Jim, what is the outlook for affordability in your view? Do we get anywhere back to the post-financial crisis period or even the pre-financial crisis period?

James Egan: When it comes to the outlook for mortgage rates, the outlook for affordability, the outlook for the U.S. housing market – look, we just, throughout Morgan Stanley Research and Strategy, published our 2026 major outlook. From now through the end of 2027, we don't have conventional mortgage rates getting below 6 percent.

We do have affordability improving on the margins. We have income growth exceeding home price appreciation that makes it a little bit better, but that doesn't get us back to the post-GFC affordability era, which was very, very affordable. Looking back over the past several decades, it gets us closer to where we were pre-GFC, not all the way back there.

But when we think about how that ripples through the housing market and how we think about that evolving from here, look, we do think that the state of mortgage credit availability means there will be a lack of distress. We think that while affordability itself may be challenged and inventories may be low, there is some level of housing activity that has to occur regardless of where mortgage rates are or affordability is.

We think we found that level. We think there's support for home sales at these current levels, and that combination of support for home sales, lack of inventory, means that home prices, very little room for them to grow from here. But we think they're going to be pretty supported.

So, from a housing market perspective, at a ten-thousand-foot view, we're calling it 1-2 percent growth in sales, in home prices, well-supported. But the affordability outlook that we've outlined throughout this podcast – challenged to see a lot of acceleration.

Now, when we pull it back to the first-time home buyer, based on our conversation, it seems that the key question is becoming less about when to buy, more about who can still afford to enter the market.

But Sarah, it's really been great talking with you about the housing market today.

Sarah Wolfe: It was great speaking with you, Jim.

James Egan: 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. 

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 my views on the New Fed Chair and how to interpret his FOMC meeting last week.

It's Monday, June 22nd at 11:30 am in New York. 

So, let’s get after it.

I want to spend today on what I think was one of the more important market events of the year so far. Kevin Warsh’s first Fed meeting as the Chair. Specifically, he is trying to fortify credibility at a very delicate moment. The economy is stronger than many expected. Inflation is still running above target. And markets have become  accustomed to central banks telling them exactly what to think.

Back in February, when Warsh was nominated, I argued that this was the right choice if the goal was to lift market credibility. At that time, precious metals were rising parabolically. To me that was a bad signal that markets were questioning whether policy makers could really run the economy hot without creating a disorderly move in the dollar or a broader inflation problem.

Since Warsh’s nomination, the S&P 500-to-gold ratio is up close to 40 percent, and I view that as a powerful vote of confidence from the markets. It suggests investors are giving Warsh the benefit of the doubt – that he can shake up the Fed, reduce reliance on the balance sheet as a policy tool, and solidify discipline that gives the administration some breathing room.

But here’s the catch. Enhancing credibility is not always painless. In fact, credibility must be earned by doing something markets don’t immediately like.

And last week had some of that flavor. Stocks weakened, the yield curve bear-flattened, the dollar strengthened, and precious metals sold off. From my perspective, that is not a failed first meeting. That is a good and necessary first step. 

What stood out to me most was Warsh’s emphasis on the inflation mandate. He made it very clear that the Fed’s primary responsibility is price stability – not managing every wiggle in the labor market, not smoothing every risk asset drawdown, and not hand-holding investors through every data point. And frankly, after five years of missing the inflation target, that message was overdue.

The stronger economy and improving private payroll data give the Fed room to lean into that message. I don’t think this means the Fed is about to hike rates immediately, or even necessarily this year. But it does mean the reaction function has changed, and markets do not like uncertainty around the Fed path.

The other major shift was communication. Warsh appears to be moving away from excessive forward guidance, and I think that’s a very healthy development. For years, I’ve argued that the Fed became too influential in shaping not only market behavior, but also how investors interpreted the data.

When markets are only trying to guess what the Fed will say next, the Fed loses the value of market prices as an independent signal. That’s backwards. Markets should be reacting to incoming information, and the Fed should be learning from those reactions – not vice versa.

A little less Fed hand-holding may be uncomfortable, but ironically it is necessary to get to a more stable place. Investors may not like it in the short term, but the system works better when market prices are less impeded by policy manipulation. The wisdom of crowds is often better than the wisdom of committees.

The near-term risk for equities is not rate hikes or even uncertainty. It’s liquidity. Balance sheet support has already started to fade. The Reserve Management Program is down roughly 75 percent from its peak, Treasury buybacks have been reduced by 50 percent. And at the same time lending growth is accelerating because the real economy is using more capital. That combination means liquidity is tightening, and our work suggests that could remain a headwind for stocks into July.

Bottom line, the market may test Warsh’s resolve. That’s what markets do. The key question is whether the Fed tolerates some short-term pain in order to strengthen longer-term credibility. My guess is that it tries to do exactly that, until funding markets, credit markets, or bond volatility forces its hand to add more liquidity and loosen financial conditions again. That argues for choppy and even corrective price action in equity markets in the near term until the earnings led bull market has its next leg higher. 

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!

Carolyn Campbell: Welcome to Thoughts on the Market. I'm Carolyn Campbell, Morgan Stanley's Asset-Backed Securities Strategist.

Vishwas Patkar: And I'm Vishwas Patkar, Morgan Stanley's Head of U.S. Corporate Credit Strategy.

Carolyn Campbell: Today, how fixed income markets are helping fund the AI build-out.

It's Thursday, June 18th, at 10am in New York.

Let's get right into it, Vishwas. We've both come on this podcast before to talk about how credit markets are financing the AI build-out. And over the last ten months, I think it's fair to say that things are faster, broader, deeper than we perhaps expected initially.

This investment now spans investment-grade corporate bonds, high yield loans, and a range of securitized products. From your seat in corporate credit, why does AI infrastructure matter so much, to investors right now?

Vishwas Patkar: This is a big talking point in our client discussions. it's also telling that less than a year ago, we wrote about this topic for the first time, identifying a $1.5 trillion financing gap that credit markets could help bridge. At that time, data center debt was not something that investors were really focused on. Yet less than 12 months forward, this, I think, is the number one theme dominating both your and my market.

And why it's important, I would say, is across, three key vectors. First, just the scale. So, if you look at overall AI-related debt issuance so far this year, we're close to $250 billion. For the balance of the year, we expect that number to double, so about $500 billion of total AI debt financing for 2026.

Increasingly the second vector, I think, is around the complexity of deals. So initially, while AI financing was dominated by vanilla investment-grade corporate bond deals, we are now seeing that broaden out into project finance style deals in the high-yield market. We have seen an uptick in chip financing across the different credit silos.

And that's important for investors, as identifying value across these different options does require deep credit expertise. And third, as this investment cycle rolls along, it's also important to be cognizant of risks that are building. Not just from a very broad top-down sense around the demand for compute. But also, what are some of the nuances in these different structures – whether it is in data center construction or is in chip financing that investors will need to monitor.

So, it's across these three themes that we think data center debt financing is gaining importance.

Carolyn Campbell: Now, the underlying demand for AI infrastructure is very strong. That doesn't necessarily mean that every bond tied to this theme is automatically going to be attractive. And as you mentioned, [$]500 billion of supply for the year; a large amount of complexity between those structures.

How should credit investors think about the various risks within these different structures?

Vishwas Patkar: So, in investment grade, the story is a bit simpler. So, we have had unsecured hyperscaler bond issuance. We have had issuance from semiconductor names. And then we've had some, what we call, private style data center deals.

But the vast majority still comes from hyperscaler investment grade rated bonds. For this market, our focus is less on fundamentals because fundamentals are very strong. And then hyperscaler are some of the more most creditworthy companies that we've seen in the history of the market. Our emphasis more is on just the quantum of supply.

So, year to date, we have had north of [$]100 billion of hyperscaler debt in the dollar market. We've had north of [$]50 billion being issued in other currencies. If you look at the overall investment grade market, supply is up almost 25 percent versus last year. That's consistent with our call for a year of record issuance this year.

And increasingly, if you look forward and then map these issuance numbers to our CapEx estimates, where we could very much be on track for another record to be hit next year. So, the issue of the investment grade market is not around the fundamentals of the companies or these deals. It's more about the quantum of supply, which we think eventually will test the demand capacity of this market.

And our base case for the investment grade space is similar to 1997-1998, where credit was starting to finance the business cycle, spreads widened modestly, and IG could underperform other risk assets. But over a longer time horizon, spreads still look historically very low.

Carolyn Campbell: Now, what about further down the credit spectrum into the non-investment grade portion? What about that part of the issuance spectrum for AI?

Vishwas Patkar: Yeah. So, what we're seeing in the sub-investment grade space, especially in high yield, is very different. There, the growth in data center financing has happened around project finance deals for data center construction. In many cases, these have come from crypto miner companies that effectively provide what we call speed to power solutions.

We've also had some unsecured issuance from neo clouds, although that's relatively small. But this sector has expanded from effectively zero billion around the fall of last year to about [$]40 billion this year. We expect to see another [$]20 billion of issuance by the end of 2026.

And the way they fit into this whole ecosystem is – these project finance deals we think are interesting diversifiers for regular credit investors. They do come with construction risks, especially initially for the first two to three years till the data center is up and running.

But on the flip side, you do get a lot of structural enhancements and creditor protections, which is something you don't see in the vast majority of the high yield market. So, I think a key shift in the framework that investors have to do for these deals is focus on asset-level risk, which is again, I think a big divergence from how the vast majority of the credit market trades, which is largely unsecured corporate-level risk that investors have been used to.

Carolyn Campbell: All right. You just brought up construction risks. Do you think that's the biggest risk facing the high-yield investors today?

Vishwas Patkar: Yes. I think for the high-yield deals in particular, construction risk is the dominant vector that investors are focused on. Because it's important to remember a lot of the debt issuers are first-time borrowers. And they have a limited track record of construction in the past. So, you could see potential delays and things like cost overruns that can affect sentiment on the sector. Or at least on specific bond deals.

And this will be especially important to monitor going into the second half of the year, as we have some of the first delivery dates coming up for the deals in the sector that were announced last year. That being said, you know, even though some of the tenants have termination rights, if delays go beyond 180 days, our view is that given the structural power constraints, these termination rights are unlikely to be exercised.

So, while construction milestones can affect sentiment and short-term valuations, we would look at any blips as buying opportunities in the space.

Alright. So Carolyn, let me throw this back to you. So, construction risk clearly very important for the corporate credit market, especially for high yield investors. Is that something ABS investors or commercial mortgage-backed investors care about? And in what other ways are these asset classes different from corporate credit?

Carolyn Campbell: Okay. So first and foremost, the biggest difference is that in securitized products, the assets are stabilized, they're cash flowing, they're online. We don't have that first vector of construction risk in our space.

The second biggest difference is while in high yield and IG we've mostly seen – or we've entirely seen single campus, single tenant data centers; in securitization issuance, it's mostly multi-tenant, multi-asset, multi-regional, deals that have come to market.

And so, it's a very different risk profile. And as a consequence, investors are focused not just on who is behind this one single lease and what are the termination rates, but what does the landscape look like in general for compute? How does that affect vacancy and churn rates?

And then lastly, the issuers themselves are different. You talked about the crypto companies. You get a little bit more of the data center, data center construction. Whereas in securitized products, these are companies that have been around for 5, 10, 20 years. They're accustomed to managing a fleet of assets, dozens if not hundreds of tenants. They've got a little bit more of a track record for the most part, than the types of issuers we're seeing in the credit market.

Vishwas Patkar: Your market post-construction, more leverage to the thematic of demand for compute – and how the AI investment cycle is playing out. Versus the corporate credit market, which is largely exposed to construction risks as the data centers get built out. So that's a very important difference.

That being said, one theme that ties both our markets are just healthy fundamentals, but at the same time heavy supply. So, I talked about how we see that affecting our view on investment grade. How is that same tension showing up in securitized products?

Carolyn Campbell: So exactly as you said, the fundamental story is very strong. We don't see deterioration in performance of the assets either that has happened yet or that we expect to come in the near term. So, it really is a technically driven story. Supply in this space, we're forecasting at around [$]30 billion for year, so smaller in magnitude, but relatively large for the market. That has very elevated supply expectations, and so as a consequence, we've seen spreads back up across the space.

We do think that some of the cross-asset comparisons will help keep spreads contained from here. And so, we do see value in securitized credit across the stack for the rest of the year.

Vishwas Patkar: All right. So, you brought up the cross-asset comparison. And so, we've discussed the fundamental differences in our market, how much issuance we expect. But, you know, just to end on a commercial note – if we are advising investors on where is the best relative value and what's the framework for comparing opportunities, how do you think about that? Where do we see value across the ecosystem?

Carolyn Campbell: I mean, I think this is probably the biggest question that investors that are looking at this space are facing today. And there's... If we're thinking just about the data center backed assets, I think there are two main things.

One is the asset itself, where we're focused on things like the geography, the tenant, the interconnectivity, the flexibility of this asset for multiple uses. And then the second is on the structure of the deal itself. How much leverage is being raised against the asset? How cash flowing is it?

And then of course, the duration as well. But it's a great question. And because of the complexity of this space, it can be really hard to compare one to the other.

Vishwas Patkar: Yeah. And, at the risk of providing a non-answer, I very much think investors are in the process of coming up with a framework because these deals have come very quickly. This is a new sector for most credit investors to analyze. But I think what we can say with a high degree of certainty is this is blurring the lines between corporate credit and securitized credit.

So, you know, this opens up more avenues for us to collaborate on this topic going forward.

Carolyn Campbell: All right. That's a great place for us to leave it today with that nice cross-collaboration. Vishwas, thank you so much for taking the time to talk.

Vishwas Patkar: Great speaking with you, Caroline.

Carolyn Campbell: 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.

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Morgan Stanley's U.S. Public Policy Strategist. 

Today, I'll be talking about chipflation and what policy tools can or can't be used to address the memory bottleneck.

It's Wednesday, June 17th, at 10am in New York.

Last week, you heard my colleague Shawn Kim talk about chipflation and the surging cost of memory. Today, I'll get into what policymakers can and can't do about it.

As listeners will know, memory chips are becoming an increasingly strategic resource because AI infrastructure depends on them. And when a resource becomes strategic, governments tend to get involved. The challenge is that policy can help at the margin but probably can't solve the problem quickly.

There are three reasons for that. First, many U.S. policy tools all take time. Direct subsidies, tax credits, procurement guarantees, and faster permitting are all things that can support new fabrication plants, packaging facilities, and testing capacity. But memory supply is not going to appear overnight. This new capacity has to be built, equipped, qualified, and ramped – and that process can take years.

Second, China may be able to add some supply in conventional memory markets, but not enough to close the broader gap created by AI demand. That's especially true for high bandwidth memory, the more strategic type of memory for frontier AI systems. Supply there still remains highly concentrated, technically complex, and difficult to scale.

Third, our base case is that U.S. policy remains more restrictive, not less. We don't expect a broad loosening of export controls given the strategic imperative of this technology. Instead, we think policymakers are likely to continue to prioritize supply chain resilience, trusted capacity, and geopolitical de-risking over the near-term price relief.

Now, from a policy perspective, we think it's important to split memory into two categories. The first is AI strategic memory, high bandwidth and advanced DRAM. That's the memory that enables the most advanced AI systems. And for that reason, we think policy here is likely to focus on protecting strategic capability, limiting geopolitical vulnerability, and expanding trusted supply across the U.S. and its allied countries.

The second category is commodity or legacy memory. That's the memory that you can think of as being used in autos, industrial systems, consumer electronics, and other non-frontier applications. Now here, we think policymakers could consider more flexible options, like differentiated licensing or targeted support for critical sectors. But even then, the limits are practical: permitting, workforce, tools, qualification cycles, and production lead times.

China is the other major variable. Chinese producers are expanding in conventional DRAM and NAND. In some consumer-grade applications, that supply could act as a relief valve for buyers that have been crowded out by AI-related demand.

But still, there are limits. Chinese producers face yield and technology gaps, even if policy is supportive. And China alone will not solve the high-bandwidth memory bottleneck. The regulatory backdrop reinforces that point.

Some Chinese memory producers remain subject to U.S. restrictions or even heightened scrutiny. Access to the most advanced lithography tools also remains a hard ceiling. Without that access, scaling leading-edge memory becomes much more difficult.

So, the bottom line is this: policy can mitigate chipflation, but it's unlikely to end it in the near term. For AI strategic memory, policymakers are more likely to defend access, deepen allied coordination, and encourage trusted capacity than to loosen restrictions. For commodity memory, there may be room for some targeted flexibility.

But of course, geopolitics and timing still matter.

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.

Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.

Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.

Matthew Hornbach: Today, markets are watching the Fed's next move. Are rate cuts delayed or could hikes possibly be back on the table?

It's Tuesday, June 16th at 8:30am in New York.

So, Mike, the FOMC meeting today and tomorrow is likely more about reading the signal rather than announcing a rate change. Markets will focus on inflation forecasts, the unemployment rate, and the growth outlook. But, of course, this will also be the first meeting after Powell ended his term as Fed chair in May. All eyes will be on Warsh.

So, what are your thoughts before the press conference?

Michael Gapen: A lot of thoughts, actually, before the press conference. I do think it's basically a foregone conclusion that the Fed will be changing its easing bias in favor of more neutral language. Seems clear the committee wants to do that, probably wanted to do that at the last meeting. And it does fit, I think, Warsh's preference for less communication, less guidance from the Fed. So, I do think that's largely a foregone conclusion, although obviously we need to see whether that happens and whether there are dissents.

I think, as you noted, the forecasts will be important, but I think what's really important from my perspective – more than the modal outlook or the baseline that participants have – is their assessment of the balance of risks around the dual mandate. And I say that because obviously a year ago, the Fed eased policy when it felt that there were downside risks to the labor market that outweighed upside risk to inflation.

This year, that seems to have flipped, where the labor market appears to have stabilized, labor demand has picked up a little bit, and it is inflation that looks persistent. So, if the Fed cut last year on downside risk to the labor market, I think the concern for markets is – maybe they hike in 2027 or later this year based on a changing balance of risks in the direction of firmer inflation.

So, for me, that's really kind of key. In addition to what they're saying about growth inflation in the labor market, what is their assessment of the distribution of risks around that modal forecast?

Matthew Hornbach: There's definitely going to be a lot of investor interest in the press conference itself. What exactly may result from the opening statement. Presumably, Chair Warsh will give an opening statement.

How are you thinking about the back and forth between Warsh and the reporters that are asking questions? Are there certain questions that you would anticipate him getting asked, and how do you think he might respond?

Michael Gapen: Well, I think certainly that if we are correct, and I think markets are correct, that they do change forward guidance in the statement to more neutral bias, that certainly opens up the possibility that the Fed will be hiking.

So, the obvious first question is – is this the first step in the direction of hiking? What would get you to raise rates? Should investors be thinking about that? Is that the course of travel here?

Now Warsh may not want to answer that if he, kind of, is consistent in the view of saying the Fed shouldn't give a lot of forward guidance. So maybe get some popcorn, Matt. It could be a situation where he gets asked questions about the future path of monetary policy, and maybe he decides, ‘I don't want to take that up right now. The data will tell us, and we'll do what's necessary.’

And second, I think as you're noting and getting to about the structure of the press conference and what he might say is; past Federal Reserve chairs, let's say from Bernanke on, have found the press conference – the press conference statement, the questions, the format, the venue – as a way to control the narrative. And I think what will be interesting is to see whether Warsh has the same design.

The risk, of course, is perhaps that he doesn't and pulls back the amount of communication guidance that he wants to give. And then we'll see what fills that vacuum. What narrative fills that vacuum? And is he okay with that?

So, it may be that there's a new sheriff in town, and he chooses that there's some questions I'll answer, others I won't. And so, I do think that interaction with the press corps will be interesting. Hard to know exactly where it's going to come down until we see it in real time.

Matthew Hornbach: During Chair Warsh's testimony to Congress, he alluded to the idea that potentially the Fed may not do a press conference at every meeting going forward. How are you thinking about that in the context of this idea that if you leave a void, somebody else may fill it?

Michael Gapen: Obviously, the Fed used to not have press conferences at all, and then they moved to having them quarterly or four times a year. And they found that that was a little suboptimal because it became harder to make decisions and changes in the off-press conference meetings [be]cause they didn't have a venue to explain what they were doing and what they were thinking. So, they migrated to eight meetings.

So, I think it’s kind of twofold. Yes, it would mean that they speak less and therefore maybe their word doesn't carry as much weight. Or there's longer gaps for other narratives to come in. Like, do we lose forward guidance from the Fed, and is that replaced by forward guidance from the Treasury, for example? How do markets weigh those signals?

And but then also I would say would that ultimately box in the Fed to only make decisions on quarterly meetings rather than eight times a year? Would the chair, for example… Let's assume that at some point in the future, the Fed decides it does want to raise interest rates. Historically, the Fed does not surprise on rate hikes. It's perfectly willing to surprise on rate cuts, when it comes to that.

But if there is a world where the Fed does decide, ‘Hey, we do need to raise rates, but we don't have a press conference to explain our view.’ Would they take the decision at that meeting or would they wait? So, does it reduce their opportunity set?

Matthew Hornbach: I think this issue would certainly be an interesting one for investors to think about, which is why I'm bringing it up with you. Because to the extent that the plan going forward is to hold a press conference only once a quarter, as you alluded to – investors may interpret that as the Fed not being willing to raise rates at every single meeting going forward, which would certainly affect the pricing in the very short end of the interest rate market.

But more broadly, on communication strategy, do you think that that would be something that Chair Warsh would take upon himself? Or do you think it would be more likely for him to organize a committee to discuss communications?

Michael Gapen: I think the right thing to do… Again, our job is to say what we think he will do – not what he should do. But I'm going to answer this one in the question of what I think he should do.

I do think he should create, say, a subcommittee on communication and reevaluate what the Fed does. [Be]ause as chair, he has almost unilateral control over communications. But obviously you work within a committee, the committee operates with consensus. So, I do think it would make sense to, kind of, work through a committee and try and get as much consensus as you can.

And, here, what I would hope where they, kind of, ultimately land is – Warsh has been critical in the past of the Fed's forecast, the forecast being incorrect, providing maybe incorrect forward guidance. And I would argue that it's not really the sole job of the SEPs – the Summary of Economic Projections – to provide a forecast.

But what you get out of them is more than just a forecast. You get a hint of the committee's reaction function. That if data are above or below certain thresholds on growth, inflation, and unemployment, then expect our policy path to look different.

So, is there a way that he could review the communication strategy, tamp down the elements that are, say, a pure forecast, but keep the items that communicate to the market what a reaction function is? That's where I think a review committee could be useful in reforming or revamping what they do.

Matthew Hornbach: Absolutely. In terms of the things that are really the purview of the committee, can you walk us through what those are in the context of Chair Warsh coming in having to ultimately make decisions on monetary policy – both interest rate policy as well as balance sheet policy? What are the purview of the committee itself?

Michael Gapen: Yeah. The two main tools of monetary policy, in this case interest rate policy and balance sheet policy, is both of those are under the purview of the Federal Open Market Committee. So, to change interest rates, to reduce the size of the balance sheet, to change the rollover rate, to buy assets, to sell assets – all of that is an FOMC decision. There are subcomponents of that world where the board can make certain decisions.

Now, the Fed views communication broadly as a tool, but in this case, communication is not an FOMC decision. The evolution of the communication strategy grew kind of organically out of '08, '09. Chairman Bernanke kind of started that process. It continued through, through Yellen. And that's been more of what I'll call a consensus operation, but there's no formal vote. So, the chair has a lot of control over how the Fed communicates, how often it communicates. But the policy decisions are from the FOMC.

Matthew Hornbach: I'm often asked about this idea that less communication may end up affecting the bond market in certain ways. And typically, the concern amongst investors is that with less communication from the Fed – whether it be the chair or whether it be from the committee as a whole through the Summary of Economic Projections and its interest rate dot plot – there's concern amongst investors that removing that type of guidance would raise bond yields, essentially through the term premium component of the term structure.

And the way that we think about it is probably in this environment where interest rates have already been inching higher, and investors are concerned about the hiking cycle that may eventuate, it probably would raise term premia initially.

But from a more medium-term perspective, the way I think about it is that, you know, term premia can be positive, it can also be negative. And if we have less forward guidance, I would generally expect that term premium component to be more volatile than it has been in the past. Not necessarily just in the upward direction. But it could also be in the downward direction if the macro environment ends up changing in some way.

Michael Gapen: Yeah, I could see in the current context, the inflation surprises have been to the upside, so less communication may mean more term premium. But we went through almost a decade after '08, '09, where most of those surprises were to the downside. So, you can imagine that it could be a symmetric story rather than an asymmetric one.

Matthew Hornbach: Absolutely. Well, thanks Mike. That's very interesting, and thanks for taking the time to talk ahead of this upcoming FOMC meeting. I'm looking forward to our next discussion around the following FOMC meeting.

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.

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. 

Today: Possible opportunities to look out for in the equity correction over the past few weeks.

It's Monday, June 15th at 1:30pm in New York.  

So, let’s get after it.

Sometimes the market changes direction or leadership not because the story has broken. Instead, it just needs to digest how quickly the story has evolved.

Over the past few weeks, equities had their biggest correction since the important bottom in March. I don’t view this as the end of the bull market though. I view it as a pause after an unsustainable acceleration in two key factors driving stocks higher this year: earnings revisions and liquidity.

In my view, the market wasn’t questioning the earnings bull market as much as it is questioning the speed at which earnings have been revised higher. These revisions have been particularly strong in leading sectors like semiconductors, which also corrected the most.

When earnings revisions breadth gets north of 70 percent, it’s reasonable to ask whether the second derivative is about to slow. That doesn’t mean earnings estimates are going down. Instead, it means the rate of improvement is probably peaking, and in markets, it’s always about the second derivative in growth. Such decelerations create corrections, not crashes.

That distinction is important. Earnings revisions breadth may pause or roll over from extreme levels, but the next twelve-month earnings estimates are still likely to rise as we move through the year and roll forward toward 2027 numbers. That’s why I remain convicted in our year-end S&P 500 target of 8000, even if the next few weeks remain choppy. Markets can correct while the earnings story remains intact. In fact, that’s often exactly how healthy bull markets reset.

The second part of this adjustment is liquidity. Earlier this year, liquidity was flowing strongly through the system as a means of regaining financial stability. Between the Fed’s Reserve Management Program, reduced bank capital requirements, and Treasury buybacks, more than half a trillion dollars of liquidity was effectively added.

But that pace is now slowing. The Reserve Management Program has fallen from roughly $40 billion a month in April to about $10 billion today; while Treasury buybacks have also slowed from the March and April highs. This rate of change slowdown matters at the margin, especially for crowded momentum trades that have been supported by abundant liquidity.

Take note of these corrections in momentum because they often bring a change in leadership and that’s the real opportunity. We’ve already seen a few leadership rotations this year – from precious and base metals, to rare earths, to energy and finally to semiconductors. Now I think the market may be ready to broaden again, much like it did late last year and in the first six weeks of this year.

Importantly, our preferred sectors of Consumer Discretionary Goods, Transports, and Regional Banks are all up more than 10 percent over the past month while the S&P 500 was down modestly. Yet, sentiment toward these areas is still muted. That’s exactly the kind of setup I like: improving fundamentals, better relative price action, and investors still skeptical.

Another piece that should help this broadening. Macro variables that have been holding lower quality cyclicals back include interest rates, crude, and the dollar – they may all now be peaking. That fits nicely with the announced deal to reopen the Straits of Hormuz last night. If oil pressure eases and the bond market walks back the Fed hike it is currently pricing, interest rate sensitive groups should have room to extend their recent outperformance.

Finally this week’s Fed meeting matters too because it’s Kevin Warsh’s first as the Chair. I’ll be watching less for the rate decision itself and more for how the bond market reacts. The key markers are still the same for me: 4.5 percent on the 10-year, while bond volatility and funding market stress need to remain calm. If the Iran deal holds, I think the Fed can lean less hawkish on rates – but I don’t expect a proactive pivot to add more liquidity.

Bottom line, markets have been digesting the peak rate of change in growth acceleration and liquidity. But that’s far from the end of the cycle. The earnings driven bull market remains intact, but the leadership may be changing. As usual, the best opportunities may be hiding in the places investors don’t believe in, yet.

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!

Chetan Ahya: Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist

Ridham Desai: And I'm Ridham Desai, Morgan Stanley's Head of India Research and Chief India Equity Strategist.

Chetan Ahya: Today, the biggest takeaways from our India Investment Forum in Mumbai. From the shifting outlook for India's markets and flows to the sectors driving the next phase of corporate earnings and CapEx.

It's Friday, June 12th at 7PM in Hong Kong.

Ridham Desai: Hong Kong And 4:30PM in Mumbai. 

Chetan Ahya: Ridham, Morgan Stanley's India Investment Forum took place in Mumbai last week, and I was there with you. These events are a great opportunity to speak with investors who come across from the globe to attend. Now that we have had a few days to process the conversations, what stood out to you? What was the biggest shift in investor sentiment that you picked on?

Ridham Desai: So, Chetan, I think it's been the case of a continuing story about India. Domestic investors look that they are bullish, and foreign investors continue to stay rather cautious on the Indian markets.

We could see that in the overall attendance. In contrast, I think domestic investors were looking for the next stock that they wanted to buy. They were seeking opportunities, and there was a lot of interest in meeting companies.

Before we get into markets, let me turn back to you from a macro side. India's growth story remains strong, but relative growth appears to be cooling. This is in contrast to markets like Japan, Taiwan, Korea, and the US. How should investors think about India's macro positioning in that context?

Chetan Ahya: So, Ridham, when I look at the macro data in India, they're all indicating a meaningful upside in the growth trend. So I'll just cite two key cyclically sensitive macro data points. One is the banking system credit growth, and number two is the auto sales, particularly the passenger vehicle sales. So bank credit growth is growing as of the last biweekly data point that we got. It's growing at seventeen point seven percent year-on-year, and car sales are growing at twenty-seven percent in the month of May.

But as you were mentioning earlier, the relative growth opportunity is a challenge for India and to just share the numbers on the earnings growth for the first quarter that we saw across the region. So we saw Korea's earnings growth at one hundred and seventy percent. We saw Taiwan's earnings growth at forty-eight percent year on year. Japan at thirty-three percent. The US has seen a growth of about twenty-seven percent year on year.

So in that context, when India is reporting thirteen percent growth, it's becoming a challenge for investors to look for opportunities in India relative to other markets. Either they are more focused on the other markets than India. So let me come back to you, Ridham. Staying with the investment implications, India projects stable valuations and strong corporate earnings, but its relative growth advantage has narrowed. How should investors reconcile this contradiction?

Ridham Desai: If I go back thirty-five years, as long as we have the MSCI index series, and as far as I have been in this industry, this is the lowest relative multiple that India has traded at. And indeed, growth last year was weak. But if you see QOQ, we have started to accelerate. The broad market earnings growth trajectory has shown a doubling in the quarter that ended March over the quarter that ended December.

But it underscores the point you made about the relative growth complex. It's clearly not in India's favor. And a lot of the capital in the world is short-term oriented, and it cares for what growth is gonna come in the next quarter or two. And that's the state of the market right now.

However, what I would say is that equities is a quintessential long-duration asset class. In the long run, what matters is terminal growth. I don't really think India's terminal growth has moved much. It remains far superior to a lot of other countries around the world. And therefore, I think this does present itself as a great opportunity for a long-term investor while the markets are digesting this relative growth disadvantage that India seems to have over the next, say, three or four quarters.

Chetan Ahya: And Ridham, another theme from the forum was policy action to attract capital. Policymakers announced a number of measures right as our conference ended and they aimed to withdraw withholding tax on debt investors, also providing banks with an incentive to take up more dollar borrowing. How central are these measures to sustaining foreign inflows into Indian markets?

Ridham Desai: I think the measures taken by policymakers are very important, probably amongst the most important policy actions this year. The removal of taxation on debt investors will make a difference. The provision for hedging to external commercial borrowings as well as to foreign currency deposits will make a difference.

It should boost flows into India over the next twelve months. That said, these measures may not help the equity flows because the equity flows, I think, are going to depend on the relative growth situation. Now, there's only that much India can do to lift its growth.

It may accelerate to the high teens. So growth elsewhere needs to decelerate for equity investors to return. Or India needs to see the start of a major IPO cycle because in primary issuances, foreigners do come to buy, and that may change the net picture on FBI flows in the equity markets. But as far as the debt markets are concerned, I think the measures taken last week are going to prove to be quite potent, and India should see the benefits accruing over the next few weeks and months.

Chetan, from your perspective, how important is the policy backdrop right now in determining whether India can keep attracting long-term global capital despite more competitive returns elsewhere in the short run?

Chetan Ahya: So Ridham, I think the key focus for the policymakers had been with these measures to boost short-term capital inflows to, to stabilize the currency. There has been a balance of payment deficit. So from that perspective, the short-term capital inflow augmentation effort as you mentioned, has been the correct move. But the long-term perspective, we think that the government needs to boost competitiveness of the Indian manufacturing. Because in the context in which AI could affect India's services exports, there is a need to augment more export receipts from the manufacturing sector. At the same time, if they improve the competitiveness of the manufacturing sector, it will help India to attract more capital inflows from long-term investors for the purpose of FDI.

And the good news is that the government is on it. They are taking a number of measures to boost that competitiveness in the manufacturing. But we think that there is more action needed and hopefully in the intention to improve the balance of payment dynamics and exports from manufacturing sector, we will see more actions from the government in the coming months.

Ridham Desai: Chetan, you've also written extensively about the structural capital spending cycle in Asia and India. Can you walk us through the key details here, especially in the  Indian context?

Chetan Ahya: So Ridham, I think the key story that we are observing, it's sort of more or less global, but definitely very clearly seen in Asia, that there seems to be a super cycle for CapEx as well as industrial activity. This CapEx cycle is effectively driven by spending in four key sectors, and that is AI and AI-related digital infrastructure, energy, defense, and industrial onshoring-related CapEx.

Now, as far as India is concerned, we are seeing investments in all the four segments that I just mentioned. In fact, it's seeing a significant amount of activity in the space of energy. And, similarly, we are seeing a lot of policy measures, I mentioned earlier, in terms of boosting manufacturing competitiveness.

But at the heart of it is government's effort to onshore industrial supply chain. So India's CapEx has also inflected higher. Having said that, the difference between India and, let's say, North Asia, which is Korea, Taiwan, Japan and China, is that they are also a big player in the export market for capital goods when there is global CapEx cycle upswing happening. Nevertheless, India will see the benefit of this CapEx cycle in terms of its own growth push, as well as improvement in productivity.

So Ridham, how would you think about the sectoral opportunity within the Indian markets?

Ridham Desai: We see a lot of interest in, in some of  these sectors which you mentioned. But actually, I would like to start off with financials. I see the banks in a very sweet spot. Balance sheets are in pristine condition. The interest rate cycle has troughed, which means margins for the banks have also bottomed and credit growth is finally accelerating. If this CapEx cycle unfolds like the way you are describing it, I think financials will stand to gain the most.

And interestingly, the valuations are quite good, both on an absolute as well as on a relative basis. So banks are cheap in India and are presenting a good growth opportunity. Also, of course, investors can go directly into those sectors which are doing this capital spend. Energy to start with, semiconductors, fertilizers, data centers and aerospace.

The only thing to note here is that not everywhere are the valuations attractive enough because in some cases the market has recognized the coming growth cycle and has started to price that in.

So we have to be careful about the valuations. But I think financials and industrials are clearly great opportunities in the context of this CapEx recovery that India is likely to see in the coming five years.

Chetan Ahya: And additionally, the most requested companies at the summit, Ridham, were consumer sector companies. What do you think investors are looking for at this sector over others?

Ridham Desai: So, Chetan, I think from a structural perspective, the Indian consumer is quite clearly the best place to be. In fact, I would say that it's the leverage that India enjoys over the rest of the world.

The one point five billion people in this country are split across, say, a hundred and fifty cohorts of ten million each, and each of these cohorts have got different consumption opportunities. So depending on what product or service you're offering to your consumers, there's a market in India, and which in nominal terms is growing between ten and fifteen percent.

As we know, last year India accounted for something around seventeen or eighteen percent of global GDP growth, which means depending again on what you are selling to your consumer, India could be between ten and hundred percent of your revenue growth. So India's consumer is something that hardly anybody can avoid.

So in summary, Chetan, when I look at it from an investment opportunity, financials, industrials, and consumption, not necessarily in that particular order, are probably the best places for investors to look at. However, IT services, I think could be the dark horse. It's a sector right now which is, , disrupted or potentially disrupted by AI, and there's a lot of confusion there.

But I think as the dust settles on this, it may emerge, uh, as one of the most interesting areas for investors to look at. So there's a lot of stuff in India happening right now. I think growth is accelerating. Valuations are looking quite interesting. In fact, the best that they've been in many, many years. Trading performance suggests that investors are not positioned at all. And if things start looking up, then India could be a very good market in the coming twelve months.

Chetan Ahya: Ridham, thanks for taking the time to talk.

Ridham Desai: Great speaking with you, Chetan. 

Chetan Ahya: And thanks for listening. If you enjoy our Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or a colleague today.

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, why is everything still so expensive?

It's Thursday, June 11th at 2pm in London.

The Federal Reserve has a so-called dual mandate, tasked with keeping the labor market healthy and prices stable. It is currently having much more success with the former than the latter.

Let's start with that good news.

Last Friday saw solid data from the U.S. jobs market, reducing some of the fears from earlier this year that artificial intelligence and other factors would lead companies to make do with fewer workers. The U.S. unemployment rate sits at just 4.3 percent, a historically low level. Measures like initial jobless claims indicate no large uptick in firings.

Yet the success within the U.S. labor market is mirrored by struggles with inflation. The Fed tries to keep inflation, the annual increase in a broad set of prices, to about 2 percent per year. Their preferred measure of these prices, so-called PCE inflation, well, it's been materially above this target over the last three months, six months, twelve months, and indeed, the last five years.

As for another key measure of inflation that was reported yesterday, CPI, overall prices increased more than 4 percent. While that was close to expectations, it still represents prices that are rising much faster than the Fed would prefer.

This leads to a dilemma. One diagnosis of what's going on is that elevated inflation is a sign that conditions are simply too loose and too accommodative at these levels of interest rates. Corporate capital expenditure and merger activity is surging, regulation is being eased, and the U.S. government is spending a lot more than it's taking in. All of these are consistent with a hot economic cycle, which in the past would've warranted higher interest rates to bring the economy back down to a more sustainable speed.

But it might not be that simple.

The surging spend that we're seeing on AI data centers feels pretty unique and almost insensitive to other dynamics. Indeed, we've seen a 700 percent increase in the price of memory over the last year. Yet it's done little to slow demand for this construction as the large, well-capitalized companies behind the AI buildout see it as so essential to their future success.

U.S. consumers are also still spending, boosted perhaps by record levels of household wealth. As just one example of this, my colleagues in Equity Research note that the price of airline tickets has gone up 25 percent over the last year, yet there's been no sign of people flying less.

Now, the positive story would be that while there are some high-profile categories like computer memory or airfare that are seeing these large price increases, the broader inflation picture is actually set to get better as the year goes on, and costs for things like housing and tariff-impacted goods moderate. That is our view at Morgan Stanley, where our economists think that inflation will ultimately be lower over the next twelve months – and lower than many in the market expect.

But there's definitely uncertainty.

This month, June, is one where central banks may appear to have a renewed commitment towards inflationary pressures; with the ECB hiking rates today and our expectation that the Bank of Japan will hike rates next week, while the Fed will remove their easing bias. And our more benign economic base case for inflation does assume that oil will start flowing through the Strait of Hormuz pretty soon. It may not, and that could also lead to more sustained inflationary pressure.

The big story on inflation has not gone away. Our assumption that pressures could ease in the second half of the year is a key and differentiated input to our forecast for lower bond yields and higher stock prices in 12 months' time. But it does rely on a change of the status quo.

As of now, inflation is still too high.

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.

Ravi Shanker: Welcome to Thoughts on the Market. I'm Ravi Shanker, Morgan Stanley's North American Airlines analyst.

Jeff Adelson: And I'm Jeff Adelson, Morgan Stanley's U.S. Consumer Finance analyst.

Ravi Shanker: Today, who really owns your travel loyalty? The airline, the bank, the rewards platform, or you?

It's Wednesday, June 10th at 7am in New York.

Jeff Adelson: So, Ravi, you just came from your annual travel conference, and I'm about to head into the second day of Morgan Stanley's 17th Annual Financials Conference here in New York, where we're hosting roughly 135 corporates.

A lot of themes are coming up there: retail engagement, product innovation, regulatory change, AI digital assets, capital markets recovery, and so on. All of these connect back to a bigger question. Who owns the customer relationship?

Ravi Shanker: And that's exactly where travel co-branded cards come in. They sit at the crossroads of premium consumer spending, loyalty, and the competition for wallet share. They've become a more important revenue stream across travel, banking, and hospitality.

But it's not as simple as more travel means more co-brand growth. Most customers still want flexibility, cashback, and low fees. Premium travelers and loyal airline customers behave differently.

Let's start with the cardholder. Most consumers have a credit card, but travel co-branded cards are still a much smaller piece of the overall wallet. So, how big is the opportunity here, and how hard is it to get consumers to switch?

Jeff Adelson: So, what's actually interesting, Ravi, is that travel co-branded cards are still relatively under-penetrated. In our survey, about 90 percent of cardholders have a general purpose card, while only about 22 percent have an airline card, and 12 percent have an hotel co-brand card. So, on the surface, the runway for growth does look significant.

The upshot is also that once you get these consumers in the door, they are much higher spending and drive a ton of volume and incremental card economics for both the banks and their co-brand travel partners.

The challenge is that consumers are pretty loyal to their cards or airlines that they already use, so most people aren't actively looking to switch. They tend to add a new card only when the value proposition is compelling enough. And sometimes given these one-time nature of the signup bonuses, it results in some churning without keeping the customer for the long term.

So ultimately, what this all means is issuers and travel brands aren't just competing with each other, they're competing against habit. So, to win, they need to offer something that's meaningfully better than what's already in the consumer's wallet.

Ravi Shanker: Got it. So, consumers seem to care most about value, fees, rates, and reward. Cashback still leads by a wide margin. So where do travel-specific rewards fit in?

Jeff Adelson: The nuance here matters. Travel rewards don't need to win with everybody to be valuable. What makes them so powerful is they resonate with a specific group of customers, specifically the ones who are traveling – the frequent travelers, the ones who spend more, and those who engage more deeply with loyalty airline programs, for instance. For those consumers, lounge access, status benefits, upgrades, and airline or hotel points can create a level of engagement that's difficult for just a basic cashback card to replicate.

The nuance here matters. Travel rewards don't need to win with everybody to be valuable. What makes them so powerful is they resonate with a specific group of customers, specifically the ones who are traveling – the frequent travelers, the ones who spend more, and those who engage more deeply with loyalty airline programs, for instance. For those consumers, lounge access, status benefits, upgrades, and airline or hotel points can create a level of engagement that's difficult for just a basic cashback card to replicate.

Ravi Shanker: So, the premium consumer looks different. Why is that customer so important to card issuers?

Jeff Adelson: So, higher income consumers frankly just spend a lot more. They're more loyal, they carry more cards, and they're more willing to pay a higher annual fee if they feel like they're getting the value from the card back after they pay that fee.

In our survey, consumers earning over [$]150,000 per year of income spent roughly twice the amount on their primary card, and they were willing to pay almost twice the annual fee as other income cohorts. They're also attractive from a credit standpoint, from a, you know, delinquency perspective. These customers are more likely to pay their balances in full each month, and as a result, have lower credit risk. And often they keep long-standing relationships with their banks or their airline partner.

That's why premium card and travel partnerships remain such an important customer acquisition tool for a bank. It has a really long lifetime value. The battle isn't really for the average card holder; it's for the affluent consumer who's driving a disproportionate share of spend in the U.S. economy.

Ravi Shanker: Got it. So, the banks and travel brands are partners today. But they're also starting to potentially compete more directly for the same customer. What should investors watch to see whether this stays a partnership or becomes more of a tug-of-war?

Jeff Adelson: So historically, this has been a successful partnership, especially in recent years as high-income consumer spending pie has grown in the U.S. How this works is airlines provide loyalty and travel experiences. Banks provide the card issuance, distribution scale, and share back those card economics to the airlines.

Everybody wins when the travel spend grows. But we're starting to see some things overlap. Banks are building their own premium travel ecosystems. That includes things like flexible rewards points with the ability to transfer to any airline you want, proprietary lounges away from the airlines, and travel benefits that increasingly compete with airline loyalty programs.

So, what investors should watch from here, in our view, are two things. Number one, is the high-income consumer and the travel pie continuing to grow? That's really what's held everything up and frankly, driven the airlines that you cover to realize that they hold this golden ticket. They hold the access to that consumer, so they've begun negotiating for more of the economics away from the card issuers.

The second thing we think that you need to watch out for is whether consumers really continue to value these airline-specific rewards enough to justify the existing partnership model. Our survey indicated that most consumers still prefer flexible rewards over points tied to a single airline. But among frequent travelers and airline loyalists, the airline ecosystem does remain powerful.

So, the future does seem to depend in part on whether these travel brands can continue to deliver on experiences that the consumers really can't get elsewhere.

So, Ravi, maybe switching to you.

For the airlines, the question I have for you is a little different. How do you turn loyalty into a durable, profitable revenue stream without losing sight of the core travel product?

Ravi Shanker: That's exactly it. Kind of you referenced the strength of the travel ecosystem in your previous response, and I think that's exactly what the airlines need to focus on. I think the takeaways for the airlines from the survey is very clear.

You cannot have a co-brand revenue opportunity in isolation. It is just a layer on top of your core revenues. You cannot build an incredible loyalty or co-brand franchise without having a very strong core airline product. The analogy we use in our report is that it's sort of like the restaurant business.

Most restaurants usually make the bulk of their profitability off of the wine menu or the liquor menu, even though you're going there primarily for the food and the ambiance and the service. If you don't have really good food and ambiance and service, you can't make money off of the wine menu.

Similarly, we think the airlines need to continue to focus on their core product, whether it's their network or their reliability, their safety, where they fly, the quality of the product in the sky, the lounges, as you mentioned. And once you get all of that in order, then you can tap into the co-brand revenue opportunity over time.

Jeff Adelson: So maybe just running with that analogy on, you know, co-branded revenues becoming a more meaningful part of the airline business. Why are they so strategically important in your view? Why should the consumer pay for that bottle of wine that they can get?

Ravi Shanker: Look, we, we don't have a full disclosure from the airlines just yet, but we have some nuggets that tell you that this is a very attractive revenue opportunity, right?

So, look at some of the numbers we do have. We think that this business has been growing at a low double-digit CAGR for the industry, which is much faster than core revenue growth. We think it has already grown to be about low double-digit percentage of overall revenues. And from the little info we have, we can surmise that this is a very, very profitable business. Something in the order of 35-50 percent operating margins, if not much higher than that in an industry that is overall working really hard to get to double-digit margins on a core basis.

So, this business can be about half of overall mid-cycle profitability, maybe even higher for some of the airlines, even though, it is considered to be an ancillary revenue stream. This is also a very, very stable business that doesn't exhibit the kind of cyclicality or volatility as the core passenger airline business. And so, we think the airlines will be looking to grow this for the margins, for the stability, and for the, honestly, growth opportunity over time.

Jeff Adelson: And if we think about that opportunity growing over time, if consumers really do care more about tangible benefits than brand prestige, as I think our survey indicated, what does that mean for the airlines trying to build that loyalty through these card partnerships?

Ravi Shanker: It's exactly as you mentioned, kind of, earlier – that we think both the banks and the airlines need to keep investing in the product. They need to keep giving the consumers enough rewards that make it seem worth the fees and worth the while to subscribe to a travel co-brand card – versus going with a more generic card that gives you just plain cash back.

And I think, again, it comes down to whether the core airline product is strong enough for the consumer to warrant going down the path of building loyalty with the airline franchise. And if the consumer is committed to travel, as a share of the consumer's wallet significantly enough to commit to travel cards' benefits over generic benefits.

We have a lot of confidence in the latter. In that all of our data, all of our surveys since the pandemic have shown that travel is now almost a consumer staple spending item rather than being a consumer discretionary spending item that it was before. And travel is now a significant spending priority – after only groceries and household staples for the average consumer. For the high-end consumer, it is the number one spending intent category.

So, we know that travel is very important. Whether the airline is worth, kind of, committing to or not is very airline specific in our view.

Jeff Adelson: So, if we put this all together and, you know, you think about your forecast for the industry and, you know, our joint forecast for the co-branded card revenues…

Ravi Shanker: Mm-hmm.

Jeff Adelson: Maybe just talk a little bit about how you think those revenues keep growing so strongly, or whether they continue to grow strongly. Or is there a risk that this all plateaus at some point in the near future?

Ravi Shanker: Look, that's a great question, and that's why we highlight three possible scenarios in the report.

In our base case, we have the industry growing at roughly the same double-digit CAGR that it has been for the last few years. That sees the market go from about $25 billion today to about [$]60 billion in the next 10 years.

In our bull case, we have travel as a share of overall spending, and travel cards as a percentage of overall credit card issuance, which you highlighted earlier was a pretty low number, actually expand to something more reasonable. And that's where we see the potential for the market almost quadrupling from $25 billion today to [$]100 billion in the next 10 years.  And our bear case, kind of that's when you talk about a macro risk. Second, maybe some kind of slowing down in travel as a spending priority, which we actually don't think happens.

But what's more likely is the point you referenced earlier, in response to my question about the relationship between the airlines and the hotel companies versus the credit card issuers may be changing a little bit. And this becoming a little more of a free-for-all in the industry and a little more competitive. That could potentially, kind of, hurt the economics for the overall industry, even though the size of the pie will continue to grow.

So that brings us back to the consumer's wallet. So, every time I'm on a trip, I have several options – maybe a cashback card, maybe a premium travel card, maybe an airliner hotel co-brand card. So, which one am I reaching for every time I look to swipe?

Jeff Adelson: Well, I mean, I think at its core, it really depends. It's a battle at the end of the day for the loyalty of a high quality, sticky and heavy spending consumer. And consumers are largely rational, right? So, they're going to go with a card where they think they get the best value. And if that's their airline card where they think they can accrue the best loyalty status and maybe get their first class upgrade every now and then and get unlimited access to the lounges, maybe they'll choose that.

But really in a survey what we learned was most consumers tell us they care about value, flexibility and rewards. So, the highest value consumers I just mentioned are also looking for experiences, convenience and status.

So that's why the banks, airlines and hotels are all investing so aggressively in these premium ecosystems to try to lock them in and keep them loyal. Every swipe is really a vote for which ecosystem delivers the most value if you think about it, right?

The winner isn't necessarily the company with the best card too. It's the company that creates so much of the strongest overall relationship with the consumer. And that's why this competition matters so much across banking, travel and hospitality.

So, we are watching this competition. So far, it's working. It's a rising tide that's lifting all boats. But as I mentioned before, it really will only continue to work if our forecasts are right and the high-income consumer views this as less of a discretionary spend item and more of a stable spend item. And, if that pie, and the high-income consumer, continues to grow in the U.S., then this relationship can continue to work for the foreseeable future, we think.

Ravi Shanker: That makes a ton of sense. Jeff, thanks so much for joining me on the show today.

Jeff Adelson: Thanks, Ravi. It was my pleasure.

Ravi Shanker: And to our listeners, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you get your podcasts and share with a friend or colleague today.

Welcome to Thoughts on the Market. I’m Mayank Maheshwari, Morgan Stanley’s Asia Energy analyst.

Today: how AI’s rapid growth is forcing Asia into a massive energy buildout across power grids, fuels, storage and dependable energy and power generation.

It’s Tuesday, June 9th at 8am in Singapore.

Every time you ask AI to draft a note, summarize a file, plan a trip or generate an image, the response feels instant and easy. But behind it sits a very physical system: data centers, electricity, cooling, fuel, metals, power lines, storage tanks and ships.

There is no AI without energy. And in Asia, the power and energy needs could get much bigger.  And right now, we are at a critical inflection point where energy, AI, and security converge into [a] once-in-a-generation investment cycle.

We see a super cycle with $5 trillion plus in new investments in energy over next five years, almost double of what we have seen in the past decade. And this has global implications as Asia consumes almost half of the world's energy needs – but produces only about a third of it at home. Energy markets may be global, but energy insecurity is local. It shows up in electricity prices, fuel shortages, factory delays, food supply pressure and household budgets.

By 2030, Asia’s energy use could rise by about 38 exajoules. That increase is roughly equal to all the energy the Middle East consumes today. Power demand alone could reach about 19 trillion  units a year when expressed in kilowatt-hours. That is around four trillion more units of electricity usage than in 2025, driven by data centers, industry, and onshoring of businesses.

AI is now part of that demand story. By 2030, data centers could use roughly one-sixth of all new power units in Asia. That makes AI a major new load on the power system.

Meeting this demand requires a major investment cycle. Asia’s annual energy investment could rise to roughly US$1.1 trillion a year over the next five years. Much of that spending goes into the power system itself: generation, grids, storage and the equipment needed to connect everything.

Grids may be the biggest bottleneck. Think of [the] grid as the highway system for electricity. You can build more power plants, but if the roads clog up, the power does not reach homes, factories or data centers. Asia’s grid investment needs could reach close to about US$1 trillion by 2030. Transformer lead times have stretched to years in some cases, which shows how tight the equipment supply chain has become.

The hardest part is keeping the lights on every hour of the day. Baseload power means electricity that can run around the clock. Asia is adding a large amount of renewable power to its energy infrastructure. But that source depends on when the sun shines or the wind blows. That is why coal, gas and nuclear remain part of the conversation.

Storage also moves from useful to essential. Batteries help smooth out renewable power demand when supply rises and falls during the day. Global energy storage installations could rise from about 500 gigawatt hours in 2025 to around 3,000 gigawatt hours in 2030.

Powering AI also reaches beyond electricity. Data centers need power, but the system around them needs dependable fuels, grids, batteries, metals, refining, storage and shipping. Electricity has to be generated, moved, backed up and supplied through physical infrastructure. That is why this story pulls in copper and aluminum for grids, fuel refining for transport and petrochemical supply chains, and fertilizers because energy security also connects to food security.

The future may look digital, but it will be powered by something far more physical: the largest energy buildout Asia has seen in decades.

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.

Welcome to Thoughts on the Market. I’m Shawn Kim, Head of Morgan Stanley’s Europe and Asia Technology Team.

Today, we’re talking about chipflation – when memory chips stop getting cheaper over time, and become more expensive and even harder to find.

It’s Monday, June 8th, at 3pm in London.

Memory chips are easy to ignore, until your laptop slows down, your phone costs more, or your cloud bill jumps.

Memory is the computer’s workspace. It holds whatever the machine needs at that moment, whether that is a web search, a video, a spreadsheet, or an AI model answering a question. DRAM is the fast memory inside servers, PCs and phones. NAND is what stores files in solid-state drives. And HBM, or high bandwidth memory, is the high-performance version sitting right next to the AI chip, helping them move huge amounts of data quickly.

That last one – HBM – is key because AI has become intensely memory hungry. Memory prices have risen more than six-fold over the last year, a sharp break from decades when the cost of DRAM generally kept falling.

The pressure is coming from AI infrastructure buildouts. We see servers accounting for 59 percent of DRAM demand by 2028, up from 37 percent in 2023. We also see enterprise solid-state drives reaching 65 percent of NAND demand, up from 18 percent. And simply put, data centers are taking a much bigger share of the memory pie.

AI memory use is climbing fast, and at every scale. A newer AI chip uses 7.2 times more HBM than earlier generations. A full system uses about 65 times more. Across an entire AI data center buildout, the jump gets even bigger. HBM has gone from roughly 10 terabytes in 2020 to about 18 petabytes in 2026, orders of magnitude more.

This demand is running into a supply chain that cannot respond quickly. New memory capacity takes years to build, qualify and ramp up. Supply relief is a process, not a switch. And that creates a two-tier market. Large AI and cloud buyers can sign long-term agreements, prepay and secure priority access. Traditional buyers, including PC makers, smartphone makers and industrial hardware companies, must compete for what remains.

This impacts everyday products. In 2027, we see PC memory demand potentially facing a 15 percent shortfall, equivalent to about 58 million PCs. Smartphones could face a 12 percent shortfall, equivalent to about 134 million units. Companies may have to raise prices, cut specifications, delay launches, and accept lower profits.

The dollar numbers are striking. We see the memory market growing from about $220 USD billion in 2025 to about $890 billion in 2026. Expectations for 2026 memory revenue rose 71 percent in just three months. That implies roughly $600 USD billion of incremental memory revenue in 2026, more than the annual market for smartphones, PCs, or servers, each taken on its own.

The broader economy may not see a significant direct inflation shock. We estimate the direct impact on headline CPI at about 0.1 percent in 2026. But pressure is showing up in producer prices, in corporate margins, cloud costs, capital spending plans and delayed technology upgrades.

AI has turned memory from the cheapest part of the digital economy into one of its most contested resources. These tiny chips most people never think of may now decide what gets built or delayed, and how much we all end up paying.

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.

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research for Morgan Stanley.

Today, I'll be talking about how investors should be digesting the latest tariff headlines and what they could mean for the broader economic and market outlook.

It's Friday, June 5th at 10am in New York.

Tariffs are back in focus as the U.S. administration has proposed new levies following Section 301 investigations into more than 60 of our trading partners. At the same time, USMCA negotiations appear to have begun in earnest, with recent headlines focused on autos, including the possibility of raising regional content requirements for vehicles and auto parts.

Now, at first glance, these developments sound like a meaningful escalation in trade policy. But we think these headlines are best understood as a continuation of the existing tariff regime rather than a new and more disruptive phase.

Let's start with Section 301. Listeners may recall that the administration replaced the IEEPA tariffs with Section 122 following the Supreme Court's decision back in February. However, that was done under a temporary authority that expires in the end of July. It's been our view that as we approach that deadline, the administration would seek to replace the existing regime under a new authority.

The conclusion of the Section 301 investigations is really a step in that direction; or said differently, a continuation of existing policy. We see the administration preserving the current tariff regime come July, but without a larger inflation or growth shock.

The second issue is the USMCA. Raising regional content rules may be part of the negotiation now, and those changes could create sector-level friction. Similarly, we think it's possible we see escalation ahead of the July deadline as all three countries work to improve the existing trade deal.

Now that being said, we're still constructive on the longer-term trade alignment between the U.S., Mexico, and Canada, and we see structural and procedural constraints that are going to limit the downside risk to something like a potential withdrawal from the agreement.

We still expect the USMCA carve-out to remain in place even for Section 301 goods on a range of trading partners. That's because we think the administration sees value in maintaining supply chain integration within North America across a number of sectors. In general, we actually think the recent pattern on tariffs has been toward less, not more, trade pressure at the margin.

Recent months have come with several carve-outs, exemptions, and delays on broad-based and sectoral tariffs. That suggests that the administration is still sensitive to the downstream cost impact of tariffs, and of course, affordability matters politically heading into the midterm elections in November.

That view also fits with our broader U.S. economics outlook. Our economists continue to see a relatively benign macro backdrop. Growth is expected to remain trend-like, with consumer spending slowing but not collapsing, and strong AI-led CapEx offsetting some of the drag from higher energy prices and policy uncertainty.

On inflation, tariffs remain part of the story, but much of the pass-through appears to be already in the data. That pairs with a more constructive outlook for equity markets as well, as our strategists there see a strong earnings story supported by things like positive operating leverage, AI adoption, improving pricing power, and a broadening out in earnings growth.

So, the key message for investors is this: tariff policy is still noisy, and it will remain a source of headline risk. But in our base case, the administration is moving toward a more durable version of the current tariff regime, not a materially more disruptive or restrictive one. Section 301 replaces Section 122, the USMCA carve-out stays in place, and selective exemptions continue where the affordability or supply chain costs are too high.

Thanks for listening. As a reminder, if you enjoy Thoughts on the Market, please take a moment to rate and review us wherever you listen, and share the podcast with a friend or colleague today.

Welcome to Thoughts on the Market. I’m Martijn Rats, Morgan Stanley’s Global Commodities Strategist. Today – how fast can Middle East production return?

It is Thursday, June the 4th, at 3pm in London.

Every time you pull into a gas station, those prices are staring back at you. What you see at the pump is just the front end of a global system we’ve been watching for months: tankers, storage, insurance, and shipping lanes, all still constrained by the Strait of Hormuz. But while prices at the pump are still high, Brent has actually fallen back to around about $92 a barrel.

In inflation-adjusted terms, today’s Brent price is actually right at the 50th percentile of the last 20 years – suggesting that the market is assuming a clean, near-term recovery in supply. Yet the disruption continues to be extraordinary. Roughly 11 million barrels per day of Gulf crude remains offline, close to half the region’s pre-conflict output.

We think the market may be too optimistic. Our working assumption is now that meaningful export recovery through the strait begins only in the second half of July. Even then, normal does not return with the flip of a switch.

First, ships need to be willing to sail. Owners and insurers need confidence that the waterway is safe. If mines remain in traditional shipping lanes, the strait can be technically open but still operate at reduced capacity. Clearing that risk can take weeks, and potentially several months.

Second, the tanker fleet is in the wrong place. When ships cannot work in the Gulf, they move elsewhere. Bringing enough empty tankers back to lift crude takes time.

Third, storage is a limiting factor. Oilfields cannot restart if export tanks are full. For producers that rely heavily on seaborne exports, empty tankers are therefore essential.

Last, oilfields themselves need restarting. Before the closure, around 36,000 wells were active across six Gulf producers. Roughly 10,000 of those are currently offline. After a shut-in of nearly five months, about 4,000 to 5,000 wells could face restart constraints. Reservoir pressure can decline, equipment can fail after sitting idle, and flowlines need cleaning and safety checks.

All told, around 75 percent of lost supply can probably come back within four months after flows through the Strait of Hormuz resume. But the final 25 percent may take well into 2027.

So why have prices not moved more? The market began this shock with buffers. Inventories were elevated, oil-on-water was high, and emergency relief releases helped. The U.S. increased seaborne net exports of crude oil and refined products from roughly 5 million barrels a day to 9 million barrels a day. At the same time, China’s seaborne net oil imports fell from around 13 million barrels a day a year ago to just over 7.5 million a day over the last 30 days.

But these cushions are thinning. Strategic reserve releases are scheduled to drop from about 2.5 million barrels per day in April through June to about 0.7 million in July and August. U.S. gasoline and diesel inventories are already well below five-year seasonal lows. China is already on track for five consecutive months of unusually low crude buying for April through August delivery. But that starts to raise the probability that Chinese buyers return for September barrels.  Buying for September typically starts mid to late June.

Now, oil is trading like the disruption is nearly over. But at the same time, the physical system is telling a slower story. Prices may look calm on the screen, but the bottleneck is in tankers, storage tanks, wells, and crews.

Our Brent forecasts remain $110 per barrel for the second quarter and about $100 a barrel for the third quarter. We recently raised our estimates for the fourth quarter to $95 and the first quarter of 2027 to $85 a barrel, and expect a return to $80 eventually thereafter.

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.

Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist.

Today – The critical question behind the AI-driven capex cycle that is front and center for markets year to date. How is credit market financing this ecosystem evolving?

It’s Wednesday June 3^rd at 2 pm in New York.

When we first discussed the role of credit markets in financing the AI and data center build-out around the middle of last year, the direction of travel was clear. Realizing the transformative potential of AI requires unprecedented levels of capex. What has really  surprised us since is the scale and speed of that spending, both of which have exceeded our expectations by a wide margin.

The upward revision to capex expectations has been dramatic. A year ago, we projected the combined capex of the five large hyperscalers at roughly $450 billion in both 2026 and 2027. After the first quarter earnings reports, Morgan Stanley’s internet equity analysts, led by Brian Nowak, now expect hyperscaler capex of roughly $800 billion in 2026 and $1.2 trillion in 2027. One data point really captures the surge in the underlying demand for compute. According to OpenRouter, the global weekly token usage, which is a key proxy for compute, has risen by roughly 350 percent since early January, increasing from about 6 trillion tokens to 28 trillion tokens.

Credit channels for financing this capex have not only been broader and deeper than we anticipated, spanning public and private markets, but have seen remarkable in the structural innovation that is blurring the lines between public and private markets. Over $200bn of public AI-related issuance across the different credit channels has happened just in the first five months of this year. We had previously assumed unsecured issuance would be limited by the scale of the largest non-financial issuers, confined to investment grade credit only, and largely USD denominated. Instead, some hyperscaler issuance has now far exceeded even the largest telecom names; funding has expanded well beyond USD into EUR, GBP, CHF, JPY and CAD markets. The issuer base has also broadened to include data center REITs and neoclouds, particularly in the high-yield market.

The scope of financing has also  widened beyond the data center shells themselves. GPU financing, which we assumed would be funded entirely through equity capital, has begun to migrate into credit markets. Funding is now coming through broadly syndicated loans and asset based financing, with ABS structures not far behind.

Structural innovation illustrates how rapidly the credit ecosystem is adapting to the complexities of demands of AI-driven capex. Financings that combine elements of project finance, tranching, and residual value guarantees, along with high-yield issuance backed by hyperscaler guaranteed leases – these are innovations that we have never seen before. These structures have expanded the investor base, reduced the funding frictions, and further blurred traditional boundaries – between both corporate and project finance, and public and private credit markets.

At the same time, physical, operational, and political constraints are beginning to shape the pace and the composition of the AI infrastructure build-out – and, by extension, the demand for financing. Grid access, power generation equipment, skilled labor, and permitting delays are emerging as significant constraints. These are compounded by political and regulatory frictions at the local, national, and international level. As power availability becomes a gating factor, the AI build-out is likely to pull energy infrastructure financing more tightly into the orbit of AI infrastructure financing.

The clear takeaway is this. The capex requirements underpinning AI infrastructure are expanding exponentially, and with them the role of credit markets in financing this build-out. Along the way, there will be winners and losers, periods of adjustment, and a range of physical, financial, and political constraints that shape outcomes on the margin.

But the broader trajectory is certain. The scale, duration, and strategic importance of AI infrastructure investment mean that financing of this will remain a defining theme for credit markets and credit investors for years to come.

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Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, how to square a market that is both highly correlated, and highly divergent, at the same time.

It’s Tuesday, June 2^nd, at 3pm London.

A market of one. That may be a way that you hear investing described these days, and strictly speaking, it's accurate. Stocks and bonds, the two ‘big’ asset classes that form the bulk of most investors' portfolios, are moving in unusual lockstep. Stocks are rising when yields fall, and vice versa, with the most consistency in over 20 years.

And both, perhaps unsurprisingly, are moving in close relationship with the price of oil. At this point, it all seems pretty clear. The Iran conflict is a big deal for markets, representing the largest disruption to global energy supply in history. Of course, stocks and bonds, and oil are all moving together based on the perception of how this enormous issue resolves.

In doing so, they suggest that the conflict still remains quite important, even as markets appear quite strong.

Just as we can measure the extent to which stocks, bonds, and commodity prices move together, we can also track how individual stocks move relative to each other. And so, are stocks also rising and falling together like we see with these big asset classes? No. In fact, without exaggeration, it is the complete opposite.

There are a few ways to measure how the individual stocks within, say, the S&P 500, are moving relative to one another. But all of them say the same thing. Day to day, stocks are moving with unusual dispersion and independence. At the same time that the relationship between stocks and bonds is the tightest in over 20 years, the relationship between stocks within the S&P 500 – to each other – is the lowest.

If Iran is the factor driving the tight linkage that we discussed between stocks and bonds, Artificial Intelligence may be the culprit behind the opposite effect when we get down into individual companies. The perception that some companies will be incredible beneficiaries of AI, while others will be left behind, would explain at least part of the divergent performance. And so would an attention gap; with so much focus and positioning in AI sensitive names, other parts of the market can quickly feel forgotten, and thus move more independently.

Indeed, while the S&P 500 is back near all-time highs, the market’s advance-decline line, a measure of how many stocks are going up versus going down, is lower than where it was in late February or mid-April.

We see a few implications to all of this. First, while stocks and bonds are closely linked for the moment, we think that this correlation would flip under more significant energy market stress. Were the price of oil to spike to our Commodity team’s bear case, of $130-$150/bbl, we think yields would start to fall as the market would turn more concerned about the effect of all of this on growth. So, while the diversification of bonds has been disappointing so far, we do think that it will improve and materialize when it really matters.

In equities, this dispersion means that stock selection can allow one to stand out from the overall market. Indeed if one considers themselves a stock picker, low correlation between stocks is exactly the market that you would hope to have.  And it also means that many individual names may not be as heady as the broad market levels would imply. As discussed on this program recently, my colleague Mike Wilson and our U.S. Equity Strategy team expects U.S. stock performance to broaden out from here.

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. Also tell a friend or colleague about us today.

Simeon Gutman: Welcome to Thoughts on the Market. I’m Simeon Gutman, Morgan Stanley’s U.S. Hardlines, Broadlines and Food Retail Analyst.

Today: the state of the pet economy, or as we lovingly call it, the “petriarchy.”

It’s Monday, June 1st, at 10am in New York.

Hey Sammy, who wants to go on a walk?

If you have a pet, you probably know the routine. You go in for one bag of food. Then you remember the treats, the medicine, the grooming appointment. Maybe the toy they definitely do not need. And then the vet bill you hope is not around the corner.

Pets are family. But family has gotten more expensive.

That’s the big shift in the U.S. pet economy. The emotional bond is still powerful. About two-thirds of dog and cat owners strongly agree their pet is an important member of the family. More than one-third say they would take on debt to pay for a pet’s medical expenses.

Today, the growth story in the pet industry has changed. After an extraordinary post-pandemic run, it has entered a slower, more mature phase. We see growth settling around 4 percent, down from nearly 9 percent annually from 2019 to 2025.

That doesn’t mean the market is shrinking. We still see total U.S. pet spending rising from about [$]200 billion in 2025 to more than [$]240 billion by 2030. But the easy growth days look behind us. The industry now has to work harder for each dollar.

Affordability sits at the center of this story. A pet may start as an emotional decision, but it quickly becomes a line item in the household budget.  Overall pet ownership remains above pre-COVID levels, at about 67 percent, but it has slipped from the 2024 high. That pressure shows up most clearly among younger consumers for whom cost has become the top barrier.

And consumers are adapting. When pet food prices rise, shoppers stock up on sale items, compare prices online and in-store, and in some cases trade down. Still, pet food remains resilient. Almost all owners plan to keep spending the same or spend more on pet food over the next six months.

The bigger change is that services continue to take share from products, with veterinary care at the center. Services accounted for just over 40 percent of pet industry spending in 2025, and we see that moving higher by 2030. Food and toys still matter, but healthcare, prescriptions, diagnostics and routine care are becoming a bigger part of the wallet.

That brings us to vets – who remain the most trusted source of pet care information, cited by nearly 60 percent of owners. Younger pet owners still rely on vets, but they also turn more to online sources, friends, relatives and even store personnel. About three-quarters of owners visited a vet in the past six months, but average visits fell to under two, which is down from just over two in 2024. This points to a more cautious consumer, especially around routine care.

We also see a subtle shift in the kinds of pets people choose. Cat ownership has moved higher versus pre-COVID levels, while dog ownership among younger adults has pulled back from its 2024 peak. That shift is not surprising, given that cats typically come with lower overall spending than dogs.

Shopping habits are changing as well. Online pet product shopping has grown a lot since 2019, but its share of wallet has leveled off at roughly one-third.

The next leg of digital growth may come less from simply moving store purchases online and more from subscriptions, pharmacy, healthcare and broader pet care ecosystems.

So where does that leave the pet economy? Pet owners are certainly not walking away from their animals. But they are making more practical choices, watching prices more closely, and deciding where convenience, health and value fit into the same budget.

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.

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, why commercial real estate debt could be overlooked and undervalued.

It's Friday, May 29th at 2pm in London.

Bond yields have risen this year, and it's attracting strong flows into fixed income markets. The problem is that all of that demand is narrowing the risk premium that one receives. Spreads on U.S. mortgage bonds are richer than 89 percent of observations over the last 20 years. Spreads on the U.S. high yield market, well, they're richer than 96 percent of the time. And spreads on U.S. investment grade, it's 99 percent.

We live in a world where the risk premium on most bonds is very low versus history, but there are exceptions. One is debt backed by commercial mortgages or so-called CMBS. Spreads here, notably and unusually, are significantly higher than the long run average. It is a market that we like.

Commercial property is largely comprised of lending against office buildings, apartments, retail complexes, and industrial sites like warehouses. The first three have faced major challenges over the last five years.

Office values have slumped as investors feared more people working from home. Apartments have suffered from significant supply in building, conceived in a low-rate world as this has come online. And retail has faced long-run concern about the trend of more online shopping. And the rise of interest rates, well, that's loomed over everything.

A building, in a lot of ways, is a lot like a bond, promising a dependable stream of rents over time. When an investor can get that stream of cash flows from the bond market, commercial property prices must adjust lower to remain competitive.

These challenges are material, but they are also not new. Indeed, investors may recall that fears around commercial property peaked way back in early 2023 following significant rate hikes by the Federal Reserve. Back then, there were widespread fears that commercial property weakness would ricochet back and threaten the banking system.

Three years later, those worst fears have not been realized. And while defaults and restructurings have happened, overall commercial property fundamentals are beginning to pick back up.

Commercial property transaction volumes increased 27 percent in the U.S. in the first quarter relative to a year prior; and prices are rising, up about 5 percent over the same period. The amount of commercial real estate debt being originated is up about 40 percent over the last year – a sign that lenders are coming back. And the number of commercial deals that are becoming distressed and unable to pay their bills, they just saw their first quarterly decline since all of those problems in early 2023.

Part of this recovery in the commercial real estate market may be explained by U.S. growth, which continues to be resilient, and some of it mirrors other cycles.

When rates rose and commercial lending markets weakened, the construction of new properties really slowed down. It takes several years to build a building, and so it's only now that the impact of everything that was not built is starting to be felt.

With less supply coming online, the value of existing property is better supported, especially relative to the more elevated risk premiums on offer for its debt.

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.

Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Deputy Global Head of Research.

Today, we're talking about what investors should take away from the recent U.S.-China summit.

It's Thursday, May 28th at 10:30am in New York.

It's been two weeks since the much-anticipated U.S.-China summit, where Presidents Trump and Xi met to discuss a wide array of issues in their relationship. Understandably, investors were watching carefully. The relationship between the two countries and its potential impact on global economic conditions has been a driver of markets at key intervals.

Brinksmanship around the trade relationship has been particularly noteworthy. In 2025, the level of tariffs substantially influenced macro markets, and export restrictions for semiconductors and rare earths drove volatility in key equity sectors such as tech hardware. Coming into the summit, the two countries had found a tenuous equilibrium, with the policy volatility of last year giving way to an uneasy calm this year.

So, did the summit change anything?

As best we can tell, not really. Some modest progress was made in lower sensitivity areas, but investors shouldn't confuse that with a durable reset in relations. The summit, in our view, points to a more managed relationship, not a fundamentally stable one.

Here's what investors should keep in mind. At the risk of stating the obvious, the concrete public policy choices of each country matter a lot from here. President Trump emphasized renewed investment in the U.S.-China relationship. That's good. Talking beats not talking. But the bigger issue is what happens next.

So far, we haven't seen broad language around joint efforts to establish trade and investment cooperation boards translated into workable arrangements; which if they materialized might hint at a more stable relationship

So, net-net for investors, the summit is best understood as a continuation of the status quo, not a pivot. It may reduce near-term tail risks, which is sufficient to support the many other positive drivers pushing equity markets higher.

But it does not eliminate the structural forces behind U.S.-China competition.

That means we'll keep tracking this relationship as an economic and markets catalyst and keep you in the loop.

Thanks for listening. If you enjoy the show, please take a moment to rate and review us wherever you listen. And share Thoughts on the Market with a friend or colleague today.

Welcome to Thoughts on the Market. I’m Matt Cost, from Morgan Stanley’s U.S. Internet team.

Today – how new AI tools are reshaping the video game industry.

It’s Wednesday, May 27th, at 10am in New York.

We’ve all done it at some point. You think you’ll open your phone for just a few minutes. But end up in a game, a match, or a virtual world for much longer than you planned. Now, that window of attention is at the heart of one of the biggest battles in entertainment.

Americans over 15 years old spend about 22 minutes per day playing games – that’s more than they spend socializing, playing sports, or reading. And the next big shift in gaming may stem from who gets to create games and how they do it.

We expect consumers to spend more than $275 billion on video games in 2026. And the industry is reinvesting over $50 billion of that into game development and operations. But AI could cut that by nearly half.

Today, making a major game is expensive, slow, and labor-intensive. A typical AAA title – the gaming equivalent of a studio blockbuster – can cost hundreds of millions of dollars and take four years to build. More than 90 percent of that cost is people: so that’s developers, designers, artists, writers and many more.

But AI could change that math. New tools could increase productivity multiple times over, helping smaller teams do more in less time. Even after accounting for AI compute and asset-generation expense, we think that cost savings could exceed 40 percent. That’s over $100 million per game project. Across the industry, that could generate savings of roughly $22 billion.

But that money won’t just go straight to profits. Increased competition may erode those savings. And studios might put more money into marketing in response. So, AI could still meaningfully shift value across the gaming ecosystem.

The positives are clear. AI can speed up coding, asset creation, testing, and many other processes that are manual today. That’ll let studios spend less time on repetitive work and more time on higher-value creative tasks.

But it’s tough for newcomers to level up. AI does open the door for new players, but we think the industry looks more insulated from near-term disruption than the market fears – especially for companies with strong IP and advantages in live operations, data, and distribution.

AI can help generate worlds, characters, and digital assets, but great gameplay is harder. Gameplay is the feel, the challenge, the feedback, and the fun. Models still struggle to measure that, let alone deliver it consistently.

Live operations are another moat for established gaming companies. Many  successful games don’t end at launch. Teams run them for years through updates, events, and passionate communities. That skill is hard to copy. And often it determines whether a game becomes a lasting franchise or fades quickly. So gradual integration of AI looks more likely than overnight replacement.

Finally, the largest opportunity may still be on the horizon. Beyond lowering the cost of making today’s games, AI could unlock entirely new types of interactive experiences that didn’t exist until now. And the game industry has been through this process before, when new technologies like smartphones changed games forever. But ultimately, the prize is still the same: building something that people can’t stop playing.

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.

Welcome to Thoughts on the Market. I'm Chetan Ahya, Morgan Stanley's Chief Asia Economist.

Today – why Asia is headed toward its strongest industrial cycle since the mid-2000s.

It's Tuesday, May 26th, at 2pm in Hong Kong.

The market narrative in Asia has been narrowly – almost exclusively – focused on artificial intelligence. But AI is just one aspect of a much broader shift across the region.

We think Asia is entering an industrial supercycle. And this is being driven by a sustained rise in capital expenditures across AI, energy, defense and [the] broader industrial sector.

The numbers behind this are substantial. We forecast Asia's total investment could rise from about $11 trillion today to $16 trillion by 2030. So this implies a 7 percent annual growth rate over the next five years, which is triple the pace of the past two years, making it quite significant. And for the high growth sector such as AI, energy, defense and broader industrial sector we expect capex to grow at an even faster runrate of about 16 percent a year.

Now let's talk about the drivers.

No doubt, the first big driver behind this momentum is AI. Asia needs to invest more in AI infrastructure. At the same time, Asian chipmakers and memory producers are lifting capex to meet demand of U.S. hyperscalers for building data centres.

The second driver is energy. Asia needs to invest in the energy sector for three reasons – for powering AI, energy transition and energy security. The power demand for AI compute is growing exponentially. On top of that, economies are having to shift towards renewables, and that needs more investment in grids, storage, and power generation equipment. Moreover, the recent geopolitical tensions have made energy security a bigger policy priority, especially for Asia which is dependent on imported energy.

The third driver is defense. Now, even before the recent escalation in the Middle East, defense budgets across Asia were moving higher. This year, China has planned their defense spending to grow at a pace faster than its GDP growth. Meanwhile, India has raised budgetary allocations for defense capex by 18 percent this year. At the same time, Japan, Korea, and Taiwan are aiming to lift their combined defense spending from about 1.7 percent of GDP to 3 percent.

The fourth driver is broader industrial sector investment. Every economy in the region is working to secure their supply chains and focused more on onshoring of critical inputs for their domestic production.

So what does this mean for Asia? The region stands to reap the benefits of a rise in capex [spending] twice over. First, the increase in Asia’s capex will fuel its industrial cycle. Second, you have to consider [that] Asia is the world’s production house. And as rest of the world is increasing capex investment in the areas I identified earlier, Asia benefits from feeding this global demand.

Already, the evidence of a strong  industrial cycle is visible. We prefer to look at capital goods imports as a proxy for capex. And that has been growing at an impressive rate of 27 percent on a year-over-year basis in dollar terms. Industrial production [growth] is nearing a four-year high. And non-tech exports, which are important from industrial production perspective, have staged a strong recovery since the fourth quarter of last year.

So which Asian economies will benefit? As such, all of them. But China, Japan, Korea, and Taiwan are the biggest beneficiaries because they are meeting both domestic and export demands. On the other hand, India's industrial sector benefits primarily from its own domestic capex cycle. The pickup in Asia’s industrial production is pushing industrial commodities prices higher, helping  Australia and Indonesia, the two biggest commodity exporters in the region.

This next chapter of Asia’s growth story will filter through – from capex to jobs and income growth, and then through to the consumer. That's why this is not just an AI story. It will become a broader economic recovery across the region.

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.

Seth Carpenter: Welcome to Thoughts on the Market. I’m Seth Carpenter, Morgan Stanley’s Global Chief Economist and Head of Macro Research. This is Part 2 of our podcast from the Japan Summit.

It’s Friday, May 22^nd at 8 am in Tokyo.

I might stick with equities for just a minute, and Sho, just to dig deeper into the equity market. Jonathan expressed some of the bullishness. Anything you want to elaborate on where the real strong conviction on this positive view about Japanese equities is coming from?

And then just as a warning, I'm going to come back to you and ask, if you're wrong, where could you be wrong? Because again, I think where we add value most to clients is not just giving a clear view, but also pressure testing that view.

Sho Nakazawa:

Our constructive view on Japan equities comes down to one simple point. Three structural changes are still continuing. So, the first is shifting macro environment. The combination of stable inflation and wage growth is a kind of phenomenon we have not seen, at least in my lifetime. It changes corporates and households’ behavior, especially in terms of balance sheet management.

And then secondly, the corporates profit improvements. We do not see it as a cyclical recovery. We see it as a structural change. As in the past, Japan corporates heavily relied on cost-cutting amid a deflationary environment. But today, price pass-through is improving, and the Japan corporates are becoming better positioned in growth profit in nominal growth environment.

The third is corporate governance reform. Awareness of the capital efficiency has clearly increased. We continue to see share buybacks, dividends increase, and a portfolio restructuring as well. And on top of that, the Takaichi administration has made growth investment and crisis management investment as well.

Of course, the Middle East situation is a source of noise. But structurally is a supporting factor for Japan equities secular bear market, which is a view Jonathan has held for very long time, has actually becoming stronger.

But let me say that if I'm wrong, maybe I should be more bullish. In fact, the two key drivers here, if we assess the bear case scenario on Japan equities…

So, one key driver should be the upside come from the investors constructive view on the Japan fiscal efficiency. And on a micro level, the corporate behavior changing faster than market expects. If we assess the recent rise in long-term yields, it reflect the concern to the Japan fiscal position and that BoJ behind the curve.

It would weigh on the Japan equity valuation because it raises cost of capital and it weighs on the Japan equity valuation. But on the other hand, [the] Japanese government will disclose its basic policy in June. And if it could include a credible plan to improve Japan’s fiscal positions, perhaps under Japan version of DOGE, which is led by Financial Minister Katayama-san, I think it could alleviate the excessive concern toward the Japan's fiscal position, and it [could] lower the cost of capital on Japan equities.

You know, micro level, the corporates behavior is already changing, as I mentioned. But there's still plenty, you know, space for Japan corporates to utilize non-cash generating assets such as cash and deposit, which is equivalent to 60 percent of GDP. The ratio is far higher than our global peers.

So, if Japan corporates move further to capital efficiency or portfolio restructuring or use some excess capital, I think there should be additional room for Japan equity market to re-rate higher.

Seth Carpenter: All right. So, if you're wrong, it's insufficient bullishness. That’s fair. It's a great place to be.

So, so Koichi,  Jonathan and Sho are super bullish on equities. They will be spending a bunch of their time traveling the world telling all of Morgan Stanley's clients everywhere in the world what a great buying opportunity Japanese equities are.

And so, do you expect big shift in capital flows, and would that drive further appreciation of the currency? How do you think about the global investors' view of Japan? And what it means for capital flows on the one hand, and the value of the currency on the other?

Koichi Sugisaki: As for the capital flows, I think under this fresh regime, what's the notable change among the Japanese financials? That they are shifting away from the fixed income product, I mean, like JGBs.

Given the current attractive yields, you maybe wonder[ing] why the banking sectors buy the JGBs. But according to the recent disclosures, they have not purchased the JGBs much because their lending activity performed very well. So, as far as their lending activity have performed well, they have no incentive to make money in the securities investment.

You know, their lending activity have accelerated thanks to the corporate CapEx investment to improve the productivity amidst the labor shortages in Japan. Once the banking sector starts to see some slowdown or some symptom of the lending activity to slow down, in such a case, they are quickly shifted to the securities investment and the JGB market will change the world.

But so far, you know, lending growth [has] accelerated much. You know, the April lending growth is around 6 percent on the year-on-year basis, very strong. So, I think the banking sector still not have a[n] incentive to buy the JGBs.

As for the lifers, [the] case is much more serious, I think. Because of the younger ages shifting towards the equities to defend the asset, particularly under the new NISA scheme [which] was launched in 2024. The younger peoples basically allocate their asset to the equities rather than the saving type of the products.

Which means that the lifers are struggling to make, to gather the new monies. And this means that the demand for the long-term JGB to shrink. And the Japan lifers already filled the duration this much by 2023 to prepare for the new regulations starting from this fiscal year. Now, fortunately, they already finished the duration this much, this type of operation by 2023. But the yield [has] gone up from 2024, thanks to the BoJ's normalization.

So, under such conditions, they are now struggling to the high market loss on the long-term JGBs. And some of lifers are now facing the impairment loss accounting. That actually [makes] lifers a net seller of the long-term JGBs rather than the buyers.

Seth Carpenter: Okay, super helpful. Okay, we focused a lot on near-term developments, the energy shock, first quarter GDP. But we can think about a longer-term growth scenario. And there, I think AI comes in at times. Chetan, you've talked about the near-term super cycle, and I think there's a near-term aggregate demand side to AI, but over the longer term, maybe it's more supply.

When I think about where growth is going, though, I also think about shifts in the strategy for policy. So maybe Yamaguchi-san, you can talk to me a bit on your take of Prime Minister Takaichi's policies. What do we think is likely to get announced? When? How do you see it affecting the long-term growth outlook for Japan?

Takeshi Yamaguchi: [The] Japanese government publishes growth strategy report and the basic policy on fiscal management or honebuto policy in June every year. But I think this year's, you know, documents will be pretty important because these are the first documents under the Takaichi administration.

And these documents will set the direction of economic policy by Takaichi-san, Sanae Takaichi. Or Sanae-nomics. Compared with Abenomics, I think Takaichi-san focuses more on the supply side issues, you know, supply domestic investment. While Abenomics focused more on the exit from deflation, focusing on demand side policy, particularly, you know, monetary easing.

In the growth strategy report, the focus will be strategic investment in 17 strategic areas, including AI, especially, you know, AI robotics, semiconductors, defense and space, cybersecurity, and content industry and so on.

Another important point of Sanaeconomic system, there's overlap between these strategic investment areas and national securities. The government will also update its defense strategy by the end of this year, and there'll be a increase in the defense budget target. The focus will be a lot on, you know, I think, dual use technologies, and also resilience of supply chains going ahead.

Another important point is, I think there will be a change in the budget formation process. I think, under deflation there’s effectively cap on non-social security spending. But I think this government will likely allocate budget, you know, for multi-investment. So, I think the budget process will be more flexible. And they put more emphasis on the initial budget rather than the supplementary budget.

So, I think, these documents will be pretty important to monitor going ahead. But overall, I think, the government – yes, they do care about the market conditions. They will likely avoid massive, you know, expansion. But I think a slight expansion, especially in the area of strategic investment is likely to happen.

Seth Carpenter: Very helpful. Alright, that's the end of the panel. Thank you very much to my colleagues. And this is where I have to shift back into podcast mode to say thank you for listening. And if you enjoy Thoughts on the Market, please share it with a colleague or friend today. Thank you very much, everybody.

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And on today's episode, we're bringing you a live taping direct from Morgan Stanley and MUFG's Japan Summit to discuss the macroeconomic overlook. And, in particular, Japan's moment: reflation, reform, and the case for a structural re-rating.

I am joined by Chetan Ahya, our Chief Asia Economist; Takeshi Yamaguchi, our Chief Japan Economist; Jonathan Garner, our Chief Asia and EM Equity Strategist; Koichi Sugisaki, who is our Head of Japan Macro Strategy; and Sho Nakazawa, who is our Japan Equity Strategist.

Seth Carpenter: I will say we have just collectively published our mid-year outlook. So twice a year, Morgan Stanley Macro Research puts together our forecast. We take the time to debate with each other, to pressure test our views on the outlook for the next year and a half to two years.

And I have to say this version of the outlook process may have been the most difficult one that I can remember. And   in no small part because one of the key fundamental drivers of the outlook globally for growth, for inflation is oil, oil prices. And the swings there have been pretty dramatic.

And so, as a result, we put a lot of effort into not just our baseline forecast, but also scenarios and the ways in which our baseline forecast could be wrong.   

But Chetan, let me start with you.   Tell us a little bit about the exposure in Asia to, to the energy shock.

Chetan Ahya: So Seth, you're right.     Asia is one of the more exposed part of the world. But I would say that we've been surprised in the way this energy shock has been managed. One is, of course, at the global level, two big swings happened. US exports increased dramatically by 3.8 million barrels per day. Just to give you perspective, global consumption of oil is about 100 million barrels, so it's simple math in terms of how big this number was. And then China parallelly also reduced its imports by 3.5 million barrels. So, we had a 7 million barrel swing from a global oil demand balance perspective.

And, secondly, as far as gas is concerned, that is where actually we were more concerned about Asia because Asia was very dependent on Middle Eastern gas. And on that front, China single-handedly has bailed out the region. So, China cut its gas imports by about 45 percent, and that had at least avoided the shortages that we were worried about. We can manage oil prices, but shortages is something very difficult to manage .

So that's at the global level. And within the region, what every economy did is to switch to an alternative source of fuel, whether it is electricity generated through coal or other renewable sources. And particularly that happened in China and India, which are the two big importers of fuel in the region.

And then additionally, what we also saw is that everybody managed the fuel price increase quite well. So, on an average, if I look at the stats as of today, only about 25 to 30 percent of the underlying fuel price increase has been passed on to the consumer. So, the governments are taking it, so there is a burden on the fiscal front that is building up.

But as far as the consumers are concerned, this has been a help, and therefore you have not seen a big spike in inflation across the region.

Seth Carpenter:  Okay. So, a lot of comments about Asia in general. Let's go more specific to here in Japan. And so, Yamaguchi-san,  you were an early adopter of the Japan reflation view. If we go back a year, two years, three years, you were probably more optimistic, more bullish about growth in the market than consensus. More recently, you've been a little bit more cautious about where growth is going. And so,  can you tell us a little bit first why you're a bit more cautious now relative to where I suspect the market is? And then when it comes to the energy shock, how do you see it playing out with the Japanese economy? And should we worry about it derailing this whole reflation trade?

Takeshi Yamaguchi: We think Japanese underlying economic fundamentals remain resilient in the sense that, you know, nominal GDP recovery will continue as a trend. But for this year, I think there's a, you know, short-term slowdown, both in terms of real GDP growth and nominal GDP growth, due to the terms of a trade shock.

So far, you know, thanks to the government energy subsidies and Japan's relatively large strategic oil reserves, the direct impact on households has been limited. But we are already seeing a big increase in producer prices in the April data. It jumped to 4.9 percent {year-over-year], and we expect this producer price index will continue to go up due to the higher oil prices, but also because of the NAFTA-related supply side, you know, disruptions in areas, you know, such as, you know, construction materials, plastic products, and industrial solvents and so on.

That said, we still believe that, you know, underlying economic fundamentals remain resilient in the sense that there's a structural labor shortage. So, wage growth may somewhat slow, but still I think a solid, you know, base up increase will continue next year, especially among young workers. Also, I think this structural tight labor market [is] encouraging companies to step up labor-saving investment. And, I think, together with government's initiatives for domestic investment, I think, domestic CapEx will also likely remain resilient.

So, this year for nominal GDP growth, we expect, you know, slightly negative growth due to the terms of trade loss. But the next year, we are expecting above 4 percent nominal GDP growth. So, the overall, you know, story remains unchanged despite the short-term headwinds.

Seth Carpenter: Okay. So fundamental story remains unchanged. We're pretty optimistic, but it's a matter of long term versus short term  Jonathan, let me turn to you. Equity markets are generally optimistic, I would say, these days, but there is a bit of a divergence between views on equities here in Asia, between Japan on the one hand, and EM overall. In the mid-year outlook, you have expressed a preference for Japanese equities over EM.

Can you talk a little bit about that view? Why that preference? Are there sectors or specific stocks that matter more? How are you thinking about this sort of allocation across equity markets for you in Asia?

Jonathan Garner:  So, certainly, as Seth indicated and Chetan and Yamaguchi-san said, it's really an environment where the sector call, particularly the CapEx, super cycle call should drive portfolios. And that naturally leads you in Asia more to North Asia, where Japan is very richly endowed in beneficiaries of the CapEx super cycle. And obviously markets like Korea and Taiwan, and much less so to South Asia, where the larger markets are much more populated by consumer and services stocks.

So, in our portfolio, we're essentially overweight capital spending, underweight the consumer. And when you look at the Japan market, one of the things that my colleague Daniel Blake has done a lot of work is, is the sort of thematic exposures that exist within our coverage. The four core Morgan Stanley research themes of multipolar world, AI, tech diffusion, future of energy and societal shifts, they map into about 75 percent by stock number of our coverage for the Japan market, and they're quite nicely distributed across the stock coverage.

Obviously, some stocks have more than one aspect to them. And that is highly advantageous and much more advantageous than in fact any other large market. Europe of course, doesn't have AI, tech diffusion, or it largely lacks the beneficiaries, the upstream beneficiaries. The US has legacy, sort of, software service, business models and consumer exposure.

Now, it's not to say that all is sort of rosy in the garden. There are large auto OEMs here in Japan where the earnings numbers are challenged. So, it's all about the kind of the dispersion that's going on within the portfolio. But just on the base case targets, 4300 for topics, that's set by Nakazawa-san and myself. It's about 12 percent upside in the base.

In the two weeks since we published the report, EM has fallen back somewhat, so there's about 8 percent upside to our EM target. But on a kind of risk-adjusted bull-bear skew, bear in mind that EM is much more skewed in terms of the earnings drivers of that market. Essentially, if you strip Korea and Taiwan out, there's no earnings growth in EM right now. You would ultimately have to favor Japan. So, Japan should be at the core of any Asia portfolio at the moment.  

Seth Carpenter: And can you just give us a little insight as to what you're seeing about how the market is or maybe is not pricing the threat from the energy shock? What are you seeing in equity markets, top line, down into sectors? Do you think there's enough concern? Do you think there's room for that to get, sort of, rerated just on the energy shock situation?

Jonathan Garner: So, what you're seeing is that anything that is consumer-related is really struggling in terms of revisions. I think there are six different subcomponents of the consumer that we can track. Every single one of them has downgrades. And the upgrades are in energy, upstream energy, which isn't that well represented in Japan. There are a couple of names.

In materials, really across the board. In semis and IT across the board, and broadly, tech hardware. And then in the defense capital goods space. And that dispersion in revisions within the Japan market or within Asia as a whole is something that I've never seen before. 

It does maybe to some extent question the resilience of the consumer in terms of the way that the numbers are being downgraded. So, I'll just leave that hanging a little bit.

Seth Carpenter: Alright, thank you very much to my colleagues. And this is where I have to shift back into podcast mode to say thank you for listening. And if you enjoy Thoughts on the Market, please share it with a colleague or friend today. Thank you very much everybody.

Voice: That was Part 1 of a special two-part episode from Morgan Stanley and MUFG’s Japan Summit. Join us tomorrow for Part 2 of the conversation.