The Outlook for European Stocks in 2026

Michelle Weaver: Welcome to Thoughts on the Market. We're coming to you live from Morgan Stanley's Global Consumer and Retail Conference in New York City, where we have more than 120 leading companies in attendance.

Today's episode is the second part of our live discussion of the U.S. consumer and how AI is changing consumer companies. With me on stage, we have Arunima Sinha from the Global and U.S. Economics team, Simeon Guttman, our U.S. Hardlines, Broad Lines, and Food Retail Analyst, and Megan Clapp, U.S. Food Producers and Leisure Analyst.

It's Friday, December 5th at 10am in New York.

So, Simeon, I want to start with you. You recently put out a piece assessing the AI race. Can you take us through how you're assessing current AI implementation? And can you give us some real-world examples of what it looks like when a company significantly integrates AI into their business?

Simeon Gutman: Sure. So, the Consumer Discretionary and Staples teams went to each of their covered companies, and we started searching for what those companies have disclosed and communicated regarding their AI. In some cases, we used AI to do this search. But we created a search and created this universe of factors and different ways AI is being implemented. We didn't have a framework until we had the entire universe of all of these AI use cases.

Once we did, then we were able to compartmentalize them. And the different groups; we came up with six groups that we were able to cluster. First, personalization and refined search; second, customer acquisition; third product innovation; fourth, labor productivity; fifth, supply chain and logistics. And lastly, inventory management. And using that framework, we were able to rank companies on a 1 to 10 scale.

Across – that was the implementation part – across three different dimensions: breadth, how widely the AI is deployed across those categories; the depth, the quality, which we did our best to be able to interpret. And then the last one was proprietary initiatives. So, that's partnerships, could be with leading AI firms.

So that helped us differentiate the leaders with others, not necessarily laggards, but those who were ahead of in the race. In some cases, companies that have communicated more would naturally scream more, so there is some potential bias in that. But otherwise, the fact pattern was objective.

Walmart has full scale AI deployment. They're integrated across their business. They've introduced GenAI tools. That's like their Sparky shopping assistant. As well as integrated to in-store features. They talked about it. It's been driving a 25 percent increase in average shopper spend. They've recently partnered with OpenAI to enable ChatGPT powered Search and Checkout, positioning where the company, where the customer is shopping.

They're also layering on augmented reality for holiday shopping, computer vision for shelf monitoring. LLMs for inventory replenishment. Autonomous lifts, the list goes on and on. But it covers all the functional categories in our framework.

Michelle Weaver: And how about a couple examples of the ways companies are using these? Any interesting real world use cases you've seen so far?

Simeon Gutman: So, one of them was in marketing personalization, as well as in product cataloging. That was one of the more sided themes at this conference. So, it was good timing. So, the idea is when product is staged on a company's website; I don't think we all appreciate how much time and many hours and people and resources it takes to get the correct information, to get the right pictures and to show all the assortment – those type of functions AI is helping enable.

And it sounds like we're on the cusp of a step change in personalization. It sounds like AI, machine learning or algorithm driven suggestions to consumers. We didn't get practical use cases, but a lot of companies talked about the deployment of this into 2026, which sounds like it's something to look forward to.

Michelle Weaver: And Megan, how would you describe AI adoption in your space in terms of innings and what kind of criteria are you using to assess the future for AI opportunity and potential?

Megan Clapp: Yeah, I would say; I'd characterize adoption in the Food and broader Staples space today is still relatively early innings. I think most companies are still standing up the data infrastructure, experimenting with various tools. We're seeing companies pilot early use cases and start to talk about them, and that was evident in the work we did with the note that Simeon just talked about.

And so, the opportunity, I think, going ahead, lies in kind of what we see in terms of scaling those pilots to become more impactful. And for Staples broadly, and Food, you know, ties into this. I think, these companies start with an advantage and that they sit on a tremendous amount of high frequency consumption data. So, the data availability is quite large. The question now is, you know, can these large organizations move with speed and translate that data into action? And that's something that we're focused on when we think about feasibility.

I think we think about the opportunity for Food and Staples broadly as we'd put it into kind of two areas. One is what can they do on the top line? Marketing, innovation, R&D, kind of the lifeblood of CPG companies, and that's where we're seeing a lot of the early use cases. I think ultimately that will be the most important driver – driving top line, you know, tends to be the most important thing in most consumer companies.

But then on the other side, there are a lot of cost efforts, supply chain savings, labor productivity. Those are honestly a bit easier to quantify. And we're seeing real tangible things come out of that. But overall I think the way we think about it is the large companies with scale and the ability to go after the opportunity because they have the scale and the balance sheet to do so – will be winners here, as well as the smaller, more nimble companies that, you know, can move a little bit faster. And so that's how we're thinking about the opportunity.

Michelle Weaver: Can you give us also just a couple examples of AI adoption that's been successful that you've seen so far?

Megan Clapp: Yeah, so on the top line side, like I said, kind of marketing innovation, R&D. One quick example on the Food side. Hershey, for example, they're using algorithms to reallocate advertising spend by zip code, based on the real time sell through. So, they can just be much more targeted and more efficient, honestly, with that advertising spend. I think from an innovation perspective too, these companies are able to identify on trend things faster and incorporate that and take the idea to shelf time down significantly.

And then on the cost side, you know, General Mills is a company is actually relatively, far ahead, I'd say, in the AI adoption curve in Staples broadly. And what they've done is deployed what they call digital twins across their network, and it has improved forecast accuracy. They've taken their historical productivity savings from 4 percent annually to 5 percent. That's something that's structural. So, seeing real tangible benefits that are showing up in the PNL. And so, I think broadly the theme is these companies are using AI to make faster, and more precise decisions.

And then I thought, I'd just mention on the leisure side, something that I felt was interesting that we learned from Shark Ninja yesterday at the conference is – when asked about the role of Agentic AI in future commerce, thinks it'll be huge was how he described; the CEO described it. And what they're doing actively right now is optimizing their D2C website for LLMs like ChatGPT and Gemini. And his point was that what drives conversion on D2C today may not ultimately be what ranks on AI driven search.

But he said the expectation is that by Christmas of next year, commerce via these AI platforms will be meaningful; mentioned that OpenAI is already experimenting with curated product transactions. So, they're really focused on optimizing their portfolio. He thinks brands will win; but you have got to get ahead of it as well.

Michelle Weaver: And that's great that you just brought up Agentic commerce. We've heard about it quite a bit over the past couple of days, Simeon. And I know you recently put out a big piece on this theme.

Agentic commerce introduces a lot of possibility for incremental sales, but it also introduces the possibility for cannibalization. Where do you see this shaking out in your space? Are you really concerned about that cannibalization possibility?

Simeon Gutman: Yeah, so the larger debate is a little bit of sales cannibalization and a potential bit of retail media cannibalization. So, your first point is Agentic theoretically opens up a bigger e-commerce penetration and just more commerce. And once you go to more e-commerce, that could be beneficial for some of these companies.

We can also put the counter argument of when e-commerce came, direct-to-consumer type of selling could disintermediate the captive retailer sales again. Maybe, maybe not. Part of this answer is we created a framework to think about what retailers can protect themselves most from this. Two of them; two of the five I’s are infrastructure and inventory. So, the more that your inventory is forward position, the more infrastructure you have; the AI and the agent will still prioritize that retailer within that network. That business will likely not go elsewhere. And that's our premise.

Now, retail media is a different can of worms. We don't know what models are going to look like.

How this interaction will take place? We don't know who controls the data. The transactions part of this conference is we were hearing, ‘Well, the retailers are going to control some of the data and the transaction.’ Will consumers feel comfortable giving personal information, credit card to agents? I'm sure at some point we'll feel comfortable, but there are these inertia points and these are models that are getting worked out today.

There's incentives for the hyperscalers to be part of this. There's incentive for the retailers to be part of it. But we ultimately don't know. What we do know is though forward position inventory is still going to win that agent's business if you need to get merchandise quickly, efficiently. And if it's a lot of merchandise at once. Think about the largest platforms that have been investing in long tail of product and speed to getting it to that consumer.

Michelle Weaver: And Arunima, I want to bring this back to the macro as well. As AI adoption starts to ramp the labor market then starts to get called into question. Is this going to be automation or is it going to be augmentation as you see a ramp in AI adoption?

So how are your expectations for AI being factored into your forecast and what are you expecting there?

Arunima Sinha: There are two ways that we think about just sort of AI spending mattering for our growth forecasts. One part is literally the spend, the investment in the data centers and the chips and so on. And then the other is just the rise in productivity. So, does the labor or does the human capital become more productive?

And if we sum both of those things together, we think that over 2026 – [20]27, they add anywhere between 40-45 basis points to growth. And just to put things in perspective, our GDP growth estimate for the end of this year in 2026 is 1.8 percent. For 2027, it's 2.0 percent. So, it's an important part of that process.

In terms of the labor market itself, the work that you have led, as well as the work that we've been doing – which is this question about adoption at the macro level, that's still fairly low. We look at the census data that tracks larger companies or mid-size companies on a monthly basis to say, ‘How much did you use AI tools in the last couple of weeks.’ And that's been slowly increasing, but it's still sort of in the mid-teens in terms of how many companies have been using as a percentage.

And so, we think that adoption should continue to increase. And as that does, for now, we think it is going to be a compliment to labor. Although there are some cohorts within sort of demographic cohorts in terms of ages that are probably going to be disproportionately impacted, but we don't think that that's a sort of near term 2026 story.

Michelle Weaver:  Well, thank you all for joining us and please follow Thoughts on the Market wherever you listen to podcasts.

Thank you to our panel participants for this engaging discussion and to our live and podcast audiences. Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Michelle Weaver: Welcome to Thoughts on the Market. We're coming to you live from Morgan Stanley's Global Consumer and Retail Conference in New York City, where we have more than 120 leading companies in attendance.

Today's episode is the first in a two-part special focused on the consumer where we'll focus on the K economy and the health of the U.S. Consumer. Tomorrow for the next episode, we'll turn our attention to AI.

My colleagues and I are eager to dig into this discussion. With me on stage, we have Arunima Sinha from the Global and U.S. Economics team, Simeon Guttman, our U.S. Hardlines, Broad Lines, and Food Retail Analyst, and Megan Clapp, U.S. Food Producers and Leisure Analyst.

It's Thursday, December 4th at 10:00 AM in New York.

So, to start, I want to go through the health of the consumer. That's of course been a theme that's been on display at the conference today. And 2025 has really been a year of mixed signals. But overall spending has held up while inflation has weighed on confidence, especially among lower- and middle-income households.

Arunima, I want to start with you on the macro front as we head into year end. How would you describe the overall state of the consumer? What are you expecting in terms of real wage growth and spending?

Arunima Sinha: If we'll just look at the rear-view mirror in terms of Q1 through Q3, this year spending growth on a real basis has been holding up. So, in the first half of this year, about 1.5 percent on average. For the third quarter, given the data that we do now have in hand, we're tracking about 3 percent, quarter-on-quarter, on a real basis. But I think it is important to emphasize that this is already a step down than the numbers that we were seeing last year. So, in 2024 on these Q-on-Q numbers, we were running somewhere between 3.9-4 percent. So there already has been some slowdown.

The recurring theme that we've had this year is how are the drivers of consumption going to weigh on different cohorts? And so, how is the labor market going away and how are wealth effects going to play out? And that, sort of, tied in squarely with the narrative that we've been emphasizing this whole year, which is that for the upper income cohorts, those net wealth effects have been very, very supportive. $50 trillion in net wealth that's been created just over the last three years.

And that has continued for this year as well. And so, meanwhile the labor market has downshifted and that's had a read through into both just nominal wage growth as well as real wage growth. So, for example, on a three-month, three-month basis, that real wage growth, after we've adjusted for the nominal for inflation, has slowed down essentially to stall speed. It used to run, somewhere between 2-2.5 percent, in the first part of this year. And that we think is going to have a read through as we go into this upcoming quarter of Q4, as well as in the first quarter of next year.

So just this lagged effect from the slowdown on labor market income is going to weigh; continue to weigh on the middle-income and sort of the upper-, lower- part of the income cohort. So, in terms of our growth forecasts for spending, over this quarter in Q4 and over next quarter in Q1, we are expecting about 1 percent real growth for consumption. That is a two-percentage point step down from where we were in Q3. And then just in terms of disposable income, we're also thinking this particular quarter in Q4 is going to be fairly weak.

Michelle Weaver: You spoke a little bit about the different income cohorts there, but I want to double click on that. The K economy has been a really persistent theme as higher income households have benefited from strong market returns. But higher price levels have weighed on lower-income households. What are your expectations for the high versus low-income consumer next year?

Arunima Sinha: So next year, we do think that there could be some broadening out in consumption growth. Just overall we have a sequential step up in growth that begins to take place, starting in the second quarter of [20]26. So, we have consumption growth that starts to slowly inch up from about just under 1 percent in the first quarter of [20]26 – all the way up to about 2 percent by the end of the year.

What that's going to be driven by, we think that there are going to be some lessening of pressures on the middle-income cohorts. And where is that going to come from? It's going to come from perhaps a still moderate labor market. So, we're not – we don't think we're going to be seeing these big 100,000-150,000 plus jobs being added every month. We're thinking maybe about 60,000 on average per month, for most of next year.

But just less policy uncertainty, some boost from the fiscal bill, the fact that monetary policy is going to be heading towards neutral. All of those things should be supportive. Given that the upper-income didn't really slow down this year, we'd also don't think there's going to be a giant acceleration next year. And so, some of that uptick in consumption growth, we think could actually come from the middle-income. And we also think that some of those tariff pressures on inflation are going to start to dissipate after peaking in the first quarter next year.

Michelle Weaver: And Simeon, I want to bring the company side into the conversation. What's the early read you've gotten on Black Friday? Expectations into the shopping season were pretty weak. Do you think things could turn out to be better than feared? And are you seeing any differences by income cohort there?

Simeon Gutman: The overall take is, it's mixed – to maybe slightly a little worse. I’ll answer it in a few different ways.

First, the old-fashioned tire kicking that the retail analysts have done during the holiday season. In our hard line, broad line, food retail space mixed to slightly a little worse. In Alex Straton’s softline world sounded a little bit better. And then if we combine the takeaways that we've had from companies, at least who presented yesterday, Walmart, Target and some other category killer retailers, it sounded about inline. Underlying trend is relatively stable.

I sat on a panel earlier today, with a data aggregator who suggested that the holiday was a little underwhelming. What we don't see; and the underwhelming being at a minus 2 percent run rate for the – I guess, the November to date period, that doesn't include Cyber Monday. What this doesn't account for is the market share shifts.

So, one of the ongoing themes across the entire retail landscape has been this big, getting bigger – we say it a lot – but the narrowing funnel of market share. So, the inline updates are probably coming from some of the largest companies, even if the overall holiday was a little underwhelming. Now inline is not anything to write home about. It's harder to get to an inline holiday if you started out below. So inline's okay but not gangbusters. That's probably the right way to characterize it.

Michelle Weaver: Megan, same question to you. How is holiday shopping tracking in your space? Have you learned anything surprising about holiday during the conference?

Megan Clapp: Yeah, I would agree with Simeon relatively inline. I'd say kind of so far so good is what we heard from companies at the conference. We had both Mattel and Shark Ninja product companies that sell into many of the larger retailers that are winning that – that Simeon talked about.

Holiday matters a lot for both of them. So, we're still many weeks ahead of us in terms of POS, but Mattel talked about positive POS continuing through the Black Friday season. They left their guidance unchanged today. They're seeing replenishment from their retailers and orders in line with expectations, which was a question just given some of the uncertainty in the landscape. Shark Ninja sells small appliances. They spoke to a strong Black Friday – again, seeing the fourth quarter and holiday play out in line with their expectations.

Maybe a couple themes that stood out and one of them was particularly interesting to me. You talked about the K economy, I think, you know, it was very clear the higher end consumer continues to spend and outperform. Value and innovation continue to be things that consumers are looking for. Online seem to do better than in stores. That's what we heard from a lot of companies coming out of last week. And then newer channels like TikTok Shop are coming into the mix and, and brands are seeing, you know, strong growth from those channels as well.

Michelle Weaver: And Arunima, I want to wrap this section on Fed policy. How do you expect Fed policy in 2026 to influence consumer spending and recovery, especially for those middle- and lower-income households?

Arunima Sinha: We still have the Fed on an easing path into the first half of 2026. So we think 75 basis points and additional policy cuts into next year. But that more or less just takes monetary policy to some estimate of neutral. So, the point is that it's not monetary policy's becoming easier, it is simply just getting too neutral.

And so, if we think about the most interest sensitive types of consumption, it's going to come from Housing and it's going to come from Durables. And what our housing strategists are thinking is that given this sort of front end of the curve, our tenure forecast for the middle of next year is still at about 3.75. And so, mortgage rates could dip below 6 percent.

So, it's not the front end of the curve. It is that sort of belly of the curve there that's important there. And so there could be some pickup in housing that's going to be important. I think for the middle-income consumer affordability, we think it's still going to be an important concern for housing, but perhaps the middle-income could benefit from some of those lower mortgage rates that are going to come in.

Michelle Weaver: ​ Arunima, Simeon, and Megan, thanks for all your insights. And to our live and podcast audiences, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen to the show and share the podcast with a friend or colleague today.