"It's a bifurcated market, in which volume is being driven by mega-deals of more than $10 billion," said Kristin Lindia, Managing Director in Morgan Stanley’s Mergers & Acquisitions group. "Below that level, particularly in the sub-$1 billion segment, volumes are actually flat to down. That leaves room for more M&A."
Lindia added that stronger equity markets, a more favorable regulatory backdrop and the need to scale amid rapid technological change are encouraging corporate boards to evaluate strategic acquisitions.
AI Infrastructure Is Creating a New Investment Cycle
The Morgan Stanley Institute convened a panel exploring the global themes surrounding AI-driven compute demand.
Panelists said AI is fueling an unprecedented, capital-intensive infrastructure cycle in which demand for computing power continues to outpace supply. The primary constraints are power availability and execution—not capital—as financing markets continue to evolve to meet demand.
Funding remains readily available across both debt and equity markets. Leading technology companies are deploying their own capital while also tapping credit markets to finance infrastructure investments.
"What's really striking is the depth, breadth, innovation and complexity of the financing structures these companies have been able to execute," said Vishy Tirupattur, Chief Fixed Income Strategist and Director of Quantitative Research at Morgan Stanley.
For investors, the buildout of AI infrastructure is creating opportunities tied both to scarce physical assets and to the longer-term productivity gains expected from AI adoption.
"The lines between growth and value are becoming increasingly blurred because of technological innovation," said Jim Caron, Chief Investment Officer of the Portfolio Solutions Group at Morgan Stanley Investment Management. "The future winners may not be today's largest companies. They could be businesses that find more efficient and cost-effective ways to innovate."
Strong Conviction in Equities
Across asset classes, Morgan Stanley strategists emphasized the importance of focusing on fundamentals rather than short-term market volatility. Although uncertainty persists, resilient growth, moderating inflation and selective opportunities continue to support a constructive investment outlook.
Panelists suggested markets may be overestimating the likelihood of additional rate hikes this year, despite the Federal Open Market Committee’s relatively hawkish tone at their June meeting. As inflation eases alongside lower energy prices and policymakers reduce reliance on forward guidance, investors may need to focus more closely on underlying economic and market signals.
“Less forward guidance should mean more policy surprises—and therefore more realized volatility,” said Martin Tobias, U.S. Interest Rate Strategist at Morgan Stanley Research. “Should Chairman Warsh adopt the Greenspan-era toolkit of a shorter statement, a smaller balance sheet and less forward guidance, that could create bigger swings in short-term rates. We continue to tell investors that in the medium term, bonds with shorter and medium-length maturities offer attractive value.”
For equities, strategists remain bullish amid a reacceleration in earnings growth.
“Strong nominal growth and improving earnings trends should drive performance across a wider range of stocks,” said Andrew Pauker, U.S. Equity Strategist at Morgan Stanley Research. “We see opportunities in areas tied to broadening economic growth, including consumer discretionary goods, regional banks and transportation companies.”
Credit Strength with a Housing Caveat
Credit markets also reflect confidence in the economic outlook. Healthy corporate balance sheets, solid earnings growth and sustained demand for income-producing assets continue to support the asset class. While investment-grade spreads remain historically tight, strategists identified attractive opportunities in high-yield markets, particularly those financing AI infrastructure.
Housing could be a notable exception to an otherwise constructive outlook. Mortgage rates above 6% continue to weigh on affordability and existing home sales. Limited inventory and the absence of forced selling have supported prices, but strategists expect the subdued activity to last longer.
"If you bought a home in 2016 and refinanced in 2020 or 2021—and your income has increased in line with the U.S. median—your monthly payment as a share of income today is below 8%," said Jim Egan, U.S. Housing Strategist and Co-Head of Securitized Products Strategy at Morgan Stanley Research. "But for someone who purchased a home over the past three years, that figure could exceed 25%."
According to Egan, policy initiatives may provide incremental support, but no single legislative solution is likely to materially change the housing market's trajectory in the near term.
