Thoughts on the Market

Morgan Stanley Podcasts
Morgan Stanley Podcasts
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Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

  1. 1d ago

    The Unexpected Investment Case for AI Safety

    Tighter AI safety requirements could reshape the pace of AI investment. Ariana Salvatore and Michael Zezas dig into why the spending may shift toward more compute, not less. Read more insights from Morgan Stanley. ----- Transcript ----- Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.  Michael Zezas: And I'm Michael Zezas, Deputy Global Head of Research at Morgan Stanley.  Ariana Salvatore: Today, we'll be talking about AI safety and regulation.  It's Wednesday, September 23rd, at 10am in New York.  We put out a note last week on AI frontier capability gain and the associated safety risks.  Those have been in focus in recent weeks, and as a result, we've gotten a number of questions about the path forward for government regulation.  So today, Mike and I are going to get into some of the newest developments, where we think things are headed, and how the midterms could shape that path.  Michael Zezas: Yeah, and this is pretty important because the concern is that if AI safety scrutiny increases, it's going to slow everything down. You might have less CapEx, fewer model releases, and there's all sorts of downstream effects for the pace of U.S. growth and investment strategy in equities and throughout the AI investment theme.  But Ariana, you and the team landed in a bit of a different place and are arguing that a bigger focus on AI safety could end up being a tailwind to compute spend rather than a brake on it. Can you break that down for us?  Ariana Salvatore: Sure. So, the way we see this playing out, is there are five potential states of the world. Some include industry self-policing; some include the prospects for heavier government intervention. Across all of them, as you mentioned, we actually think this is a pretty big tailwind to compute spend and CapEx more broadly.  That's because as the labs integrate greater safety monitoring infrastructure, we think that spend is only going to accelerate, especially as LLM capabilities increases at a nonlinear rate. Similarly, on the regulation front, we think there are a few things that prevent something like a large comprehensive AI regulation bill from coming to fruition.  We think there's really three, kind of, key obstacles to something like that happening.  The first is the politics. So, the president himself has said he's against some sort of large-scale regulation. The second is the procedure. So mechanically speaking, there would need to be a legislative vehicle for this sort of thing to ride on. That's hard to see emerging in the very near term. And the third is precedent.  So, historical precedent here tells you that usually regulation is catalyzed by some sort of high salience event. That's why our framework for government reaction here hinges on two components: incident salience, as I just mentioned, and instrument availability. Instrument availability basically reflects the extent to which the government already has a tool that it can pull in this direction.  So, that's how we think about it going forward. That doesn't mean all policy action is off the table, but that supports our expectation for higher CapEx, higher compute spend over the coming years.  Michael Zezas: Right. So, the idea is that the spending continues and the things that would otherwise limit that spending, you don't see as real plausible policy options at the moment. And can you break this down a little bit more? Because I know there's a lot of different proposals floating around Washington, D.C. from policymakers right now.  What are you paying attention to?  Ariana Salvatore: We don't expect an overarching AI regulatory authority in the near term. Now, importantly, we also don't expect sweeping open weight model regulation. The reason for that is threefold. First of all, we think the U.S. is keen on maintaining this managed stability relationship with China.  We've written about the expectations around the U.S.-China summit. That's kind of a delicate balance that we think is likely to persist. So, overly restricting open weights models might throw a little bit of a wrench into that equilibrium that we see. So that's the first reason.  The second reason is diffusion. We think the U.S. administration wants to see the proliferation of open weights models. We know that companies are using some sort of hybrid of open and closed weight. So, to the extent that, you know, banning these models would slow adoption, we don't think that's in the interest of the administration.  And the third reason is purely mechanical. It's really hard to enforce these sorts of restrictions. Once a model weight is published online, it can be really hard to clamp down exactly who and where it's going to.  Obviously, companies can download them, customize them, et cetera. So, the enforcement picture here is also really challenging. That being said, we do think that the executive can continue to lean in and, sort of, make some incremental adjustments or changes on the regulatory front. But we think it's likely less severe than some of the proposals you're seeing in Congress right now. Things like the Kill Switch Act, for example, which basically mandate that companies can maintain an ability to shut down models at a moment's notice, right? If a certain threshold is crossed.  So, that's something that we see as less likely to come to fruition. But again, setting safety standards, guardrails, all of that from the administration we think is possible in the near term. Michael Zezas: What about some of the pushback that would at least appear to be rising at the state and local level around construction of data centers?  Is that something that you think might materially slow the industrial build-out and the CapEx levels around AI?  Ariana Salvatore: So far, what we've seen is that AI safety risks are not the top of the priority list when it comes to data center pushback, right? So, things like environmental concerns, affordability – those tend to be the main vectors of the opposition.  That being said, we've gotten the question, right, to your point, of does this, sort of, risk focus mean that the data center backlash is likely to grow? We think that it could, but at the same time, we think this is a highly idiosyncratic issue, meaning that this is something to pay attention to on a very granular level.  Certain states and localities will be the ones to really administer these restrictions, and we think in the aggregate, hyperscalers are going to be able to continue to mitigate. We've already seen these mitigation measures employed. We're still constructive on AI CapEx this year and next, because overall, we see the build-out really becoming more of a conditional build-out.  So, that means contingent upon some of these concessions, maybe it's more expensive in certain areas. But overall, we don't think that the concerns around safety are going to derail that story.  Michael Zezas: So, then when it comes to data centers, the conditions that might be being put on their construction at the state and local level, for the most part – those building out the data centers have been willing to make those concessions, so it hasn't slowed that much. Is that fair?  Ariana Salvatore: That's right, and it really depends on where the pushback is coming from, right? So, in some cases, you're seeing communities push back on things like water usage, right? And we're seeing the hyperscalers come out and respond and say explicitly, you know, how much water they're using in some of these operations. Google is proposing a regulatory framework, so that's something that they're mitigating through that lens.  In another example, you've got local communities pushing back on just, sort of, disruptions to quality of life, and you're seeing companies like Meta announce a fund to engage more locally there. So, it really is different. There's no one-size-fits-all solution here. But yes, I agree with you that overall, we don't think this is going to meaningfully constrain the build-out.  Michael Zezas: Got it. So, it seems like the idea here is that the secular trend around AI development is going to continue in your view. Is there any way that you think the midterm elections or the outcome around that might change your thinking?  Ariana Salvatore: So, I think the midterms will be important for sentiment, but when it comes to the actual policy path, we don't think they're the main driver, and there's two key reasons for that.  The first is obviously the president is not changing until 2029. So, the fact that President Trump still has to be involved in any capacity – if we were to see a bill emerge from Congress to us gives a little bit of clarity on what that bill could actually look like. And so ultimately, whatever comes to fruition will have to be a product of collaboration between Democrats, Republicans in Congress, and the president. So, that's a pretty much a constant.  The second reason I would say is because, as I kind of alluded to earlier, you tend to see government response when there's a high salience event. And in that case, it doesn't really matter what the government configuration is if it's reactionary.  When you think back to things like the pandemic, we saw the CARES Act. In 2008-2009, you saw the ARRA. Those are all efforts that were produced in a divided government. And so, in that vein, we basically think that you need to see some sort of event catalyze a response.  The key driver is not going to be government configuration. It's going to be the salience of that event specifically.  Michael Zezas: Okay, got it. So, the guidance to investors on the back of all of this is what?  Ariana Salvatore: So, the thematic recommendations from our team are intact, right? So, what we were talking about is basically we see these all converging towards a tailwind to CapEx and a tailwind to compute supply.  So, in t

  2. 1d ago

    Why Central Banks Are Raising Rates Again

    Central banks are turning more hawkish as inflation risks increase. Our Global Chief Economist and Head of Macro Research Seth Carpenter explains what that means for the Fed, ECB and Bank of Japan. Read more insights from Morgan Stanley. ----- Transcript ----- Seth Carpenter: Welcome to Thoughts on the Market. I’m Seth Carpenter, Morgan Stanley’s Global Chief Economist and Head of Macro Research. Today, I’m going to talk about all the movement we’ve seen in central banks and how it’s changing our forecasts.  It’s Tuesday, September 22, at 10 a.m. in New York.  Over the past two weeks, our economists here at Morgan Stanley have revised their outlooks for the Fed, the ECB, and the Bank of Japan to include more rate hikes.  Each economy faces different challenges, but all three central banks have arrived at roughly the same conclusion: growth has remained remarkably resilient despite all of the shocks hitting the global economy. And renewed energy-price pressures have increased the risk that inflation proves more persistent than they had previously expected.  The clearest example—and our biggest revision here—is the Fed.  Now for much of this year, we had actually thought the Fed might avoid hiking interest rates altogether. But in addition to this increase that we just saw at the September FOMC meeting, we now expect two additional rate hikes—in December and in March that will bring the terminal rate up to 4.25 to 4.5 percent.  While Chair Warsh has highlighted the inflationary implications of higher energy and commodity prices, for me, the more important signal was the assessment that policy is not sufficiently restrictive.  So in our view, the Fed appears to be reassessing not just the inflation outlook, but the amount of restraint that is required to bring inflation sustainably back to target.  But even with all of that said, we’re still looking at this shift as more of a recalibration of policy for the Fed rather than a fundamental shift in policy. And so the market may have—just may have—overestimated how much hiking is left.  But the shift does have clear and important market implications.  Our rate strategists expect investors to pull forward additional tightening expectations in the near term, while increasingly questioning how long policy can remain at restrictive levels before growth starts to slow. But more broadly, the Fed now appears a bit more sensitive to energy-driven inflation pressures, and that strengthens the case for a firmer dollar.  Over recent months, rising energy prices have supported the euro because investors have seen the ECB respond more aggressively than the Fed. That maybe former asymmetry could be changing.  Our foreign-exchange strategists therefore continue to favor dollar strength, particularly against the yen.  Now Europe does face a similar inflation challenge to the Fed, though through a different mechanism.  The renewed rise in natural-gas and other energy prices has led our economists to revise up their inflation forecast materially and, therefore, to add in another ECB rate hike in December.  But we have got to keep in mind that it is not energy prices all by themselves that have changed the outlook.  Economic activity in the euro area has also proven to be much more resilient than we had anticipated. And that reduces concerns that an additional modest tightening of policy would derail growth.  And so if you take it all together, the ECB is increasingly focused on preventing higher energy costs from feeding into broader inflationary dynamics.  Now Japan might seem different, but the underlying story is really surprisingly similar.  For decades, the BoJ’s challenge was generating inflation. But now policymakers are now increasingly concerned about the possibility that inflation will overshoot its target.  After the BoJ’s hike last week, we expect it to raise rates to 1.5 percent in December and then raise rates further, to about 1.75 percent, in March.  Like the Fed and the ECB, the BoJ faces an economy that has absorbed tighter financial conditions much better than had been expected. And yet, unlike the Fed and the ECB, our strategists believe that markets have become too aggressive in pricing the eventual destination of rates. And that creates scope for expectations to be revised lower over time.  As a result, while Japanese rates may continue to rise gradually, our foreign-exchange strategists still expect a broader trend of yen weakness to emerge once temporary positioning effects fade.  So the common thread across all three of these central banks that I’ve discussed is that, while the energy shock has changed the inflation conversation, the resilience in growth has further changed the policy conversation. And so for investors, next year is probably going to be characterized by higher policy rates and a stronger dollar than markets expected at the beginning of the year.  Well, thanks for listening. And If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.

  3. 2d ago

    Market Resilience Isn’t Complacency

    Our CIO and Chief U.S. Equity Strategist Mike Wilson discusses why quality stocks, strong earnings and price momentum support his view that the bull market remains intact. Read more insights from Morgan Stanley. ----- Transcript ----- Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.   Today on the podcast I’ll be discussing the ongoing mid-cycle transition.  It's Monday, September 21st at 11:30 am in New York.   So, let’s get after it.  The S&P 500 is near record highs. That’s despite rising energy prices, two wars running in parallel and AI safety concerns back in the headlines. Meanwhile central banks are tightening. On paper, that's a lot of reasons to be nervous. So are investors just being complacent? I don't think so.  More than 40 percent of the Russell 3000 has fallen at least 20 percent since June, while the S&P 500’s forward price earnings multiple has fallen back to 19 times, which is almost 20 percent lower than a year ago. At the same time, median stock earnings growth is running around 15 percent, and revisions breadth is back near cycle highs. Falling valuations alongside strong earnings growth is not complacency. It is the definition of a classic mid-cycle transition.  That distinction matters because mid-cycle markets tend to frustrate almost everyone. The index can remain resilient while much of the market corrects. Earnings can stay strong while multiples fall. And leadership can change without the bull market ending.  Last week’s Fed meeting fits squarely into that framework. The 25-basis-point hike was largely priced, so the real information was Chair Warsh’s willingness to follow through on his commitment to fight inflation. Recent core inflation data were firmer than expected, but the details were not uniformly hot.  Some of the upside was concentrated in a handful of categories, shelter remained soft, and tariff pass-through appears to be fading. That gave the Fed room to act without forcing investors to assume we are heading into another 2022-style tightening campaign.  In my view, the hike can enhance credibility. If investors believe the Fed is acting early enough to contain inflation, a higher policy rate can reduce uncertainty and term premium rather than automatically driving long-term financing costs higher.  But the rate hike is not my concern. A few additional hikes over the next year are unlikely to end this bull market if earnings remain strong. The bigger unknown is how a Warsh-led Fed approaches the balance sheet, money supply, and credit growth. His philosophy has historically leaned more monetarist than prior Fed chairs. However, we still don’t know how aggressively he will apply it – or how much influence he will have over the rest of the committee. That matters because the private economy is using more capital, and an overly restrictive approach to liquidity could become more consequential than the policy rate itself.  This is one reason I continue to favor large-cap quality. High free-cash-flow yield, low accruals, and operating-efficiency factors are leading, while the high-sales-per-employee factor has been one of the strongest recent performers. That also aligns closely with our preference for AI adopters rather than the enablers.  Price momentum is not disappearing. But its composition is changing toward quality, services-oriented, asset-light, and fee-based businesses. That is exactly what should happen during a mid-cycle transition.  The near-term swing factor remains energy prices. Another meaningful rise in crude or refined products would put upward pressure on the expected policy path, long-end yields, and bond volatility in an unhealthy way. It would also arrive during a period when midterm-election seasonality often produces a 5 to 10 percent index correction.  In a worst-case near-term scenario, the S&P 500 could trade near 7100, but I would view that as a tactical correction within the bull market – not a change in our fundamental views. Either way, I remain convicted in our 8,000 year-end price target.  The bottom line is that this market is behaving exactly like a mid-cycle market should: valuations are compressing, earnings are carrying the load, and leadership is moving toward quality. The index may look calm, but plenty of concern has already been priced at the stock level.  The mistake would be confusing resiliency with complacency—and missing the rotation taking place in plain sight.  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!

  4. 6d ago

    Trump-Xi Talks Put Trade and Tech in Focus

    As President Xi heads to Washington, trade, rare earths and AI are set to dominate the agenda. Our Head of U.S. Public Policy Research Ariana Salvatore unpacks what the meeting could mean for supply chains, tech stocks and the broader market. Read more insights from Morgan Stanley. ----- Transcript ----- Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley. Today, I'll be talking about next week's U.S.-China summit, specifically the bilateral trade relationship, what we can expect on critical minerals and rare earths, AI dialogues, and what it all means for markets. It's Friday, September 18th at 10am in New York. President Xi is scheduled to visit the White House on September 24th for his second meeting with President Trump this year, and his first White House visit in roughly a decade. The meeting follows President Trump's visit to Beijing in May, where the two sides established a framework for what they call a more constructive relationship of strategic stability. That meeting also produced new trade and investment dialogues, commitments around agricultural purchases and aircraft, and an agreement to begin a dialogue on artificial intelligence. But next week's summit comes at an important moment because several of the temporary arrangements that helped stabilize the economic relationship are due to expire later this fall. We think there are three areas to focus on. The first is trade. The current U.S.-China tariff truce is scheduled to expire in November. Now, public reporting suggests that the two governments are discussing an extension alongside potential announcements on agriculture, non-tariff barriers, and a relatively narrow set of goods that could see lower tariffs. The question for markets, therefore, is less whether next week produces a comprehensive new trade agreement and more so on whether the two sides can extend the current period of stability and prevent another significant increase in tariffs. The second area is critical minerals. This is probably one of the clearest examples of the leverage that each side has over the other. Washington, we think, wants more predictable Chinese exports of rare earths and other critical materials used across semiconductors, autos, aerospace, and defense. Beijing, meanwhile, has been pushing back against U.S. restrictions on Chinese companies' access to advanced technology. Public reporting suggests that both of these issues are part of the negotiations heading into the summit, and the timing here is really important. November 10th is an upcoming cliff affecting China's rare earth restrictions and U.S. technology controls, followed later that month by another deadline covering certain minerals. So what happens next week could determine whether those restrictions remain suspended or begin to snap back. The third area is technology, and increasingly artificial intelligence. The two leaders agreed in May to establish an AI dialogue, and President Trump has specifically said AI will be discussed next week. Reporting also shows that shared AI risks could be one area for discussion, although the broader competitive relationship makes a comprehensive agreement difficult, we think. From a policy perspective, the most important point is that technology restrictions are moving beyond advanced chips. The debate includes cloud and compute access, model distribution, procurement, and potentially the use of certain foreign AI models themselves. In other words, we think that while the summit could produce something like an agreement to keep talking on AI, the underlying shift matters more. AI sovereignty pushes both the U.S. and China toward more restrictions or heavier government involvement even over a longer period of time. We expect that a middle path is the more plausible U.S. approach. So think targeted restrictions on specific Chinese developers rather than a blanket prohibition on Chinese open weight models. But even that would reinforce what we've called the two worlds thesis, increasingly distinct U.S. and Chinese tech ecosystems with separate infrastructure, supply chains, standards, and distribution channels. There could also be a host of other issues on the agenda, specifically the U.S.-Iran conflict, which we see as a tail risk into the talks. So what does all this mean for investors? Even a constructive summit is unlikely to reverse the structural push toward technology and supply chain diversification. In fact, we argue that greater U.S.-China bifurcation will actually reinforce investment in parallel ecosystems, semiconductor capacity, data centers, cloud infrastructure, power, and critical mineral supply chains. In that sense, actually less geopolitical friction next week could reduce near-term market volatility, but without necessarily changing the underlying investment cycle. So, the key question coming out of the summit is not simply whether the relations are improving or deteriorating. It's whether the two sides can preserve enough stability to manage their competition while the longer-term process of de-risking continues underneath. 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

  5. Sep 17

    Why the Fed May Have Further to Go

    After raising interest rates for the first time in more than three years, the Fed still doesn’t see policy as restrictive. Our Global Head of Fixed Income Research Andrew Sheets breaks down what that could mean for the monetary policy path. 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 Federal Reserve may have raised interest rates and yet still thinks that monetary policy is providing support. It's Thursday, September 17th at 2pm in London.  Yesterday, the Federal Reserve raised interest rates by a quarter of a percent. That part was widely expected. What was more notable was how Chair Warsh described it.  At the press conference following the action, he said that the Fed had removed "a dose of accommodation," and he said that both he and many of his colleagues were hard-pressed to describe broader financial conditions as restrictive.  That's an important distinction that now moves to the heart of the market debate.  If monetary policy is already restrictive, another rate hike means that the Fed is pressing harder on the proverbial brakes on the economy. But if policy is still accommodative, a hike is more like easing off the gas. It means the Fed is simply providing a little less support. And if that is how the committee sees the world, it suggests that there could be further to go.  Following yesterday's meeting, Morgan Stanley's economists now expect two additional quarter point rate hikes in December and March, taking the Fed's target rate range from 4.25 to 4.5 percent; and we then expect those rates to remain there through the rest of 2027. Three things are driving this updated view.  First is exactly that language around accommodation. The interest rates that keep the economy in balance are always a mystery when viewed in real time. But given booming earnings growth, loan growth, and corporate activity, it's not obvious that the current level of interest rates are holding back activity for the economy as a whole. The Fed may believe that as well, making higher rates a little more palpable. Second is inflation. Chair Warsh repeatedly emphasized that trends matter here more than individual data points, and on that basis, inflation still looks too high. Too many categories are still running above 3 percent. The Fed simply does not sound convinced that inflation is moving sustainably back towards its 2 percent target as fast as it would like. Third is geopolitics. Chair Warsh explicitly cited geopolitical developments as one of the things that had changed since their meeting in July. He also made it clear that the Fed is watching not just high oil prices, but so-called second-round effects. And whether higher prices for fuel translate into higher prices for things that require a lot of fuel. Airline tickets, for example, are one of the areas of the economy where prices are going up the fastest. Higher oil prices are a key reason why. And so with energy markets still severely disrupted, this remains a wild card. There is, maybe, one other wrinkle. The committee also raised its estimate of the so-called long-run neutral interest rate – the rate that it thinks we'll ultimately end up at over the long term that will keep the economy in balance. And it raised this to about 3.25 percent. This is an uncertain estimate, and Chair Warsh himself downplayed its importance. But directionally, a view that the interest rate that keeps things in balance is higher means that any given interest rate that we see today is less restrictive on economic growth. It's less elevated relative to that neutral rate than we previously thought. That, too, leans towards the case for more tightening and more rate increases rather than less. None of this is set in stone. If energy prices fall, geopolitical tensions ease, or inflation improves more quickly, the Fed could stop earlier. But for now, we think the important message from this week's meeting was not simply that the Fed raised rates.  It was that even after doing so, it still doesn't think that policy is especially tight. And if that's right, there may be still more to do.  Thank you, as always, for your time. If you find Thoughts the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

  6. Sep 16

    One Fed Hike—Or More to Come?

    Our Global Head of Macro Strategy Matthew Hornbach joins our Chief U.S. Economist Michael Gapen to discuss the Fed’s potential next moves and how energy prices are influencing market expectations. Read more insights from Morgan Stanley. ----- Transcript ----- Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley. Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist. Matthew Hornbach: Today, what the Federal Reserve decided at its September meeting and what it could mean for rates through the end of the year. It's Wednesday, September 16th at 4pm in New York. So, Mike, the Fed raised rates by 25 basis points at this week's meeting. What stood out to you the most in the decision? And when it comes to inflation, how do you think this 25-basis point rate hike is actually going to affect the inflation outlook? Michael Gapen: Yeah, so certainly the decision was in line with expectations. You know, obviously what we've learned in the very broad sense is that inflation isn't moving fast enough in the direction that the Fed wants. So, it's responding by tighter monetary policy. And that does set up a very interesting question which you just asked, which is: Well, is it going to work? Is this the right response to the inflation that we're seeing? So, if you do go back and reread that Jackson Hole speech, there's not a lot in there about the drivers of inflation, what's causing higher inflation. But it's clear the only response to above target inflation from the point of view of the chair was tighter monetary policy. So, the Fed is in a bit of a pickle. Most of us believe the majority of the inflation we're seeing is supply side driven from tariffs, from energy. At least in the past, let's call it supply chain disruptions, a de-globalization narrative. Some of it is demand side driven through AI. But I think we're all looking at that thinking modestly tighter rates isn't necessarily going to bring down that AI-related inflation. So, we're left to conclude that the Fed's in this uncomfortable position of saying, "Well, a lot of the inflation that we're seeing is supply side driven and from the structural AI story that we're not convinced higher rates can maybe address." So I think the answer would be, if inflation's going to come down, then higher rates will be weighing on the parts of the economy that are more interest rate sensitive and generally soft already. Matthew Hornbach: Is this a one and done? Or do you think that when the Fed actually goes ahead and hikes rates after a long pause, they are thinking about delivering more than just one rate hike? Michael Gapen: Yeah, I strongly believe the committee as a whole is thinking in terms of more than one move. Monetary policy doesn't, say, hyper-react. It reacts with a bit of a delay. So, to your point, they've been on hold for a while. When they think about changing policy, then they're thinking about a series of moves. So, I think in their mind, if they're raising rates, there's a strong probability that they will do at least one more or two more. They're never going to think that a 25-basis-point move in the funds rate will fundamentally change the macro-outlook. So, I don't think they'd ever walk into this thinking one and done. Now, it is possible we get an ex-post one and done. So, how could that come about? If it is true indeed that we're right that a lot of this inflation is supply-side driven. It is coming down. It's clear that the three- and six-month annualized rates are pointing to disinflation into year-end. We can debate whether it's fast enough or not. But if disinflation continues to happen, then the Fed will have hiked, expect to maybe do another one. But by the time we get there, inflation has improved enough, and they end up not doing it. So, they would sound like, "Oh, we're still ready. We still think we've got more work to do." But in the moment, the data just arrives in a way that they stay where they are. So you would look back and say it was a one and done, but I don't think they go into this thinking one rate hike is going to fundamentally change the story. Matthew Hornbach: Now, of course, the data that we'll get between today and the December meeting will likely have an impact on their decision-making – as well as any revisions that we end up getting. And I think one of the stories that investors have been talking about are some of the methodological changes that the Bureau of Economic Analysis is implementing into the PCE inflation data. Do you see any scope for those types of revisions to lend itself to a one and done type of a policy for this year? Michael Gapen: It is possible. There's uncertainty about what actually those revisions are going to bring. But quality adjustments to software, for example, will over time likely bring inflation lower. Some of the revisions to the other categories. So, we do think it will on average lower year-on-year rate of inflation by about 1/10 or so, maybe a little more. So, it could show up on the high side. And then you've got what looks to be a different path. So yes, I think one of the reasons to maybe go slower, think about perhaps a quarterly pace of hikes, as opposed to, "Oh, we're just going to ramp up three, four meetings in a row," is to let some of this play out. See what those revisions look like. So yes, it could contribute to a world where revisions plus softness in the incoming data mean they hike, say, in September, don't do another one after that. Or those revisions are part of the reason why they think a slower-moving cycle rather than a more aggressive one is appropriate. Matthew Hornbach: Does the labor market play any role today in monetary policy? Michael Gapen: I think it's certainly secondary, if not tertiary. I don't want to say that the committee as a whole sees the labor market just fine and we don't have any concerns there. What's super helpful from the rate hike perspective is labor income, wage income out of the labor market is still decelerating and pretty modest. It doesn't suggest that the economy's overheating and the labor market is a source of upward pressure on inflation. So, I think that's beneficial in terms of thinking of the rate hike cycle. In the other direction, I'd say we've had a number of months now of, kind of, you know, let's call it 50,000 to 70,000 jobs a month on average if you kind of smooth through some of the volatility. That's not amazing, but it's not awful either. So Matt, I'd like to turn it back to you. This is of course the economist's perspective. When we translate this into the rates market; rates market clients may have a very different view. But I would be interested to hear your thoughts on how you think the rates market is dealing with the inflation. I don't want to say impulse, but let's call it the sticky disinflation we're getting, the sources of that inflation, and how it sees monetary policy reacting. How is the rates market digesting all of this? Matthew Hornbach: So, I think actually investors are reasonably nonplussed about what's happening in the underlying rate of inflation in the country. But what has inserted itself into the conversation is the price of energy and how impulsively energy prices have risen over recent months. When we look at how market prices evolve with respect to the path for monetary policy, what we observe empirically is that if energy prices are going up in a given week or in a given month, the market reprices to a more hawkish path for Fed policy. And if energy prices come down in a given week or a given month, and we see the market pricing towards a less hawkish path for monetary policy. So, the primary driver of how the markets are pricing the future of Fed policy is, in fact, the changes in the price of energy commodities. So, Brent crude oil, WTI crude oil, gasoline prices. And so, this is something that we just can't get away from. There are, of course, other things that do influence the level of Treasury yields, but I would suggest that they are more secondary or tertiary themselves in terms of… Similar to the labor market. I would say they have less of an impact on the overall level of yields. So, with a market-implied hiking cycle from the Fed at about three hikes or so from here, given that the Fed just delivered one rate hike, you know, the 10-year treasury yield is around 5 percent. It was much lower earlier this year, and we were pricing in two rate cuts at that point in time. So, you get the sense that if the market's moving from pricing in two rate cuts to pricing in four rate hikes, and the 10-year yield goes from 4.25 percent to 5 percent, obviously there's a relationship there. One factor that investors are certainly interested in is – how does the debt stock play a role in the level of yields? And one of the things that I've been telling people to consider is that it's not the level of the debt, the amount of debt in the economy that matters most for the level of interest rates – as odd as that may be to hear for listeners. It's how quickly that debt stock grows. So, if the debt stock is going up at a certain pace, and that pace is within the bounds of investor expectations, then it typically doesn't have that big of an impact on the bond market. So, one of the factoids that may surprise people is: about four years ago, the news media was very interested in the fact that the amount of debt in the United States had breached $31 trillion. And, the 10-year treasury yield at that time had peaked at about 4.25 percent, somewhere around there. Well, earlier this year, before the conflict in Iran began, the 10-year treasury yield was also around 4.25 percent. But this is four years later, and over these four years, the U.S. has added $9 trillion to the debt. So, here again, this is a good example, I think, of this idea that you can have a dramatic expansion in the debt from [$]31 trillion to

  7. Sep 15

    The Mid-Cycle Shift Equity Investors Shouldn’t Miss

    Our CIO and Chief U.S. Equity Strategist Mike Wilson breaks down how the market is transitioning to a mid-cycle environment, with leadership shifting toward higher-quality, asset-light companies with durable earnings. Read more insights from Morgan Stanley. ----- Transcript ----- Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.  Today on the podcast I’ll be discussing why inflation should not be a concern for equity investors. It's Tuesday, September 15th at 9 am in New York.  So, let’s get after it. The markets have spent the past few months doing far more work than what most casual observers might think. Since early June, the S&P 500 has chopped sideways, but underneath the surface leadership has changed materially. The early-cycle, capital-intensive winners are giving way to higher-quality companies with stronger free cash flow, better margins with more asset-light businesses. Software, Financial Services, Insurance, and Healthcare Services are beginning to show the earnings revision strength that Semiconductors and other cyclicals enjoyed earlier this year. To me, that is the market confirming an economy moving from early to mid-cycle. While many investors are debating yesterday’s news, the market is already moving to new leadership. A good example of this is the inflation data that was released last week. The results were a bit higher than expected and elicited quite a reaction from the media and Fed watchers. However, the probability of a September interest rate hike has been rising for months and was close to 70% before the data were released. Now it’s 95%. Equities have de-rated alongside that repricing in the bond market. In short, the inflation data may have been news to some, but it wasn’t to Mr. Market. While some may view this as the Fed being behind the curve, the bond market has been expecting it for months and essentially doing the tightening for the Fed. Equity markets are well aware of this dynamic which is why valuations have fallen and the index has gone nowhere for the past few months. This is also classic mid cycle transition behavior—strong earnings growth is offset by falling valuations as the Fed starts to focus on its inflation mandate. In other words, the first hike does not mean “risk off.” However, it does reinforce the quality rotation and overall narrative we have been highlighting since June. And earnings are the reason. To remind regular listeners, the median Russell 3000 company is growing earnings in the mid-teens, the fastest since 2021; and revisions remain strong. That is the mid-cycle playbook to a T—earnings are doing the heavy lifting and the market is becoming more selective, not necessarily less constructive. More specifically, the market is demanding better cash conversion, stronger margins, and more durable growth. This is why the momentum unwind earlier this summer has been misunderstood. Some investors see it as nothing more than leverage coming out of crowded positions, but that really misses the bigger message. Semiconductors are a classic early cycle sector and it reached an extreme in earnings revisions breadth back in June. That was the fundamental trigger for the unwind, and the leverage just magnified it. The price momentum factor can recover, but the stocks and sectors that lead may look very different. That is usually how a healthy market adjusts: the baton gets passed before everyone realizes the race has changed. With regard to interest rates, I also think the mainstream explanation is incomplete. Many investors assume higher yields are simply a referendum on debt and deficits. I see stronger nominal growth as the more important driver. Nominal GDP is running close to 7% on a five-year average basis and has reaccelerated on capex incentives, compute demand, and higher velocity real economy. Equities are an inflation hedge when inflation reflects stronger revenue and earnings growth. Deflation—not inflation—is the real kryptonite for stocks. This does not mean we are completely out of the woods on the mid cycle transition that began in June. If oil continues to rise sharply from here, it will likely push interest rates higher and put pressure on growth, an unhealthy combination for stocks. This would likely lead to a 5-10% drawdown in the S&P 500 before the bull market can resume in earnest. The other risk is the midterm elections which historically have been a headwind for equities in the September and October time frame.   Bottom line, the inflation data is old news. The rotation is not. We are transitioning to a mid-cycle market where earnings durability, free cash flow, operational efficiency, and quality matter more. Investors waiting for complete clarity from the Fed may miss the message already coming from the market: leadership has moved to higher quality, asset light companies. Don’t fight it; embrace it.  Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out.

  8. Sep 14

    Patients Are Taking the Driver's Seat in Healthcare

    Healthcare companies are rethinking their business models as patients gain more control over how they access care and purchase medicine. Our analysts Erin Wright and Terence Flynn unpack this shift and the emerging opportunities. Read more insights from Morgan Stanley. ----- Transcript ----- Erin Wright: Welcome to Thoughts on the Market. I'm Erin Wright, US Healthcare Services Analyst at Morgan Stanley. Terence Flynn: And I'm Terence Flynn, Morgan Stanley's US BioPharma Analyst. Erin Wright: Today, how the consumer is moving into the driver's seat across healthcare. It's Monday, September 14th at 7:00 AM We're recording in New York City, where Morgan Stanley's twenty-fourth Annual Healthcare Conference is happening this week. One of the biggest shifts we're seeing across the industry is patients gaining more choice, transparency, and control over how they access care and medicine. You can already see it in everyday behavior. In our AlphaWise survey earlier this year, thirty-four percent of US consumers said that they'd chosen to take a voluntary wellness lab test in the past three years, and roughly two-thirds already own a wearable or plan to buy one. And now we're seeing the same trend reshaping how people buy medicine and choose care. So Terence, let's start with biopharma. For years, direct-to-consumer pharma meant advertising and nudging people to ask your doctor about what particular treatment is best for them. What's different this time around? And what's different in this next wave of direct access? Terence Flynn: Yeah, absolutely. Thanks, Erin. So for most of the industry's history, the patient sat at the end of the value chain and had really limited control over the product, the price, or the route through which the drug was obtained. Manufacturers marketed to doctors and consumers, but the transaction was itself intermediated. So we think that's starting to change here. It's no longer simply about more consumer advertising or another cash pay discount. There's a parallel access infrastructure that's building here where the patient can increasingly start the initiation of the treatment journey themselves, obtain a prescription, often digitally through a telehealth provider, and then fill this prescription through other non-traditional channels. And so there really is a shift in the model that we're starting to see here. But again, we're not talking about replacing insurance here; we're talking about areas where friction is high and where a cash pay price is viable. Erin Wright: So Obesity has been the clearest proof point, as we are seeing patients asking providers about GLP-1s. Where else are we seeing this? Terence Flynn: Yeah. So manufacturers are actually already selling over twenty-five branded drugs directly to patients at cash prices. Now, the common features of these drug classes are that they're self-administered, so essentially the patient can start and stay on treatment, and where there's limited in-person infrastructure that's needed, and where, as I mentioned, you have a lower price point or a coverage gap, meaning traditional insurance coverage doesn't exist. Now, we're seeing this in large chronic categories. You mentioned obesity. Another one is, migraine headaches. There are also other areas that are amenable to telehealth, so think oral PCSK9 therapies, topical dermatology, non-opioid pain. So again, we think as more self-administered products launch, you're gonna see the addressable DTC pool expand. Erin Wright: And ultimately what does this reveal about patient demand and gaps in reimbursement? Terence Flynn: Yeah, I think GLP-1s, as you mentioned, Erin, provided the first proof point here that this new DTC model could actually be viable. And really the reason for that is that, the US employer coverage base right now, only about fifty percent cover these obesity medications. And so for the other fifty percent, you have a gap in coverage. And that's really why people are seeking other channels for coverage. And so again, that really created this opening here for this new model. And so again, that's another consideration when you think about other medicines that could go through these channels is you have to think about the insurance coverage situation. And so for some areas like oncology, for example, insurance coverage is gonna be very high, and so those wouldn't be amenable to a DTC approach. Erin Wright: So Terence, your analysis points to roughly twenty-six billion peak US opportunity. What makes a certain therapeutic well-suited for direct-to-consumer, and where is the opportunity most concentrated? Terence Flynn: Yeah. So there are really four variables that we considered. The first is self-administration. So as I mentioned, you have to be able to administer the medicine yourself, meaning you don't have to go into the physician or hospital for an injection, for example. The second is that the diagnosis doesn't need an in-person confirmation. So think of something like a biopsy or something. So you'd have to be able to diagnose, as I said, over a remote telehealth channel. The third would be something that is a lower price point. Obviously, there are, like we mentioned, the GLP-1 medicines are at a different price point versus oncology medicines. And then the last one would be any kind of legal restrictions. So sometimes FDA has a lot of restrictions around who can prescribe a medicine. These are called REMS. And so any medicine that had restrictions like that obviously would not be amenable to DTC. So again, we think through those different variables, and then we ultimately built up this twenty-six billion dollar TAM that represents about three percent of total branded pharmaceutical spend. Of that, about half is driven by the obesity or GLP-1 medications. So Erin, that's a good bridge to healthcare services because consumerism isn't just about paying cash. What does greater consumer control actually look like? Erin Wright: You're right. It's not just about paying out of pocket for healthcare. With now consumers becoming more proactive with their healthcare and preventative care, we are seeing a whole healthcare ecosystem shift, from health insurers now offering lifestyle savings accounts empowering patients with more choice on that front, health systems and hospitals are creating a digital front door and delivery of care twenty-four/seven on that front. And also, we're seeing more direct-to-consumer pharmacies and transparent pharmacies that are gaining traction. Terence Flynn: And what does the Alpha Wise survey data tell us about consumers' willingness to pay out of pocket for care? Erin Wright: So based on our AlphaWise consumer survey, twenty-five percent of consumers report paying entirely out of pocket for at least one healthcare service over the past year. That was actually higher than what we were expecting. Most commonly, this was attributable to behavioral and mental health services, about eight percent of the cohort. Annual spend was about nine hundred and eight dollars, but maximum willingness to spend was about double that. So this suggests consumers are using out-of-pocket services and medications and are willing to spend to do so. Terence Flynn: That's very interesting. How important are digital tools, wearables, and testing in actually accelerating this shift? Erin Wright: So wearables are certainly a piece of the puzzle. What is new though here is that we're seeing wearable data align with actual biological data, where, for example, clinical laboratories are now partnering with these wearable companies and other direct-to-consumer healthcare platforms to offer subscription-based biomarker panels and other testing services. This is where this type of technology becomes more actionable from a healthcare perspective and really, frankly, empowers patients to take matters into their own hands. Terence Flynn: So as consumers take more control, as you discussed, what types of healthcare service models are best positioned to benefit? Erin Wright: There are certainly a host of companies across healthcare that are attacking this from several different angles. But if we think about who in the industry has the most touch points into the consumer, into the patient, it would be your diversified managed care companies and vertically integrated managed care companies where we view that many of these larger insurers are best able to adapt to consumerism in healthcare. We're already starting to see that happen with stepped-up technology investments helping to facilitate greater transparency and access, whether it's across insurance, provider arms, technology, or, um, or pharmacy assets as well. To sum it up, in biopharma, we're seeing a parallel access channel emerge alongside traditional reimbursement. And in healthcare services, consumers are gaining more control over how they choose access and pay for their care. Consumers aren't stepping outside of the healthcare system. They're taking a more proactive and more active role in how they navigate it. Terrence, thank you for taking the time to talk. Terence Flynn: Great speaking with you Erin. Erin Wright: 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 a colleague today.

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