Episódios

  • Our analysts Michael Zezas and Erik Woodring discuss the ways tariffs are rewiring the tech hardware industry and how companies can mitigate the impact of the new U.S. trade policy.

    Read more insights from Morgan Stanley. 

    ----- Transcript -----

    Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Global Head of Fixed Income and Public Policy Research.

    Erik Woodring: And I'm Erik Woodring, Head of the U.S. IT Hardware team.

    Michael Zezas: Today, we continue our tariff coverage with a closer look at the impact on tech hardware. Products such as your smartphone, computers, and other personal devices.

    It's Thursday, April 17th at 10am in New York.

    President Trump's reciprocal tariffs announcements, followed by a 90 day pause and exemptions have created a lot of turmoil in the tech hardware space. People started panic buying smartphones, worried about rising costs, only to find out that smartphones may or may not be exempted.

    As I pointed out on this podcast before, these tariffs are also significantly accelerating the transition to a multipolar world. This process was already well underway before President Trump's second term, but it's gathering steam as trade pressures escalate. Which is why I wanted to talk to you, Erik, given your expertise.

    In the multipolar world, IT hardware has followed a China+1 strategy. What is the strategy, and does it help mitigate the impact from tariffs?

    Erik Woodring: Historically, most IT hardware products have been manufactured in China. Starting in 2018, during the first Trump administration, there was an effort by my universe to diversify production outside of China to countries friendly with China – including Vietnam, Indonesia, Malaysia, India, and Thailand. This has ultimately helped to protect from some tariffs, but this does not make really any of these countries immune from tariffs given what was announced on April 2nd.

    Michael Zezas: And what do the current tariffs – recognizing, of course, that they could change – what do those current tariffs mean for device costs and the underlying stocks that you cover?

    Erik Woodring: In short, device costs are going up, and as it relates to my stocks, there's plenty of uncertainty. If I maybe dig one level deeper, when the first round of tariffs were announced on April 2nd, the cumulative cost that my companies were facing from tariffs was over $50 billion. The weighted average tariff rate was about 25 per cent. Today, after some incremental announcements and some exemptions, the ultimate cumulative tariff cost that my universe faces is about $7 billion. That is equivalent to an average tariff rate of about 7 per cent. And what that means is that device costs on average will go up about 5 per cent.

    Of course, there are some that won't be raised at all. There are some device costs that might go up by 20 to 30 per cent. But ultimately, we do expect prices to go up and as a result, that creates a lot of uncertainties with IT hardware stocks.

    Michael Zezas: Okay, so let's make this real for our listeners. Suppose they're buying a new device, a smartphone, or maybe a new laptop. How would these new tariffs affect the consumer price?

    Erik Woodring: Sure. Let's use the example of a smartphone. $1000 smartphone typically will be imported for a cost of maybe $500. In this current tariff regime, that would mean cost would go up about $50. So, $1000 smartphone would be $1,050.

    You could use the same equivalent for a laptop; and then on the enterprise side, you could use the equivalent of a server, an AI server, or storage – much more expensive. Meaning while the percentage increase in the cost will be the same, the ultimate dollar expense will go up significantly more.

    Michael Zezas: And so, what are some of the mitigation strategies that companies might be able to use to lessen the impact of tariffs?

    Erik Woodring: If we start in the short term, there's two primary mitigation strategies. One is pulling forward inventory and imports ahead of the tariff deadline to ultimately mitigate those tariff costs. The second one would be to share in the cost of these tariffs with your suppliers. For IT hardware, there's hundreds of suppliers and ultimately billions of dollars of incremental tariff costs can be somewhat shared amongst these hundreds of companies.

    Longer term, there are a few other mitigation strategies. First moving your production out of China or out of even some of these China+1 countries to more favorable tariff locations, perhaps such as Mexico. Many products which come from Mexico in my universe are exempted because of the USMCA compliance. So that is a kind of a medium-term strategy that my companies can use.

    Ultimately, the medium-term strategy that's going to be most popular is raising prices, as we talked about. But some of my companies will also leverage affordability tools to make the cost ultimately borne out over a longer period of time. Meaning today, if you buy a smartphone over two-year of an installment plan, they could extend this installment plan to three years. That means that your monthly cost will go down by 33 per cent, even if the price of your smartphone is rising.

    And then longer term, ultimately, the mitigation tool will be whether you decide to go and follow the process of onshoring. Or if you decide to continue to follow China+1 or nearshoring, but to a greater extent.

    Michael Zezas: Right. So, then what about onshoring – that is moving production capacity to the U.S.? Is this a realistic scenario for IT hardware companies?

    Erik Woodring: In reality, no. There is some small volume production of IT hardware projects that is done in the United States. But the majority of the IT hardware ecosystem outside of the United States has been done for a specific reason. And that is for decades, my companies have leveraged skilled workers, skilled in tooling expertise. And that has developed over time, that is extremely important. Tech CEOs have said that the reason hardware production has been concentrated in China is not about the cost of labor in the country, but instead about the number of skilled workers and the proximity of those skilled workers in one location. 

    There's also the benefit of having a number of companies that can aggregate tens of thousands, if not hundreds of thousands of workers, in a specific factory space. That just makes it much more difficult to do in the United States. So, the headwinds to onshoring would be just the cost of building facilities in the United States. It would be finding the skilled labor. It would be finding resources available for building these facilities. It would also be the decision whether to use skilled labor or humanoids or robots.

    Longer term, I think the decision most of my companies will have to face is the cost and time of moving your supply chain, which will take longer than three years versus, you know, the current presidential term, which will last another, call it three and a half years.

    Michael Zezas: Okay. And so how does all of this impact demand for tech hardware, and what's your outlook for the industry in the second half of this year?

    Erik Woodring: There's two impacts that we're seeing right now. In some cases, more mission critical products are being pulled forward, meaning companies or consumers are going and buying their latest and greatest device because they're concerned about a future pricing increase.

    The other impact is going to be generally lower demand. What we're most concerned about is that a pull forward in the second quarter ultimately leads to weaker demand in the second half – because generally speaking, uncertainty, whether that's policy or macro more broadly, leads to more concerns with hardware spending and ultimately a lower level of spending. So any 2Q pull forward could mean an even weaker second half of the year.

    Michael Zezas: Alright, Erik, thanks for taking the time to talk.

    Erik Woodring: Great. Thanks for speaking, Mike.

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

  • The ever-evolving nature of the U.S. administration’s trade policy has triggered market uncertainty, impacting corporate and consumer confidence. But our Head of Corporate Credit Research Andrew Sheets explains why he believes this volatility could present a silver lining for credit investors.

    Read more insights from Morgan Stanley. 

    ----- Transcript -----

    Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about how high uncertainty can be a risk for credit, and also an opportunity.

    It's Wednesday, April 16th at 9am in New York.

    Markets year-to-date have been dominated by questions of U.S. trade policy. At the center of this debate is a puzzle: What, exactly, the goal of this policy is?

    Currently, there are two competing theories of what the U.S. administration is trying to achieve. In one, aggressive tariffs are a negotiating tactic, an aggressive opening move designed to be bargained down into something much, much lower for an ultimate deal.

    And in the other interpretation, aggressive tariffs are a new industrial policy. Large tariffs, for a long period of time, are necessary to encourage manufacturers to relocate operations to the U.S. over the long term.

    Both of these theories are plausible. Both have been discussed by senior U.S. administration officials. But they are also mutually exclusive. They can’t both prevail.

    The uncertainty of which of these camps wins out is not new. Market strength back in early February could be linked to optimism that tariffs would be more of that first negotiating tool. Weakness in March and April was linked to signs that they would be more permanent. And the more recent bounce, including an almost 10 percent one-day rally last week, were linked to hopes that the pendulum was once again swinging back.

    This back and forth is uncertain. But in some sense, it gives investors a rubric: signs of more aggressive tariffs would be more challenging to the market, signs of more flexibility more positive. But is it that simple? Do signs of a more lasting tariff pause solve the story?

    The important question, we think, is whether all of that back and forth has done lasting damage to corporate and consumer confidence. Even if all of the tariffs were paused, would companies and consumers believe it? Would they be willing to invest and spend over the coming quarters at similar levels to before – given all of the recent volatility?

    This question is more than hypothetical. Across a wide range of surveys, the so-called soft data, U.S. corporate and consumer confidence has plunged. Merger activity has slowed sharply. We expect intense investor focus on these measures of confidence over the coming months.

    For credit, lower confidence is a doubled edged sword. To some extent, it is good, keeping companies more conservative and better able to service their debt. But if it weakens the overall economy – and historically, weaker confidence surveys like we’ve seen recently have indicated much weaker growth in the future; that’s a risk. With overall spread levels about average, we do not see valuations as clearly attractive enough to be outright positive, yet.

    But maybe there is one silver lining. Long term Investment grade corporate debt now yields over 6 percent. As corporate confidence has soured, and these yields have risen, we think companies will find it unattractive to lock in high costs for long-term borrowing. Fewer bonds for sale, and attractive all-in yields for investors could help this part of the market outperform, in our view.

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

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  • As gold prices reach new all-time highs, Metals & Mining Commodity Strategist Amy Gower discusses whether the rally is sustainable.

    Read more insights from Morgan Stanley. 

    ---- Transcript -----

    Welcome to Thoughts on the Market. I’m Amy Gower, Morgan Stanley’s Metals & Mining Commodity Strategist. Today I’m going to talk about the steady rise we’ve had in gold prices in recent months and whether or not this rally can continue. 

    It’s Tuesday, April 15th, at 2pm in London.

    So gold breached $3000/oz for the first time ever on 17th of March this year, and has continued to rise since then; but we would argue it still has room to run. 

    First of all, let’s look back at how we got here. So, gold already rallied 25 percent in 2024, which was driven largely by strong central bank demand as well as the start of the US Fed rate cutting cycle, and strong demand for bars and coins as geopolitical risk remained elevated. 

    And arguably, these trends have continued in 2025, with gold up another 22 percent, and now rising tariff uncertainty also contributing. This comes in two ways – first, demand for gold as a safe haven asset against this current macro uncertainty. And second as an inflation hedge. Gold has historically been viewed by investors as a hedge against the impact of inflation. So, with the U.S. tariffs raising inflation risks, gold is seeing additional demand here too. 

    But, of course, the question is: can this gold rally keep going? We think the answer is yes, but would caveat that in big market moves -- like the ones we have seen in recent weeks -- gold can also initially fall alongside other asset classes, as it is often used to provide liquidity. But this is often short-lived and already gold has been rebounding. We would expect this to continue with the price of gold to rise further to around $3500/oz by the third quarter of this year. 

    There are three key drivers behind this projection: 

    First, we see still strong physical demand for gold, both from central banks and from the return of exchange-traded funds or ETFs. Central banks saw what looks like a structural shift in their gold purchases in 2022, which has continued now for three consecutive years. And ETF inflows are returning after four years of outflows, adding a significant amount year-to-date, but still well below their 2020 highs, suggesting there’s arguably much more room to go here. 

    Second, macro drivers are also contributing to this gold price outlook. A falling U.S. dollar is usually a tailwind for commodities in general, as it makes them cheaper for non-dollar holders; while a stagflation scenario, where growth expectations are skewed down and inflation risks are skewed up, would also be a set-up where gold would perform well. 

    And third, continued demand for gold as a safe-haven asset amid rising inflation and growth risks is also likely to keep that bar and coin segment well supported.  

    And what would be the bullish risks to this gold outlook? Well, as prices rise, you tend to start ask questions about demand destruction. And this is no different for gold, particularly in the jewelry segment where consumers would go with usually a budget in mind, rather than a quantity of gold. And so demand can be quite price sensitive. Annual jewelry demand is roughly twice the size of that central bank buying and we already saw this fall around 11 percent year-on-year in 2024. So, we would expect a bit of weakness here. But offset by the other factors that I mentioned. 

    So, all in all, a combination of physical buying, macro factors and uncertainty should be driving safe haven demand for gold, keeping prices on a rising trajectory from here. 

    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.

  • Our CIO and Chief U.S. Equity Strategist Mike Wilson probes whether market confidence can return soon as long as tariff policy remains in a state of flux.

    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 last week’s volatility and what to expect going forward.

    It's Monday, April 14th at 11:30am in New York.

    So, let’s get after it.

    What a month for equity markets, and it's only halfway done! Entering April, we were much  more focused on growth risks than inflation risks given the headwinds from AI Capex growth  deceleration, fiscal slowing, DOGE and immigration enforcement. Tariffs were the final  headwind to face, and while most investors' confidence was low about how Liberation Day  would play out, positioning skewed more toward potential relief than disappointment.

    That combination proved to be problematic when the details of the reciprocal tariffs were  announced on April 2nd. From that afternoon's highs, S&P 500 futures plunged by 16.5 per cent into Monday morning. Remarkably, no circuit breakers were triggered, and markets functioned very well during this extreme stress. However, we did observe some forced selling as Treasuries, gold and defensive stocks were all down last Monday. 

    In my view, Monday was a classic capitulation day on heavy volume. In fact, I would go as far  as to say that Monday will likely prove to be the momentum low for this correction that began back in December for most stocks; and as far back as a year ago for many cyclicals. This also means that we likely retest or break last week's price lows for the major indices even if some individual stocks have bottomed. We suspect a more durable low will come as early as next month or over the summer as earnings are adjusted lower, and multiples remain volatile with a downward bias given the Fed's apprehension to cut rates – or provide additional liquidity unless credit or funding markets become unstable. 

    As discussed last week, markets are now contemplating a much higher risk of recession than  normal – with tariffs acting as another blow to an economy that was already weakening from the numerous headwinds; not to mention the fact that most of the private economy has been  struggling for the better part of two years. In my view, there have been three factors supporting headline GDP growth and labor markets: government spending, consumer services and AI Capex – and all three are now slowing.

    The tricky thing here is that the tariff impact is a moving target. The question is whether the  damage to confidence can recover. As already noted, markets moved ahead of the  fundamentals; and markets have once again done a better job than the consensus in predicting the slowdown that is now appearing in the data.  

    While everyone can see the deterioration in the S&P 500 and other popular indices, the  internals of the equity market have been even clearer. First, small caps versus large caps have  been in a distinct downtrend for the past four years. This is the quality trade in a nutshell which  has worked so well for reasons we have been citing for years — things like the k-economy and crowding out by government spending that has kept the headline economic statistics higher than they would have been otherwise. This strength has encouraged the Fed to maintain interest rates higher than the weaker cohorts of the economy need to recover.  

    Therefore, until interest rates come down, this bifurcated economy and equity markets are likely to persist. This also explains why we had a brief, yet powerful rally last fall in low quality  cyclicals when the Fed was cutting rates, and why it quickly failed when the Fed paused in  December. The dramatic correction in cyclical stocks and small caps is well advanced not only in  price, but also in time. While many have only recently become concerned about the growth  slowdown, the market began pricing it a year ago.

    Looking at the drawdown of stocks more broadly also paints a picture that suggests the market  correction is well advanced, but probably not complete if we end up in a recession or the fear  of one gets more fully priced. This remains the key question for stock investors, in my view, and  why the S&P 500 is likely to remain in a range of 5000-5500 and volatile – until we have a more  definitive answer to this specific question around recession, or the Fed decides to circumvent the growth risks  more aggressively, like last fall.

    With the Fed saying it is constrained by inflation risks, it appears likely to err on the side of remaining on hold despite elevated recession risk. It's a similar performance story at the sector and industry level, with many cohorts experiencing a drawdown equal to 2022. Bottom line, we've experienced a lot of price damage, but it's too early to conclude that the durable lows are in – with policy uncertainty persisting, earnings revisions in a downtrend, the Fed on hold and back-end rates elevated. While it’s too late to sell many individual stocks at this point, focus on adding risk over the next month or two as markets likely re-test last week’s lows.  

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

  • Our Head of Corporate Credit Research analyzes the market response to President Trump’s tariff reversal and explains why rallies do not always indicate an improvement in the overall environment.

    Read more insights from Morgan Stanley. 

    ---- Transcript -----

    Welcome to Thoughts on the Market. I'm Andrew Sheets, head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about the historic gains we saw this week in markets, and what they may or may not tell us. 

    It's Friday April 11th at 2pm in London

    Wednesday saw the S&P 500 gain 9.5 percent. It was the 10th best day for the U.S. equity market in the last century. Which raises a reasonable question: Is that a good thing? Do large one-day gains suggest further strength ahead – or something else? 

    This is the type of Research question we love digging into. Pulling together the data, it’s pretty straightforward to sort through those other banner days in stock market history going back to 1925. And what they show is notable. 

    I’m now going to read to you when those large gains occurred, in order of the gains themselves. 

    The best day in market history, March 15th 1933, when stocks soared over 16 per cent? It happened during the Great Depression. The 2nd best day, Oct 30th 1929. During the Great Depression. The 3rd best day – Great Depression. The fourth best – the first trading day after Germany invaded Poland in 1939 and World War 2 began. The 5th best day – Great Depression. The 6th Best – October 2008, during the Financial Crisis. The 7th Best – also during the Financial Crisis. The 8th best. The Great Depression again. The 9th best – The Great Depression. And 10th best? Well, that was Wednesday. 

    We are in interesting company, to say the least. Incidentally, we stop here in the interest of brevity; this is a podcast known for being sharp and to the point. But if we kept moving further down the list, the next best 20 days in history all happen during either COVID, the 1987 Crash, a Recession, or a Depression. 

    So why would that be? Why, factually, have some of the best days in market history occurred during some of the very worst of possible backdrops. 

    In some cases, it really was a sign of a buying opportunity. As terrible as the Great Depression was – and as the grandson of a South Dakota farmer I heard the tales – stocks were very cheap at this time, and there were some very large rallies in 1932, 1933, or even 1929. During COVID, the gains on March 24th of 2020, which were associated with major stimulus, represented the major market low. 

    But it can also be the case that during difficult environments, investors are cautious. And they are ultimately right to be cautious. But because of that fear, any good news – any spark of hope – can cause an outsized reaction. But it also sometimes doesn't change that overall challenging picture. And then reverses. Those two large rallies that happened in October of 2008 during the Global Financial Crisis, well they both happened around hopes of government and central bank support. And that temporarily lifted the market – but it didn’t shift the overall picture. 

    What does this mean for investors? On average, markets are roughly unchanged in the three months following some of these largest historical gains. But the range of what happens next is very wide. It is a sign, we think, that these are not normal times, and that the range of outcomes, unfortunately, has become larger. 

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

  • Our analysts Vishy Tirupattur and Martin Tobias explain how the announcement of new tariffs and the subsequent pause in their implementation affected the bond market.

    Read more insights from Morgan Stanley. 

    ---- Transcript -----

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

    Martin Tobias: And I'm Martin Tobias, from the U.S. Interest Rate Strategy Team.

    Vishy Tirupattur: Yesterday the U.S. stock market shot up quite dramatically after President Trump paused most tariffs for 90 days. But before that, there were some stresses in the funding markets. So today we will dig into what those stresses were, and what transpired, and what investors can expect going forward.

    It's Thursday, April 10th at 11:30am in New York.

    President Trump's Liberation Day tariff announcements led to a steep sell off in the global stock markets. Marty, before we dig into that, can you give us some Funding Markets 101? We hear a lot about terms like SOFR, effective fed funds rate, the spread between the two. What are these things and why should we care about this?

    Martin Tobias: For starters, SOFR is the secured overnight financing rate, and the effective fed funds rate – EFFR – are both at the heart of funding markets.

    Let's start with what our listeners are most likely familiar with – the effective fed funds rate. It's the main policy rate of the Federal Reserve. It's calculated as a volume weighted median of overnight unsecured loans in the Fed funds market. But volume in the Fed funds market has only averaged [$]95 billion per day over the past year.

    SOFR is the most important reference rate for market participants. It's a broad measure of the cost to borrow cash overnight, collateralized by Treasury securities. It's calculated as a volume weighted median that covers three segments of the repo market. Now SOFR volumes have averaged 2.2 trillion per day over the past year.

    Vishy Tirupattur: So, what you're telling me, Marty, is that the, the difference between these two rates really reflects how much liquidity stress is there, or the expectations of the uncertainty of funding uncertainty that exists in the market. Is that fair?

    Martin Tobias: That's correct. And to do this, investors look at futures contracts on fed funds and SOFR.

    Now fed funds futures reflect market expectations for the Fed's policy rate, SOFR futures reflect market expectations for the Fed policy rate, and market expectations for funding conditions. So, the difference or basis between the two contracts, isolates market expectations for funding conditions.

    Vishy Tirupattur: So, this basis that you just described. What is the normal sense of this? Where [or] how many basis points is the typical basis? Is it positive? Is it negative?

    Martin Tobias: In a normal environment over the past three years when reserves were in Abundancy, the three-month SOFR Fed funds Futures basis was positive 2 basis points. This reflected SOFR to set 2 basis points below fed funds on average over the next three months.

    Vishy Tirupattur: So, what happened earlier this week is – SOFR was setting above effective hedge advance rate, implying…

    Martin Tobias: Implying tighter funding conditions.

    Vishy Tirupattur: So, Marty, what actually changed yesterday? How bad did it get and why did it get so bad?

    Martin Tobias: So, three months SOR Fed funds tightened all the way to -4 basis points. And we think this was a reflection of investors’ increased demand for cash; whether it was lending more securities outright in repo to raise cash, or selling securities outright, or even not lending excess cash in repo. This caused dealer balance sheets [to] become more congested and contributed to higher SOFR rates.

    Vishy Tirupattur: So, let's give some context to our listeners. So, this is clearly not the first time we've experienced stress in the funding markets. So, in previous episodes – how far did it get and gimme some context.

    Martin Tobias: Funding conditions did indeed tighten this week, but the environment was far from true funding stress like in 2019 and certain periods in 2020. Now, in 2019 when funding markets seized, and the Fed had to intervene and inject liquidity, three months SOFR fed funds basis averaged -9 basis points. And that compares to -4 basis points during the peak macro uncertainty this week.

    Vishy Tirupattur: So, Marty, what is your assessment of the state of the funding markets right now?

    Martin Tobias: Right. Funding conditions have tightened, but I think the environment is far from true funding stress. Thus far, the repricing has occurred because of a higher floor for funding rates and not a scarcity of reserves in the banking system.

    Vishy Tirupattur: So, to summarize, so the funding stress has been quite a bit earlier this week. Not as bad as the worst conditions we saw say in 2019 or during the peak COVID periods in 2020. but still pretty bad. And relative to how bad it got, today we are slightly better than what we were two days ago. Is that a fair description?

    Martin Tobias: Yes. That's good. Now, Vishy, what is your view on why the longer end of the bond market sold off.

    Vishy Tirupattur: So longer end bond markets, as you know, Marty, while safe from a credit risk perspective, do have interest rate sensitivity. So, the longer the bonds, the greater the interest rate sensitivity. So, in periods of uncertainty, such as the ones we are in now, investors prefer to be in ultra short-term funds or cash – to minimize that interest rate sensitivity of their portfolios. So, what we saw happening in some sense, we can call it dash for cash.

    I think we both agree that this demand for safety will persist, and we will continue to see inflows into money market funds, which you covered in your research. So, your insights Marty will be very helpful to clients as we navigate these choppy waters going forward.

    Thanks a lot, Marty, for joining this webcast today.

    Martin Tobias: Great speaking with you, Vishy,

    Vishy Tirupattur: 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.

    Disclaimer

    Vishy Tirupattur: Yesterday all my troubles were so far away. I believe in yesterday.

  • Earlier today, President Trump announced a pause on reciprocal tariffs for 90 days. Our Global Head of Fixed Income Research and Public Policy Strategy Michael Zezas looks at the fallout.

    ----- Transcript -----

    Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. 

    Today – possible outcomes of President Trump's sudden pause on reciprocal tariffs.

    It’s Wednesday, April 9th, at 10pm in New York. 

    We’d actually planned a different episode for release today where my colleague Global Chief Economist Seth Carpenter and I laid out developments in the market thus far and looked at different sets of potential outcomes. Needless to say, all of that changed after President Trump announced a 90-day pause on most tariffs that were set to rise. And so, we needed to update our thinking.

    It's been a truly unprecedented week for financial markets. The volatility started on April 2, with President Trump’s announcement that new, reciprocal tariffs would take effect on April 9. When added to already announced tariffs, and later adding even more tariffs in for China, it all added up to a promise by the US to raise its average tariffs to levels not seen in 100 years. 

    Understandably, equity markets sold off in a volatile fashion, reflecting investor concerns that the US was committed to retrenching from global trade – inviting recession and an economic future with less potential growth. The bond market also showed signs of considerable strain. Instead of yields falling to reflect growth concerns, they started rising and market liquidity weakened. The exact rationale is still hard to pin down, but needless to say the combined equity and bond market behavior was not a healthy situation.

    Then, a reprieve. President Trump announced he would delay the implementation of most new tariffs by 90 days to allow negotiations to progress. And though he would keep China tariffs at levels over 100 per cent, the announcement was enough to boost equity markets, with S&P gaining around 9 per cent on the day.

    So, what does it all mean? We’re still sorting it out for ourselves, but here’s some initial takeaways and questions we think will be important to answer in the coming days.

    First, there's still plenty of lingering uncertainties to deal with, and so investors can’t put US policy risk behind them. Will this 90 day reprieve hold? Or just delay inevitable tariff escalation? And even if the reprieve holds, do markets still need to price in slower economic growth and higher recession risk? After all, US tariff levels are still considerably higher than they were a week ago. And the experience of this market selloff and rapid shifts in economic policy may have impacted consumer and business confidence. In my travels this week I spent considerable time with corporate leaders who were struggling to figure out how to make strategic decisions amidst this uncertainty. So we’ll need to watch measures of confidence carefully in the coming weeks. 

    One signal amidst the noise is about China, specifically that the US’ desire to improve supply chain security and reduce goods trade deficit would make for difficult negotiation with China and, ultimately, higher tariffs that would stay on for longer relative to other countries. That appears to be playing out here, albeit faster and more severely than we anticipated. So even if tariff relief is durable for the rest of the world, the trade relationship with China should be strained. And that will continue to weigh on markets, where costs to rewire supply chains around this situation could weigh on key sectors like tech hardware and consumer goods. 

    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.

  • Our CIO and Chief U.S. Equity Strategist explains why the new tariffs added momentum to a correction that was already underway, and what could ease the fallout in equity markets.

    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 equity market reactions to the tariffs and what to expect from here. 

    It's Tuesday, April 8th at 11:30am in New York.

    So, let's get after it. 

    From our perspective, last week's Liberation Day was more like the cherry on top for a market that had been dealing with multiple headwinds to growth all year, rather than the beginning. While the magnitude of the tariffs turned out to be worse than our public policy team's base line expectations, the price reaction appears capitulatory to us given that many stocks were already down 30 to 40 percent before the announcement on Wednesday. As discussed in last week’s podcast, our 5500 first half support level on the S&P 500 quickly gave way given this worse than expected outcome for tariffs. The price action since then has forced us to consider new technical support levels which could be as low as the 200-week moving average. And that would be 4700 on the S&P 500. 

    I think it’s worth highlighting that cyclical stocks started underperforming in April of last year and are now down more than 40 percent relative to defensive stocks. In other words, markets have been telling us for almost a year that growth was going to slow, and since January, it's been telling us it's going to slow significantly. In fact, cyclicals have underperformed defensives to a degree only seen during a recession, not prior to them. This fits very nicely with our long-standing view that most of the private economy has been much weaker than the headline numbers suggest – thanks to unprecedented fiscal spending, AI capex and wealthy consumers spending their gains from asset prices. 

    With the exceptional fourth quarter surge in U.S. fiscal spending likely to decline even without  DOGE's efforts, global growth impulses will suffer too. Hence, foreign stocks are unlikely to provide much of a safe haven if the U.S. goes on a diet or detox from fiscal spending. Markets began to contemplate such an outcome with last week’s announcements. Therefore, I remain of the view we discussed two weeks ago that U.S. equities should trade better than foreign ones going forward. That is especially the case with China, Europe and Japan all which run big current account surpluses and are more vulnerable to weaker trade.

    Meanwhile, the headline numbers on employment and GDP have been flattered by government related jobs and the hiring of immigrants at below market wages. This is one reason the Fed has kept rates higher than many businesses and consumers need and why we remain in an economy of haves and have-nots. Our long standing thesis is that the government has been crowding out much of the economy since COVID, and arguably since the Great Financial Crisis. It's also why large cap quality has been such a consistent outperformer since the end of 2021 and why we have continued to have high conviction and our recommendation are overweight these factors despite short periods of outperformance by low quality cyclicals or small caps – like last fall when the Fed was cutting rates and we pivoted briefly to a more pro-cyclical recommendation. 

    Bottom line, equity markets are discounting machines and they trade six months in advance of the headlines. With most stocks topping in December of last year and cyclicals’ relative performance peaking almost a year ago, this correction is well advanced, and this is not the time to be selling. However, it's fair to say that the tariff announcements last week have taken us to an area with greater tail risk that includes a recession or financial contagion that must be taken into consideration when thinking about levels and adding risk.

    I see three specific scenarios that could put in a durable floor more quickly:

    1. President Trump delays the effective date for the implementation of the additional tariffs beyond the initial 10 percent that went into effect this weekend

    2. The Fed offers support for markets, either explicitly or verbally

    3. A number of nations come to the table and negotiate on favorable terms to the United States.

    In short, get ready for another bumpy week and remember markets are looking much further ahead than today’s headline. I remain optimistic that the second half will be better than the first as these growth negative policies morph into growth positive ones via de-regulation, a better fiscal trajectory, lower interest rates and taxes and maybe even higher wages for the American consumer.

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

  • As market turmoil continues, our global economists give their view on the ramifications of the Trump administration’s tariffs, and how central banks across key regions might react.

    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 today we're going to be talking tariffs and what they mean for the global economy.

    It's Monday, April 7th at 10am in New York.

    Jens Eisenschmidt: It's 4pm in Frankfurt. 

    Chetan Ahya: And it's 10pm in Hong Kong. 

    Seth Carpenter: And so, I'm here with our global economists from around the world: Mike Gapen, Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist. So, let's jump into it. Let me go around first and ask each of you, what is the top question that you are getting from investors around the world?

    Chetan?

    Chetan Ahya: Tariffs.

    Seth Carpenter: Jens?

    Jens Eisenschmidt: Tariffs.

    Seth Carpenter: Mike?

    Michael Gapen: Tariffs.

    Seth Carpenter: All right. Well, that seems clear. Before we get into the likely effects of the tariffs, maybe each of you could just sketch for me where you were before tariffs were announced. Chetan, let me start with you. What was your outlook for the Chinese economy before the latest round of tariff announcements?

    Chetan Ahya: Well Seth, working with our U.S. public policy team, we were already assuming a 15-percentage point increase on tariffs on imports from China. And China also was going through some domestic challenges in terms of high levels of debt, excess capacities, and deflation. And so, combining both the factors, we were assuming China's growth will slow on Q4 by Q4 basis last year – from 5.4 percent to close to 4 percent this year.

    Jens, what about Europe? Before these broad-based tariffs, how were you thinking about the European economy?

    Jens Eisenschmidt: We had penciled in a slight recovery, not really getting us much beyond 1 percent. Backdrop here, still rising real wages. We had some tariffs in here, on steel, aluminum; in cars, much again a bit more of a beefed-up version if you want, of the 18 tariffs – but not much more than that. And then, of course, we had the German fiscal expansion that helped our outlook to sustain this positive growth rates into 2026.

    Seth Carpenter: Mike, for you. You also had thought that there were going to be some tariffs at some point before this last round of tariffs. Maybe you can tell us what you had in mind before last week's announcements.

    Michael Gapen: Yeah, Seth. We had a lot of tariffs on China. The effective rate rising to say 35 to 40 percent. But as Jens just mentioned, outside of that, we had some on steel and aluminum, and autos with Europe, but not much beyond that. So, an effective tariff rate for the U.S. that reached maybe 8 to 9 percent.

    We thought that would gradually weigh on the economy. We had growth at around 1.5 percent this year and 1 percent next year. And the disinflation process stopping – meaning inflation finishes the year at around 2.8 core PCE, roughly where it is now. So, a gradual slowdown from tariff implementation.

    Seth Carpenter: Alright, so a little bit built in. You knew there was going to be something, but boy, I guess I have to say, judging from market reactions, the world was surprised at the magnitude of things. So, what's changed in your mind? It seems like tariffs have got to push down the outlook for growth and up the out outlook for inflation. Is that about right? And can you sketch for us how this new news is going to affect the outlook?

    Michael Gapen: Sure. So instead of effective tariff rates of 8 to 9 percent, we're looking at effective tariff rates, maybe as high as 22 percent.

    Seth Carpenter: Oh, that's a lot.

    Michael Gapen: Yeah. So more than twice what we were expecting. Obviously, some of that may get negotiated down. 

    Seth Carpenter: And would you say that's the highest tariff rate we've seen in a while?

    Michael Gapen: At least a century. If we were to a 1.5 percent on growth before, it's pretty easy to revise that down, maybe even a full percentage point, right?

    So you’re, it's a tax on consumption and a tariff rate that high is going to pull down consumer spending. It's also going to lead to even much higher inflation than we were expecting. So rather than 2.8 for core PCE year-on-year, I wouldn't be surprised if we get something even in the high threes or perhaps even low fours.

    So, it pushes the economy, we would say, at least closer to a recession. If not, you're getting closer to the proverbial coin toss because there are the potential for a lot of indirect effects on business confidence. Do they spend less and hire less? And obviously we're seeing asset markets melt down. I think it's fair to describe it that way. And you could have negative wealth effects on the upper income consumers. So, the direct effects get you very modest growth a little bit above zero. It's the indirect effects that we're worried about.

    Seth Carpenter: Wow, that's quite a statement. So, a substantial slowdown for the U.S. Flirting with no growth. And then given all the uncertainty, the possibility that the U.S. actually goes into recession, a real possibility there. That feels like a big call.

    Jens, if the U.S. could be on the verge of recession with uncertainty and all of that, what are you thinking about Europe now? You had talked about Europe before the tariffs growing around 1 percent. That's not that far away from zero. So, what are you thinking about the outlook for Europe once we layer in these additional tariffs? And I guess every bit is important. Do you see retaliatory tariffs coming from the European Union?

    Jens Eisenschmidt: No, I think there are at least three parts here. I totally agree with that framing. So, first of all, we have the tariffs and then we have some estimates what they might mean, which, just suppose what we have heard last week sticks, would get us already in some countries into recessionary territory; and for the aggregate Euro area, not that far from it. So, we think effects could range between 60 and 120 basis points of less growth. Now that to some extent, incorporates retaliation. And so, the question is how much retaliation we might expect here. This is a key question we get from clients. I'd say we get something; that seems, sure.

    At the same time, it seems that Europe weighs a response that is taking into account all the constraints that are in the equation. After all the U.S. is an ally also in security concerns. You don't wanna necessarily endanger that good relationship. So that will for sure play a role. And then the U.S. has a services surplus with Europe, so it's also likely to be a response in the space of services regulation, which is not necessarily inflationary on the European side, and not necessarily growth impacting so much.

    But, you know, be it as it may. This is going to be down from here, for sure. And then the other thing just mentioned by Michael, I mean there is clearly a read across from a slower U.S. growth environment that will also not help growth in the Euro area. So, all being told it could very well mean, if we get the U.S. close to recession, that the Euro area is flirting with recession too.

    Seth Carpenter: Got it. 

    Chetan Ahya: Seth, can I interrupt you on this one? I just wanted to add the perspective on retaliatory tariffs from China. What we had actually originally billed was that China would take up a retaliatory response, which would be less than be less than proportionate, just like the last time. But considering that China has actually, mashed U.S. reciprocal tariffs, it makes us feel that it's very unlikely that a deal will be done anytime soon.

    Seth Carpenter: Okay. So then how would you revise your view for what's going on with China?

    Chetan Ahya: Yeah, so as I mentioned earlier, we had already built in some downside but with these reciprocal tariffs, we see another 50 to 100 [basis points] downside to China's growth, depending upon how strong is the policy stimulus.

    Seth Carpenter: So, at some point, I suspect we're going to start having a discussion about what it really means to have a global recession, and markets are going to start to look to central banks.

    So, Mike, let me turn to you. Jay Powell spoke recently. He repeated that he is in no hurry to cut interest rates. Can you talk to me about the challenges that the Fed is facing right now?

    Michael Gapen: The Fed is faced with this problem where tariffs mean it's missing on both sides of its mandate, where inflation is rising and there's downside risk to the economy.

    So how do you respond to that?

    Really what Powell said is it's going to be tough for us to look through this rise in inflation and pre-emptively ease. So, for the moment they're on hold and they're just going to evaluate how the economy responds. If there's no recession, it likely means the Fed's on hold for a very long time. If we get negative job growth, if you will, or job cuts, then the Fed may be moving to ease policy. But right now, Powell doesn't know which one of those is going to materialize first.

    Seth Carpenter: Alright Mike. So, I understand what you're saying. Inflation going higher, growth going lower. Really awkward position for the Fed, and I think central banks around the world really have to weigh the two sides of these sorts of things, which one’s going to dominate…

    Jens Eisenschmidt: Exactly. Seth, may I jump in here because I think that's a perfect segue to the ECB; which I was thinking a lot about that – just recently coming back from the U.S. – how different the position really is here. So, the ECB currently is on the way to neutral, at least as we have always thought as a good way of framing their way. Inflation is falling to target. Now with all the risks that we have mentioned, there's a clear risk we see. Inflation going below 2 percent, already by mid this year – if oil prices were to stay as low as they are and with the euro appreciation that we have seen.

    The tariffs scare in terms of the inflationary impact from tariffs, that's much less clear. Now, whether that's really something to worry about simply because what you typically see with these tariffs – it's actually a depreciation of the exchange rate, which we haven't seen. So, we think there is a clear risk, downside risk to our path; at least that we have an anticipation. A quicker rate cutting cycle by the ECB. And potentially if the growth outlook that we have just outlined all these risks really materializes, or threatens is more likely to materialize, then the cuts could also be deeper.

    Seth Carpenter: That's super tricky as well though, because they're going to have to deal with all the same uncertainty. I will say this brings up to me the Bank of Japan because it was the one major central bank that was going the opposite direction before all of this. They were hiking while the other central banks were cutting.

    So, Chetan, let me turn to you. Do you think the Bank of Japan's gonna be able to follow through on the additional rate hike that you all had already had in your forecast?

    Chetan Ahya: Yes Seth. I think Bank of Japan will have a difficult time. Japan is exposed to direct effect of 24 percent reciprocal tariffs. It will see downside from global trade slowdown, which will weigh on its exports and yen appreciation will weigh on its inflation outlook. Hence, unless if U.S. removes tariffs very quickly in the near term, we see the risk that BOJ will pause instead of hiking as we had assumed in our earlier base case.

    Seth Carpenter: Well, this is a good place to stop. Let me see if I can summarize the conversations we've had so far. Before this latest round of tariffs had been announced, we had thought there'd be some tariffs, and we had looked for a bit of slowdown in the U.S. and in Europe and in China – the three major economies in the world. But these new rounds of tariffs have added a lot to that slowdown pushing the, the global economy right up to the edge of recession. And what that means as well is for central banks, they're left in at least something of a bind. The Bank of Japan though, the one major central bank that had been hiking, boy, there's a really good chance that that rate hike gets derailed.

    Seth Carpenter: Well, thank you for listening. And if you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

  • As markets continue reacting to the Trump administration’s tariffs, Michael Zezas, our Global Head of Fixed Income Research and Public Policy Strategy, lists the expected impacts for investors across equity sectors and asset classes.

    Read more insights from Morgan Stanley. 

    ---- Transcript -----

    Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research and Public Policy Strategy. Today we’ll be talking about the market impacts of the recently announced tariff increases.

    It’s Friday, April 4th, at 1pm in New York.

    This week, as planned, President Trump unveiled tariff increases. These reciprocal tariffs were hiked with the stated goal of reducing the U.S.’s goods trade deficit with other countries. We’ve long anticipated that higher tariffs on a broad range of imports would be a fixture of U.S. policy in a second Trump term. And that whatever you thought of the goals tariffs were driving towards, their enactment would come at an economic cost along the way. That cost is what helped drive our team’s preference for fixed income over more economically-sensitive equities. 

    But this week’s announcement underscored that we actually underestimated the speed and severity of implementation. Following this week’s reciprocal tariff announcement, tariffs on imports from China are approaching 60 per cent, a level we didn’t anticipate would be reached until 2026. And while we expected a number of product-specific tariffs would be levied, we did not anticipate the broad-based import tariffs announced this week. All totaled, the U.S. effective tariff rate is now around 22 per cent, having started the year at 3 per cent. 

    So what’s next? Our colleagues across Morgan Stanley Research have detailed their expected impacts across equity sectors and asset classes and here are some key takeaways to keep in mind. 

    First, we do think there’s a possibility that negotiation will lower some of these tariffs, particularly for traditional U.S. allies like Japan and Europe, giving some relief to markets and the economic outlook. 

    However, successful negotiation may not arrive quickly, as it's not yet clear what the U.S. would deem sufficient concessions from its trading partners. Lower tariff levels and higher asset purchases might be part of the mix, but we’re still in discovery mode on this. And even if tariff reductions succeed, it's still likely that tariff levels would be meaningfully higher than previously anticipated. 

    So for investors, we think that means there’s more room to go for markets to price in a weaker U.S. growth outlook. In U.S. equities, for example, our strategists argue that first-order impacts of higher tariffs may be mostly priced at this point, but second-order effects – such as knock-on effects of further hits to consumer and corporate confidence – could push the S&P 500 below the 5000 level. 

    In credit markets, weakness has been, and may continue to be, more acute in key sectors where tariff costs are substantial; and may not be able to pass on to price, such as the consumer retail sector. These are companies whose costs are driven by overseas imports. 

    So what happens from here? Are there positive catalysts to watch for? 

    It's going to depend on market valuations. If we get to a point where a recession is more clearly in the price, then U.S. policy catalysts might help the stock market. That could include negotiations that result in smaller tariff increases than those just announced or a fiscal policy response, such as bigger than anticipated tax cuts. 

    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.

  • Our Thematics and Public Policy analysts Michelle Weaver and Ariana Salvatore discuss the top five strategies for companies to mitigate the effects of U.S. tariffs. 

    Read more insights from Morgan Stanley. 

  • Our analysts Paul Walsh, Mike Wilson and Marina Zavolock debate the relative merits of U.S. and European stocks in this very dynamic market moment.

    Read more insights from Morgan Stanley. 

  • Our analysts Arunima Sinha, Heather Berger and James Egan discuss the resilience of U.S. consumer spending, credit use and homeownership in light of the Trump administration’s policies.

    Read more insights from Morgan Stanley. 

  • Policy questions and growth risks are likely to persist in the aftermath of the Trump administration’s upcoming tariffs. Our CIO and Chief U.S. Equity Strategist Mike Wilson outlines how to seek investments that might mitigate the fallout.

    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 – our views on tariffs and the implications for equity markets.  

    It's Monday, March 31st at 11:30am in New York. 

    So let’s get after it. 

    Over the past few weeks, tariffs have moved front and center for equity investors. While the reciprocal tariff announcement expected on April 2nd should offer some incremental clarity on tariff rates and countries or products in scope, we view it as a maximalist starting point ahead of bilateral negotiations as opposed to a clearing event. This means policy uncertainty and growth risks are likely to persist for at least several more months, even if it marks a short-term low for sentiment and stock prices. 

    In the baseline for April 2nd, our policy strategists see the administration focusing on a continued ramp higher in the tariff rate on China – while product-specific tariffs on Europe, Mexico and Canada could see some de-escalation based on the USMCA signed during Trump’s first term. Additional tariffs on multiple Asia economies and products are also possible. Timing is another consideration. The administration has said it plans to announce some tariffs for implementation on April 2nd, while others are to be implemented later, signaling a path for negotiations. However, this is a low conviction view given the amount of latitude the President has on this issue. 

    We don't think this baseline scenario prevents upside progress at the index level – as an "off ramp" for Mexico and Canada would help to counter some of the risk from moderately higher China tariffs. Furthermore, product level tariffs on the EU and certain Asia economies, like Vietnam, are likely to be more impactful on a sector basis. 

    Having said that, the S&P 500 upside is likely capped at 5800-5900 in the near term – even if we get a less onerous than expected announcement. Such an outcome would likely bring no immediate additional increase in the tariff rate on China; more modest or targeted tariffs on EU products than our base case; an extended USMCA exemption for Mexico and Canada; and very narrow tariffs on other Asia economies. 

    No matter what the outcome is on Wednesday, we think new highs for the S&P 500 are out of the question in the first half of the year; unless there is a clear reacceleration in earnings revisions breadth, something we believe is very unlikely until the third or fourth quarter.

    Conversely, to get a sustained break of the low end of our first half range, we would need to see a more severe April 2nd tariff outcome than our base case and a meaningful deterioration in the hard economic data, especially labor markets. This is perhaps the outcome the market was starting to price on Friday and this morning.  

    Looking at the stock level, companies that can mitigate the risk of tariffs are likely to outperform. Key strategies here include the ability to raise price, currency hedging, redirecting products to markets without tariffs, inventory stockpiling and diversifying supply chains geographically. All these strategies involve trade-offs or costs, but those companies that can do it effectively should see better performance. In short, it’s typically companies with scale and strong negotiating power with its suppliers and customers. This all leads us back to large cap quality as the key factor to focus on when picking stocks. 

    At the sector level, Capital Goods is well positioned given its stronger pricing power; while consumer discretionary goods appears to be in the weakest position.  

    Bottom line, stay up the quality and size curve with a bias toward companies with good mitigation strategies. And see our research for more details.  

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

  • As credit resilience weakens with a worsening fundamental backdrop, our Head of Corporate Credit Research Andrew Sheets suggests investors reconsider their portfolio quality.

    Read more insights from Morgan Stanley. 

    ----- Transcript -----

    Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about why we think near term improvement may be temporary, and thus an opportunity to improve credit quality. 

    It's Friday March 28th at 2pm in London

    In volatile markets, it is always hard to parse how much is emotion, and how much is real change. As you would have heard earlier this week from my colleague Mike Wilson, Morgan Stanley’s Chief U.S. Equity Strategist, we see a window for short-term relief in U.S. stock markets, as a number of indicators suggest that markets may have been oversold. 

    But for credit, we think this relief will be temporary. Fundamentals around the medium-term story are on the wrong track, with both growth and inflation moving in the wrong direction. Credit investors should use this respite to improve portfolio quality. 

    Taking a step back, our original thinking entering 2025 was that the future presented a much wider range of economic scenarios, not a great outcome for credit per se, and some real slowing of U.S. growth into 2026, again not a particularly attractive outcome. 

    Yet we also thought it would take time for these risks to arrive. For the economy, it entered 2025 with some pretty decent momentum. We thought it would take time for any changes in policy to both materialize and change the real economic trajectory. 

    Meanwhile, credit had several tailwinds, including attractive yields, strong demand and stable balance sheet metrics. And so we initially thought that credit would remain quite resilient, even if other asset classes showed more volatility. 

    But our conviction in that resilience from credit is weakening as the fundamental backdrop is getting worse. Changes to U.S. policy have been more aggressive, and happened more quickly than we previously expected. And partly as a result, Morgan Stanley's forecasts for growth, inflation and policy rates are all moving in the wrong direction – with forecasts showing now weaker growth, higher inflation and fewer rate cuts from the Federal Reserve than we thought at the start of this year. And it’s not just us. The Federal Reserve's latest Summary of Economic Projections, recently released, show a similar expectation for lower growth and higher inflation relative to the Fed’s prior forecast path. 

    In short, Morgan Stanley’s economic forecasts point to rising odds of a scenario we think is challenging: weaker growth, and yet a central bank that may be hesitant to cut rates to support the economy, given persistent inflation. 

    The rising risks of a scenario of weaker growth, higher inflation and less help from central bank policy temper our enthusiasm to buy the so-called dip – and add exposure given some modest recent weakness. Our U.S. credit strategy team, led by Vishwas Patkar, thinks that U.S. investment grade spreads are only 'fair', given these changing conditions, while spreads for U.S. high yield and U.S. loans should actually now be modestly wider through year-end – given the rising risks.  

    In short, credit investors should try to keep powder dry, resist the urge to buy the dip, and look to improve portfolio quality. 

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

  • Our global economists Seth Carpenter and Rajeev Sibal discuss how global trade will need to realign in response to escalating U.S. tariff policy.

    Read more insights from Morgan Stanley. 

  • Our European Sustainability Strategists Rachel Fletcher and Arushi Agarwal discuss how fermentation presents a new opportunity to tap into the alternative proteins market, offering a solution to mounting food supply challenges.

    Read more insights from Morgan Stanley. 

    ----- Transcript -----

    Rachel Fletcher: Welcome to Thoughts on the Market. I'm Rachel Fletcher Morgan Stanley's, Head of EMEA Sustainability Research.

    Arushi Agarwal: And I'm Arushi Agarwal European Sustainability Strategist, based in London.

    Rachel Fletcher: From kombucha to kimchi, probiotic rich fermented foods have long been staples at health-focused grocers. On the show today, a deeper dive into the future of fermentation technology. Does it hold the key to meeting the world's growing nutrition needs as people live longer, healthier lives?

    It's Wednesday, 26th of March, at 3 pm in London.

    Many of you listening may remember hearing about longevity. It's one of our four long-term secular themes that we're following closely at Morgan Stanley; and this year we are looking even more closely at a sub-theme – affordable, healthy nutrition. Arushi, in your recent report, you highlight that traditional agriculture is facing many significant challenges. What are they and how urgent is this situation?

    Arushi Agarwal: There are four key environmental and social issues that we highlight in the note. Now, the first two, which are related to emissions intensity and resource consumption are quite well known. So traditional agriculture is responsible for almost a third of global greenhouse gas emissions, and it also uses more than 50 percent of the world's land and freshwater resources. What we believe are issues that are less focused on – are related to current agricultural practices and climate change that could affect our ability to serve the rising demand for nutrition.

    We highlight some studies in the note. One of them states that the produce that we have today has on average 40 percent less nutrition than it did over 80 years ago; and this is due to elevated use of chemicals and decline in soil fertility. Another study that we refer to estimates that average yields could decline by 30 to 50 percent before the end of the century, and this is even in the slowest of the warming scenarios.

    Rachel Fletcher: I think everyone would agree that there are four very serious issues. Are there potential solutions to these challenges?

    Arushi Agarwal: Yes, so when we've written about the future of food previously, we've identified alternative proteins, precision agriculture, and seeds technology as possible solutions for improving food security and reducing emissions.

    If I focus on alternative proteins, this category has so far been dominated by plant-based food, which has seen a moderation in growth due to challenges related to taste and price. However, we still see significant need for alternative proteins, and synthetic biology-led fermentation is a new way to tap into this market.

    In simple terms, this technology involves growing large amounts of microorganisms in tanks, which can then be harvested and used as a source of protein or other nutrients. We believe this technology can support healthy longevity, provide access to reliable and affordable food, and also fill many of the nutritional gaps that are related to plant-based food.

    Rachel Fletcher: So how big is the fermentation market and why are we focusing on it right now?

    Arushi Agarwal: So, we estimate a base case of $30 billion by 2030. This represents a 5,000-kiloton market for fermented proteins. We think the market will develop in two phases. Phase one from 2025 to 2027 will be focused on whey protein and animal nutrition. We are already seeing a few players sell products at competitive prices in these markets. Moving on to phase two from 2028 to 2030, we expect the market will expand to the egg, meat and daily replacement industry.

    There are a few reasons we think investors should start paying attention now. 2024 was a pivotal year in validating the technology's proof of concept. A lot of companies moved from labs to pilot state. They achieved regulatory approvals to sell their products in markets like U.S. and Singapore, and they also conducted extensive market testing. As this technology scales, we believe the next three years will be critical for commercialization.

    Rachel Fletcher: So, there's potentially significant growth there, but what's the capital investment needed for this scaling effort?

    Arushi Agarwal: A lot of CapEx will be required. Scaling of this technology will require large initial CapEx, predominantly in setting up bioreactors or fermentation tanks. Achieving our 2030 base case stamp will require 200 million liters in bioreactor capacity. This equals to an initial investment opportunity of a hundred billion dollars. But once these facilities are all set up, ongoing expenses will focus on input costs for carbon, oxygen, water, nitrogen, and electricity. PWC estimates that 40 to 60 percent of the ongoing costs with this process are associated with electricity, which makes it a key consideration for future commercial investments.

    Rachel Fletcher: Now we've talked a lot about the potential opportunity and the potential total addressable market, but what about consumer preferences? Do you think they'll be easy to shift?

    Arushi Agarwal: So, we are already seeing evidence of shifting consumer trends, which we think can be supportive of demand for fermented proteins. An analysis of Google Trends, data shows that since 2019, interest in terms like high protein diet and gut health has increased the most. Some of the products we looked at within the fermentation space not only contain fiber as expected, but they also offer a high degree of protein concentration, a lot of times ranging from 60 to 90 percent.

    Additionally, food manufacturers are focusing on new format foods that provide more than one use case. For example, free from all types of allergens. Fermentation technology utilizes a very diverse range of microbial species and can provide solutions related to non-allergenic foods.

    Rachel Fletcher: We've covered a lot today, but I do want to ask a final question around policy support. What's the government's role in developing the alternative proteins market, and what's your outlook around policy in Europe, the U.S., and other key regions, for example?

    Arushi Agarwal: This is an important question. Growth of fermentation technology hinges on adequate policy support; not just to enable the technology, but also to drive demand for its products. So, in the note, we highlight various instances of ongoing policy support from across the globe. For example, regulatory approvals in the U.S., a cellular agriculture package in Netherlands, plant-based food fund in Denmark, Singapore's 30 by 30 strategy.

    We believe these will all be critical in boosting the supply side of fermented products. We also mentioned Denmark's upcoming legislation on carbon tax related to agriculture emissions. We believe this could provide an indirect catalyst for demand for fermented goods. Now, whilst these initiatives support the direction of travel for this technology, it's important to acknowledge that more policy support will be needed to create a level playing field versus traditional agriculture, which as we know currently benefits from various subsidies.

    Rachel Fletcher: Arushi, this has been really interesting. Thanks so much for taking the time to talk.

    Arushi Agarwal: Thank you, Rachel. It was great speaking with you,

    Rachel Fletcher: 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.

  • Our European Heads of Diversified Financials and Banks Research Bruce Hamilton and Alvaro Serrano discuss the biggest themes and debates from the recent Morgan Stanley European Financials Conference.

    Read more insights from Morgan Stanley. 

    ----- Transcript -----

    Bruce Hamilton: Welcome to Thoughts on the Market. I'm Bruce Hamilton, Head of European Diversified Financials.

    Alvaro Serrano: And I'm Alvaro Serrano, Head of European Banks.

    Bruce Hamilton: Today we'll discuss our key takeaways from Morgan Stanley's 21st European Financials Conference last week.

    It's Tuesday, March 25th, 3pm, here in London.

    We were both at the conference here in London where we had more than 550 registered clients and roughly a hundred corporates in attendance. Alvaro, once again, you were the conference chair, and I wondered if you could first talk about the title of the conference this year – Europe's moment. What inspired this and was it a clear theme at the conference?

    Alvaro Serrano: European banks are probably one of the strongest performing sectors globally. That has been on the back of expectations and prospects of a Ukraine peace deal, expectations of high defense spending, and we were going to German elections. I think it's fair to say that post German elections, Germany has delivered above expectations on the fiscal package. And the announcement was a big boost, at a time where U.S. growth is starting to be questioned. I think it's turning the investment flows into Europe. It's Europe's moment to shine, and hence the title.

    Bruce Hamilton: And what were some of the other sort of key themes and debates that emerge from company presentations and panels at the conference?

    Alvaro Serrano: The German fiscal/financial package definitely dominated the debate. But it was how it fed through the PNL that was the more tangible discussion. First of all, on NII – Net Interest Income – definitely more optimism among banks. The yield curve has steepened more than 50 basis points since the announcement together with increased prospects of loan growth. Accelerated loan growth is definitely improving the confidence from management teams on the median term growth outlook. I think that was the biggest takeaway for me.

    Bruce Hamilton: Got it. And our North American colleagues have been tracking the risks and opportunities for U.S. financials under the Trump administration. How, if at all, are European financials better positioned than their U.S. counterparts?

    Alvaro Serrano: Ultimately deregulation has been a big theme in the U.S. from the new administration. We've seen tangible sort of measures like the delay in implementation of Basel endgame; and some steps in around consumer legislation – so that we haven't seen [in] Europe.

    We had events from the supervisory arm of the ECB. And I think the overall message is that there's unlikely to be deregulation on the capital front.

    What grabbed a lot of the headlines, a lot of the debate was the proposal from the European Commission on Capital Markets Union now rebranded Savings and Investment Union. There's been measures and proposals around savings products, around a reform of the securitization market, which have pretty positive implications. Medium term, it should increase the velocity of the bank's balance sheets, and ultimately the profitability. So, more optimistic on the medium-term outlook.

    Bruce, I wanted to turn it over to you. The capital markets recovery cycle was a very big topic of discussion, especially given the rising investor concerns lately. What did you learn at the conference?

    Bruce Hamilton: So, yeah, you're right. I mean, obviously the capital markets cycle is pretty key for the performance of the diversified financial sector – as was clear from investor polling. I would say the messages from the companies were mixed. On the one hand, the more transactional driven models – so, some of the exchanges that the investment platforms – were relatively upbeat, across asset classes. Volume, momentum has been strong through the first quarter of this year. And so that was encouraging.

    And looking further out – the confidence around some of these secular growth drivers, across the business model. So, data growth, software solutions growth, post-trade opportunities, expanding fixed income offerings were all clear from the exchanges.

    On the other hand, the business models that are more geared to sort of deal activity, to M&A – sort of private market firms. Clearly there, the messaging was more mixed, given the slower start to the year in the light of tariff uncertainty, which has driven a widening in bid our spread. So certainly there, the messaging was a little bit more downbeat. Though in the context of a still-improving sort of multi-year recovery cycle anticipated in capital markets. So, a pause rather than a cancellation of that improvement.

    Alvaro Serrano: And what about private markets? Especially in light of the sluggish capital markets activity since the start of the year?

    Bruce Hamilton: Well encouragingly, I think, you know, investors still had private markets, the private market sub-sector, as the most popular of the diverse vote financial sub-sectors. Which I think you could take to read as meaning that the pullback in shares has already captured some of the concerns around a slower start to the year in terms of capital markets activity.

    The view of most investors remains that some of the longer-term growth drivers, including increasing allocations from wealth, remain pretty supportive for the longer-term structural growth in the sector. So, I think, some clearly worry that a worsening in credit conditions could still cause share price moves down. But I think generally, we still feel the longer term looks pretty encouraging.

    Finally, Alvaro, any significant updates on the use of AI within the financial sector?

    Alvaro Serrano: It definitely came up pretty much in every session because ultimately AI and broader digitization efforts in mass market models like the banks are – is a key tool to improve efficiency. It came up as a key lever to improve user experience and at the same time improve cost efficiency. And when it comes to underwriting loans, it's also a very important tool, although asset quality's not a key theme at the moment.

    It’s a race to embrace, I would say, because it's a key competitive advantage. And if you're not, you fall behind.

    Bruce Hamilton: Great Alvaro. Thanks for taking the time to talk.

    Alvaro Serrano: Great speaking with you, Bruce.

    Bruce Hamilton: 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.

  • Our CIO and Chief U.S. equity strategist Mike Wilson discusses investors’ outlook following last week’s Fed meeting, and lists the key signals to gauge whether stocks can fully rebound from the recent correction.  

    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 recent rally in stocks and why it can continue. 

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

    So let’s get after it. 

    Last week's Fed meeting appeared to come as a relief to many market participants as Chair Powell seemed to downplay concerns about inflation, offering a bit more emphasis on the growth side of the Fed’s mandate. The Fed also made the decision to slow the pace of balance sheet runoff, a development that came sooner than some expected and indicated the Fed is ready to act, if necessary. Looking ahead, investors are now very focused on the April 2nd reciprocal tariff deadline. While this catalyst could offer some incremental clarity on tariff rates and countries and products in scope, we think it's more a starting point for tariff negotiations – as opposed to a clearing event. In short, a Fed put seems closer to being in the money than a Trump put though it probably would require material labor weakness or choppier credit and funding markets. 

    So far, DOGE firings have had little impact on data like jobless claims or the overall unemployment rate. There may also be a lag between when employees are laid off and when these individuals show up as unemployed, given that severance is offered to most. The more important question for labor markets is whether the recent decline in the stock market, fall in confidence and rise in economic trade uncertainty will lead to layoffs in the private economy. Our economists' base case assumes that these factors won't drive an unemployment cycle this year; but payrolls, claims, and the unemployment rate will be critical to monitor to inform that view going forward.  

    As usual, looking at the S&P 500 alone does not fully describe the magnitude of the correction in equities. As I noted last week, equity markets got as oversold in this correction as they were during the bear market of 2022. One could ask: Is this the bottom or the beginning of something more severe? In our experience, it’s rare for volatility to end when price momentum is at its lows. However, you can get strong rallies from these conditions which is why we expected one to begin when the S&P 500 reached the bottom end of our first half trading range of 5500 on March 13th. Since then, stocks have rallied with lower quality, higher beta equities leading the bounce, so far. We believe that can continue in the near-term even though we are still advocating higher quality stocks in one's core portfolio for the intermediate term – given weakness in earnings revisions since last November. 

    More specifically, earnings revisions have remained in negative territory for the major U.S. averages all year and have not yet showed signs of bottoming. However, we are starting to see some interesting shifts in revisions trends under the surface. The most notable change here is that the Magnificent 7 earnings revisions look to be stabilizing after a steep decline. This could halt the underperformance of these mega cap stocks in the near term as we head into earnings season and this would help stabilize the S&P 500, in line with our call from two weeks ago. 

    It could also help to attract flows back into the U.S. In our view, one of the reasons why we've seen capital rotate to international markets is that the high-quality leadership cohort of the U.S. equity market began to underperform. So, if this group regains relative strength we could see a rotation back to the U.S. 

    Finally, the weaker U.S. dollar could also reverse the relative earnings revisions downtrend between U.S. and European companies. If you remember, at the end of last year, the U.S. dollar was very strong and provided a headwind to U.S. relative revisions when companies reported fourth quarter results, as we previewed. This may be going the other way for first quarter results season and drive money back to the U.S., at least temporarily.  

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

  • Amid lower growth and inflation concerns in the US, investors have begun scouring international markets for other opportunities. Our analysts Andrew Sheets, Neville Mandimika and Anlin Zhang dig into one potential outperforming category. 

    Read more insights from Morgan Stanley.