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As America nears its 250th birthday, our Global Head of Fixed Income Andrew Sheets looks back at the early republic as a volatile frontier market, and what its path from credit risks to durable institutions can teach investors today.
Read more insights from Morgan Stanley.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, markets are closed for the observance of 4th of July. But as America approaches its 250th anniversary, we take a look back to look forward at early America as a frontier market.
It's Friday, July 3rd at 9am in Seattle.
If you were a global investor at the end of the 18th century looking for a stable, low-risk home for your capital, it would have been entirely reasonable to avoid the newly minted United States of America. By the standards of modern finance, the young republic was not a developed market in waiting. It was a frontier economy: volatile, debt-burdened, institutionally fragile, resource-rich, politically combustible, and astonishingly unequal.
Its currency had collapsed. Its public finances were suspect. Its citizens resisted taxation, and its growth prospects were extraordinary. In 1810, 70 percent of the country was under the age of 25.
That is one of the revelations of Gordon Wood's Empire of Liberty, which focuses on the early days of the new country from 1789 to 1815.
Wood's America is not the marble republic of statues and myth. It is speculative, messy, and full of motion. The United States succeeded not by escaping the dysfunctions that we associate with emerging or frontier markets, but by turning them into sources of strength.
Start with capital. Early America needed it desperately. Roads, canals, land purchases, and government all required credit, and there was never enough of it. The country was rich in land and poor in liquidity, a classic emerging market mismatch.
What the young country couldn't borrow or invent, it misappropriated, lifting intellectual property from its former masters in Britain. What Alexander Hamilton understood was the importance of confidence given this challenge; that debts would be honored, contracts enforced, and taxes, however unpopular, collected.
His financial program was an attempt to solve the emerging market problem before the phrase existed. How to persuade investors that a new state, born in revolution and nearly bankrupted by war, could be trusted. To Hamilton, public credit was the foundation of independence.
To many Jeffersonians, however, this system looked like an attempt to smuggle a British financial order back into the country that had just fought to expel it.
The early republic's debates over debt, banks, speculation, and taxation sound contemporary because the underlying question is perennial in frontier markets: Can a society embrace credit and foreign capital without being captured by it?
The U.S. was not starting from zero. It inherited legal traditions, habits of self-government, and a culture of contract and property. Those foundations gave confidence that disputes could be adjudicated, debts pursued, and rules would not be arbitrary.
Early America was risky, but it was not lawless. And still, it did not go smoothly. There was no Federal Reserve, FDIC, or even a uniform national currency. Business was conducted with foreign coins, notes issued by private banks, IOUs, and blind optimism.
Bank failures were common. In 1808, the Farmers Exchange Bank of Rhode Island issued over $600,000 of notes against less than $90 of gold in its vaults. You almost have to admire the audacity.
Yet the same instability that made early America risky also made it unusually open. Land was the country's great asset class, a source of migration, ambition, speculation, and opportunity, at least for white settlers. It also produced bubbles, administrative strain, the expansion of slavery, and the violent dispossession of Native peoples.
The Louisiana Purchase in 1803 was a risky, leveraged acquisition of distressed real estate, doubling the scale of the American experiment before anyone had quite figured out how the original version was supposed to work. Wood is especially good on the familiar energy unleashed by this world.
The engine of U.S. growth was not an aristocracy of polished grandees, but the "middling sort." Shopkeepers, artisans, tavern owners, mechanics, farmers, merchants, and speculators – many convinced that in America, birthright mattered less than hustle.
Commentators of the time complained about the degraded press, political polarization, hostility to expertise, and the vulgarity of a society obsessed with getting ahead. None of this sounds especially distant.
What saved America from the usual traps of frontier economies was not immaculate stability. It was adaptability. Its constitution was amended. Political power changed hands despite animosity.
Bankruptcy laws allowed for failure. Competition was ferocious, and economic power was generally too diffuse to be easily monopolized. The early republic's genius lay less in solving its contradictions than in creating ways to fight over them without destroying the whole.
That is a useful lesson for America at 250. We tend to look backwards for reassurance, imagining that the country once possessed a unity, prudence, and institutional solidity that we have since lost. Wood suggests something different, that the United States was turbulent from the start.
Its legacy was contested, its finances distrusted, its politics venomous, its expansion intertwined with slavery and Native dispossession, and its future uncertain. Emerging markets become developed markets not because they stop having crises, but because they build credibility through them. They learn which institutions matter, which bargains endure, which debts must be paid, and which moral liabilities compound when deferred.
America was not born orderly, rich, or secure. It was born in the mud, financed on fragile credit, driven by speculation, and sustained by an almost irrational confidence in the future.
So, enjoy the fireworks – and let them be a reminder that national maturity is not the absence of volatility. It's the capacity to turn that volatility into renewal.
A postscript: Gordon S. Wood died in early June of this year. As a professor, author, and one of the preeminent scholars of the American Revolution, he brought fresh insight and deep humanization to the country's founding. For anyone looking for a better understanding of America as it celebrates a big anniversary, we'd wholeheartedly recommend his work
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.
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Following meetings across Europe and Asia, our Global Head of Cross-Asset Strategy Research, Serena Tang, discusses two of the main themes on investors' minds: uncertainty around U.S. monetary policy and increasing caution toward AI despite its long-term potential.
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.
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With voters focused on prices and the economy, our Head of Public Policy Research Ariana Salvatore and U.S. Thematic Strategist Michelle Weaver discuss the consumer trends that could matter most heading into November’s elections.
Read more insights from Morgan Stanley.
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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.
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Our CIO and Chief U.S. Equity Strategist Mike Wilson explains that gains in the stock market are expanding to more sectors and why investors should position quickly.
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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.
It's Tuesday, June 30th at 11:30am in New York.
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.
Coming into this year, the primary differentiation to our view was that the economic and earnings outlook were much stronger than the consensus believed. That view was built around a few simple, but powerful ideas: easy comparisons after a three year rolling recession, lean cost structures, pent-up demand, fiscal support from capex incentives and tax cuts, deregulation for the banks, and a monetary backdrop that was increasingly supportive through the liquidity channel.
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 1500 is 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 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 revision 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 that 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 too. 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 the 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!
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Europe's equity rally has surprised many investors. Our Europe Head of Research Product Paul Walsh and Chief European Equity Strategist Marina Zavolock discuss potential outcomes of the broadening market.
Read more insights from Morgan Stanley.
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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.
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.
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Although markets may recalibrate to a different policy playbook under the new Fed chair Kevin Warsh, housing could remain in a holding pattern. Our co-heads of Securitized Products Research Jay Bacow and James Egan explain why.
Read more insights from Morgan Stanley.
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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.
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.
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Our U.S. Public Policy Strategist Ariana Salvatore joins our Deputy Global Head of Research Michael Zezas to consider the consumer outlook and how it may impact the November midterm elections.
Read more insights from Morgan Stanley.
----- Transcript -----
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.
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In his first meeting as Fed Chair, Kevin Warsh signaled restraint in providing guidance. Our Global Head of Fixed Income Research Andrew Sheets looks at possible impacts of the new approach.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, 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.
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First-time homebuyers may get short windows of relief, but our co-head of Securitized Products Research James Egan and Senior Economist and Strategist in Morgan Stanley's Private Wealth Management Sarah Wolfe say the bigger story is a housing market resetting around a higher bar to entry.
Read more insights from Morgan Stanley.
----- Transcript -----
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 percent. 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 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.
***
Sarah Wolfe is a member of Morgan Stanley's Wealth Management Division and is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.
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Our CIO and Chief U.S. Equity Strategist Mike Wilson reacts to Kevin Warsh’s first Fed meeting, explaining why the new chair’s credibility may require letting markets experience some short-term pain.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast I’ll be discussing 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!
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As AI investment keeps growing, our strategists Carolyn Campbell and Vishwas Patkar discuss the many ways tech infrastructure gets financed and the opportunities for investors.
Read more insights from Morgan Stanley.
----- Transcript -----
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.
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AI’s appetite for memory has turned chips into an inflationary factor. Our U.S. Public Policy Strategist Ariana Salvatore looks at what policymakers could do to reduce that pressure.
Read more insights from Morgan Stanley.
----- Transcript -----
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.
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Our Global Head of Macro Strategy Matthew Hornbach and our Chief U.S. Economist Michael Gapen discuss the signals investors will be seeking from the new Fed Chair leading his first monetary policy meeting and possible implications for markets.
Read more insights from Morgan Stanley.
----- Transcript -----
Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.
Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.
Matthew Hornbach: Today, 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 unemplyment, 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.
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Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why the recent equity correction may be more reset than reversal and where investors may find the next opportunities.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today: 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!
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Chief Asia Economist Chetan Ahya joins Head of India Research and Chief India Equity Strategist Ridham Desai to break down India’s macro outlook, capital flows and sector opportunities.
Read more insights from Morgan Stanley.
----- Transcript -----
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: And 4:30PM in Mumbai.
Chetan Ahya: Ridham, the 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. 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 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 from 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: 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 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. 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 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.
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Our Global Head of Fixed Income Research Andrew Sheets explains our differentiated view of a potential benign outlook for inflation, despite the recent acceleration.
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----- Transcript -----
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.
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Morgan Stanley analysts Ravi Shanker and Jeff Adelson take a look at what the fight for affluent, loyal travelers could mean for banks and airlines.
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----- Transcript -----
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.
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As AI demand surges, our Asia Energy Analyst Mayank Maheshwari discusses the new multi-trillion-dollar investment cycle to secure the power, fuels, grids and storage that keep modern life running.
Read more insights from Morgan Stanley.
----- Transcript -----
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.
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The Head of our Europe and Asia Technology Team, Shawn Kim, explains how AI’s appetite for memory chips is boosting the cost of everything from data centers to smartphones, with consequences that may reach far beyond the tech industry.
Read more insights from Morgan Stanley.
----- Transcript -----
Shawn Kim: 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.
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Trade policy is once again in the news with the announcement of new tariffs. Our Head of Public Policy Research Ariana Salvatore digs into why tariffs may not be a disruptive factor for markets this time.
Read more insights from Morgan Stanley.
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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.
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