Thoughts on the Market Podcast

Welcome to Thoughts on the Market. I’m Cesar Medina, Morgan Stanley’s Latin America Technology, Media, and Telecom Analyst. Today – we discuss what’s driving the digital revolution in global sports. And what it means for fans as well as investors.

It’s Monday, August 11th, at 10am in New York.

These days, watching a sporting event at home usually means streaming the big game on a large 4K HDR screen. Maybe even 8K for premium events. You might access real time stats from a supporting app or social media on a secondary device. Maybe even have a group chat with friends.

But imagine a game with real-time personalized stats. Immersive alternate camera angles. Or even experiencing the match from a player's perspective—all powered by AI. These innovations are already being tested and rolled out in select leagues.

Global sports generates half a trillion dollars in annual revenues. Despite all that cash, until very recently the industry was slow to embrace digital technology, lagging behind movies and music.  Now that’s changing – and fast.

So, what’s driving this transformation?

Three powerful forces are closing this digital gap. One – younger, tech-savvy audiences demanding more immersive and personalized experiences. Two – new distribution models, with digital platforms stepping into the arena.  And three – institutional investment, bringing capital and a push for modernization.

You might ask – what does this all mean for fans, investors, and the future of entertainment?

Let’s start with fans. Today’s sports fans aren’t just watching—they’re interacting, betting, gaming, and sharing. And younger fans are leading the charge. They are spending more time online and expect hyper-personalized content. They're more interested in individual athletes than teams, and they engage through social media, fantasy sports, and interactive platforms.

Surveys show that fans under 35 are significantly more likely to spend money on sports if the experience is digital-first. Some leagues have seen viewership jump by 40 percent after introducing interactive features. Others are using AI to personalize content, boosting engagement and revenue.

Digital transformation isn’t just about watching games though—it’s about reimagining the entire ecosystem. When it comes to live events, smart venues are using AI to adjust ticket prices based on weather, opposing team, and demand. Some are even using facial recognition for faster entry and purchases. Streaming platforms are making broadcasts more interactive, while combating piracy with predictive tech. As for engagement, fantasy sports, esports, and betting are booming. AI-driven platforms are helping fans make smarter picks—and spend more.

Altogether, these innovations could boost global sports revenues by over 25 percent, adding more than $130 billion in value.

While North America leads in monetization, Emerging Markets are catching up fast. In India, Brazil, and the Middle East, for example, sports franchises are seeing double-digit growth in value—sometimes outpacing traditional media.

And here’s the kicker: many of these regions have younger populations and faster-growing digital adoption. That’s a recipe for serious growth. Meanwhile, niche sports and women’s leagues are also gaining global traction, expanding the definition of mainstream entertainment.

Of course, this transformation of the sports industry faces real hurdles—technical expertise, budget constraints, and cultural resistance among coaches and athletes. But the incentives are clear. And as more capital flows into sports—from private equity to sovereign wealth funds—digital transformation is becoming a strategic priority.

So, what’s the biggest takeaway?

Global sports is no longer just about what happens on the field. It’s about how fans experience it—on their phones, in their homes, and in the stadiums of the future. So whether you’re an investor, a fan, or just someone who loves a good underdog story, this is a game worth watching.

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.

Michelle Weaver: Welcome to Thoughts on the Market. I’m Michelle Weaver, Morgan Stanley’s U.S. Thematic and Equity Strategist here at Morgan Stanley.

Today -- we're going back to school! A look at the second biggest shopping season in the U.S.. And what it can tell us about the broader market.

It’s Friday, August 8th, at 10am in New York.

It's that time of the year again. With parents, caregivers and students making shopping lists for back-to-school supplies. And it’s not just limited to school supplies and backpacks. It probably also includes laptops or tablets, smart phones and, of course, the latest clothes. For investors, understanding how consumers are feeling—and spending—right now is critical. Why? Because back-to-school spending tells us a lot about consumer sentiment. And this month’s data has been sending some mixed but meaningful signals.

Let’s start with the mood on Main Street. According to our latest proprietary consumer survey, confidence in the economy is sliding. Just under one-third of consumers think the economy will improve over the next six months—which is down from 37 percent last month and 44 percent in January. And that’s a pretty big drop from the start of the year. Meanwhile, half of all consumers expect the economy to get worse.

Household finances are also feeling the squeeze. While around 40 percent expect their financial situation to improve, closer to 30 percent expect it to worsen. The net score is still positive, but down from last month and even more so from January.

The takeaway? Consumers are feeling the pinch—and inflation remains their number one concern.

We did see a bit of a brighter picture though around tariff fears. And tariffs are definitely still a worry, but we’re past that point of peak fear. This month, over a third of consumers said they’re “very concerned” about tariffs—down from 43 percent in April, post Liberation Day. And fewer people are planning to cut back on spending because of them: that number is just 30 percent now, compared to over 40 percent a few months ago.

In fact, almost 30 percent of consumers actually plan to spend more despite tariffs. That’s a sign of resilience—and perhaps necessity—as families prepare for the school year.

And that brings us back to back-to-school shopping, which is a relative bright spot.

Nearly half of U.S. consumers have already shopped or are planning to shop for the school year—right in line with what we saw in previous years. Among those shoppers, 47 percent are spending more than last year, while only 14 percent plan to spend less. That’s a significant net positive at 34 percent.

What’s in the cart? More than 90 percent of shoppers are buying apparel, footwear, and school supplies. Apparel leads, followed by footwear, followed by supplies.

If we look beyond the classroom at other things people are spending on, travel is still a priority. Around 60 percent of consumers plan to travel over the next six months, with visiting friends and family as the top reason. That’s consistent with where we were a year ago and shows that experiences still matter—even in uncertain times.

The big takeaway from all this data: Consumer sentiment is cooling, but spending—especially spending for seasonal needs—is holding up. Back-to-school categories like apparel and footwear are outperforming, making them potential bright spots for retailers.

As we head into fall, keep your eyes on U.S. consumers. They’re not just shopping for school—they’re also signaling where the market could be headed next.

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.

Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.

Today – how a tricky two months could feel a lot like stagflation, and a lot different from what we’ve had so far this year.

It’s Thursday, August 7th, at 2pm in London.

For all the sound and fury around tariffs in 2025, financial markets have been resilient. Stocks are higher, bond yields are lower, credit spreads are near 20-year tights, and market volatility last month plummeted.

Indeed, we sense increasing comfort with the idea that markets were tested by tariffs – after all we’ve been talking about them since February – and weathered the storm. So far this year, growth has generally held up, inflation has generally come down, and corporate earnings have generally been fine.

Yet we think this might be a bit like a wide receiver celebrating on the 5-yard line. The tricky impact of tariffs? Well, it might be starting to show up in the data right now, with more to come over the next several months.

When thinking about the supposed risk from tariffs, it’s always been two fold: higher prices and then also less activity, given more uncertainty for businesses, and thus weaker growth.

And what did we see last week? Well, so-called core-PCE inflation, the Fed’s preferred inflation measure, showed that prices were once again rising and at a faster rate. A key report on the health of the U.S. jobs market showed weak jobs growth. And key surveys from the Institute of Supply Management, which are followed because the respondents are real people in the middle of real supply chains, cited lower levels of new orders, and higher prices being paid.

In short, higher prices and slower growth. An unpleasant combo often summarized as stagflation.

Now, maybe this was just one bad week. But it matters because it is coming right about the time that Morgan Stanley economists think we’ll see more data like it. On their forecasts, U.S. growth will look a lot slower in the second half of the year than the first. And specifically, it is in the next three months, which should show higher rates of month-over-month inflation, while also seeing slower activity.

This would be a different pattern of data that we’ve seen so far this year. And so if these forecasts are correct, it’s not that markets have already passed the test. It's that the teacher is only now handing it out. 

For credit, we think this could make the next several months uncomfortable and drive some modest spread widening. Credit still has many things going for it, including attractive yields and generally good corporate performance. But this mix of slower growth and higher inflation, well, it’s new. It’s coming during an August/September period, which is often somewhat more challenging for credit. And all this leads us to think that a strong market will take a breather.

Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

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

Vishwas Patkar: And I'm Vishwas Patkar, Head of U.S. Credit Strategy at Morgan Stanley.

Vishy Tirupattur: Today we want to talk about the opportunities and challenges in the credit markets, in the context of AI and data center financing.

It's Wednesday, August 6th at 3pm in New York.

Vishy Tirupattur: So, Vishwas spending on AI and data centers is really not new. It's been going on for a while. How has this CapEx been financed so far predominantly? What has changed now? And why do we need greater involvement of credit markets of different stripes?

Vishwas Patkar: You're right, Vishy. So, CapEx on AI is certainly not new. So last year the hyperscalers alone spent more than $200 billion on AI related CapEx. What changes from here on, to your question, is the numbers just ramp up sharply. So, if you look at Morgan Stanley's estimates leveraging work done by our colleague Stephen Byrd over the next four years, there's about [$]2.9 trillion of CapEx that needs to be spent across hardware and data center bills.

So what changes is, while CapEx so far has been largely self-funded by hyperscalers, we think that will not be the case going forward. So, when we leverage the work that has been done by our equity research colleagues around how much the hyperscalers can spend, we've identified a [$]1.5 trillion financing gap that has to be met by external capital. And we think credit would play a big role in that.

Vishy Tirupattur: A financing gap of [$]1.5 trillion. Wow. That's a big number, by any measure. You talked about multiple credit channels that would need to be involved. Can you talk about rough sizing of these channels?

Vishwas Patkar: Yep. So, we looked at four broad channels in the report that went out a few weeks ago. So, that [$]1.5 trillion gap breaks out into roughly [$]800 billion across private credit, which we think will be led by asset-based finance. Another [$]200 billion we think will come from Investment Grade rated bond issuance from the large tech names. Another [$]150 billion comes through securitized credit issuance via data center ABS and CMBS. And then finally there is a [$]350 billion plug that we've used. It's a catchall term for all other forms of financing that can cover sovereign spend, PE (private equity), VC among others,

Vishy Tirupattur: The technology sector is fairly small within the context of corporate grade markets. You are estimating something like [$]200 billion of financing to come from this channel. Why not more?

Vishwas Patkar: So, I think it comes down to really willingness versus ability. And, you know, you raise a good point. Tech names certainly have a lot of capacity to issue debt. And when I look at some of the work done by my colleague Lindsay Tyler in this report, the big four hyperscalers alone could issue over [$]600 billion of incremental debt without hurting their credit ratings.

That said, our assumption is that early in the CapEx cycle, companies will be a little hesitant to do significantly debt funded investments as that might be seen as a suboptimal outcome for shareholder returns. And that's why we have reduced the magnitude of how much debt issuance could be vis-a-vis the actual capacity some of these companies have.

So, Vishy, I talked about private credit meeting about half of the investment gap that we've identified and within that asset-based finance being a very important channel. So, what is ABF and why do you expect it to play such a big role in financing AI and data centers?

Vishy Tirupattur: So, ABF is a very broad term for financing arrangements within the context of private credit. These are financing arrangements that are secured by loans and contractual cash flows such as leases – either with hard assets or without hard assets. So, the underlying concept itself is pretty widely used in securitizations.

So, the difference between ABF structures and ABS structures is that the ABF structures are highly bespoke. They enable lots of customization to fit the specific needs of the investors and issuers in terms of risk tolerance, ratings, returns, duration, term, et cetera.

So, ABS structures, on the other hand, are pretty standardized structures, you know, driven mainly by rating agencies – often requiring fairly stabilized cash flows with very strict requirements of lessee characteristics and sometimes residual value guarantees, in cases where hard assets are actually part of the collateral package.

So, ABF opens up a wider range of possible structures and financing options to include assets that are on different stages of development. Remember, this is a very nascent industry. So, there are data centers that are fully stabilized cash flows, and there are data centers that are in very early stages of building with just land, or land and power access just being established.

So, ABF structures can really do it in the form of a single asset or single facility financing or could include a portfolio of multiple assets and facilities that are in different stages of development.

So, put all these things together, the nascent nature and the bespoke needs of data center financing call for a solution like ABF.

Vishwas Patkar: And then taking a step back. So, as you said, the [$]1.5 trillion financing gap; I mean, that's a big number. That's larger than the size of the high yield market and the leveraged loan market.

So, the question is, who are the investors in these structures, and where do you think the money ultimately comes from?

Vishy Tirupattur: So, there is really a favorable alignment here of significant and substantial dry powder across different credit markets. And they're looking for attractive yields with appeal to a sticky investor base. This end investor base consists of investors such as insurance companies, sovereign wealth funds, pension funds, endowments, and high net worth retail individuals.

Vishy Tirupattur: These are looking for scalable high quality asset exposures that can provide diversification benefits. And what we are talking about in terms of AI and data center financing precisely fall into that kind of investment. And we think this alignment of the need for capital and need for investments, that bridges this gap for [$]1.5 trillion that we're talking about here.

So, my final question to you, Vishwas, is this. Where could we be wrong in our assessment of the financing through the various credit market channels?

Vishwas Patkar: With the caveat that there are a lot of assumptions and moving parts in the framework that we build, I would flag really two risks. One macro, one micro.

The macro one I would talk about in the context of credit market capacity. A lot of the favorable dynamics that you talked about come from where the level of rates are. So, if the economy slows and yields were to drop sharply, then I think the demand that credit markets are seeing could come into question, could see a slowdown over the coming years.

The more micro risks, I think really come from how quickly or how slowly AI gets monetized by the big tech names. So, while we are quite optimistic about revenue generation a few years out, if in reality revenues are stronger than expected, then you could see more reliance on the public markets.

So, for instance, the 200 billion of corporate bond issuance is likely going to be skewed higher in a more optimistic scenario. On the flip side, if there is mmuch ore uncertainty around the path to revenue generation, and if you see hyperscalers pulling back a bit on CapEx – then at the margin that could push more financing to the way of credit markets. In which case the overall [$]1.5 trillion number could also be biased higher.

So those are the two big risks in my view.

Vishy Tirupattur: So, Vishwas, any way you look at it, these numbers are big. And whether you are involved in AI or whether you're thinking about credit markets, these are numbers and developments that you cannot ignore.

So, Vishwas, thanks so much for joining.

Vishwas Patkar: Thank you for having me on 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.

Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.

Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.

Matthew Hornbach: Today – a look back at last week’s meeting of the Federal Open Market Committee or FOMC, and the path for rates from here.

It's Tuesday, August 5th at 10am in New York.

Mike, last week the Fed met for the fifth time this year. The committee didn't provide a summary of their economic projections, but they did update their official policy statement. And of course, Chair Powell spoke at the press conference. How would you characterize the tone of both?

Michael Gapen: Yeah, at first the statement I thought took on a slightly dovish tone for two reasons. One, unexpected; the other expected. So, the committee did revise down their assessment of growth and economic activity. They had previously described the economy as growing at a quote, ‘solid pace,’ and now they said, you know, the incoming data suggests that growth and economic activity moderated.

So that's true. That's actually our view as well. We think the data points to that.

The second reason the statement looked a little dovish, and this was expected is the Fed received two dissents. So, Governors Bowman and Waller both dissented in favor of a 25 basis point rate cut at the July meeting.

But then the press conference started. And I would characterize that as Powell having at least some renewed concerns around persistence of inflation. So, he did recognize or acknowledge that the June inflation data showed a tariff impulse.

But I'd say the more hawkish overtones really came in his description of the labor market, which I know were going to get into.

And we've been kind of wondering and, you know, asking implicitly – is the Fed ever going to take a stand on what constitutes a healthy and/or weak labor market? And Powell, I think put down a lot of markers in the direction; that said, it's not so much about employment growth, it's about a low unemployment rate. 

And he kept describing the labor market as solid, and in healthy condition, and at full employment. So, the combination of that suggests it's a higher bar, in our mind, for the Fed to cut in September.

Matthew Hornbach: And on the labor market, if we could dig a little bit deeper on that point. It did seem to me certainly that Powell was channeling your views on the labor market.

Michael Gapen: Well, I wish I had that power but thank you.

Matthew Hornbach: Well. I'd like to now channel your views – and of course his views – to our listeners. Can you just go a little bit deeper into this dichotomy that you've been highlighting between the pace of job growth and the unemployment rate itself?

Michael Gapen: Yeah. Our thesis and what we've laid out coming into the year, and we think the data supports, is the idea that immigration controls have really slowed growth in the labor force. And what that means is the break-even rate of employment has come down.

So even as economic growth has slowed and demand for labor has slowed, and therefore employment growth has slowed – the unemployment rate has stayed low, and there's some paradox in that. Normally when employment growth weakens, we think the economy’s rolling over; the Fed should be easing.

But in an environment of a very slow growing labor force, the two can coincide. And there's tension in that, we recognize. But our view is – the more the administration pushes in the direction of restraining immigration, the more likely it is you'll see the combination of low employment growth, but a low unemployment rate. And our view is that still means the labor market is tight.

Matthew Hornbach: Indeed, indeed. Just one last question from me. How are you thinking about the Fed's policy path from here? In particular, how are you looking at the remaining data that could get the Fed to cut rates in September?

Michael Gapen: Yeah, I think that there's no magic sauce here, if you will; or secret sauce. Powell, you know, essentially is laying out a case where it's more likely than not inflation will be deviating from the 2 percent target as tariffs get passed through to consumer prices. And the flag that he planted on the labor market suggests maybe they're leaning in the direction of thinking the unemployment rates is likely to stay low.

So, we just need more revelations on this front. And the gap between the July and the September FOMC meetings is the longest on the Fed's calendar. So, they will see two inflation reports and two labor market reports.

And again, it just to provide context and color, right? What I think Powell was doing was positioning his view against the two dissents that he received. So where, for example, Governor Waller laid out a case where weaker employment growth could justify cuts, Powell was reflecting the view of the rest of the committee that said, ‘Well, it's not really employment growth, it's about that unemployment rate.’

So, when these data arrive, we'll be kind of weighing both of those components. What does employment growth look like going forward? How weak is it? And what's happening to that unemployment rate?

So, if the Fed's doing its job, this shouldn't be magic.

If the labor market's obviously rolling over, you'll get cuts later this year. If not, we think our view will play out and the Fed will be on the sideline through, you know, early 2026 before it moves to rate cuts then.

So Matt, what I'd like to do is kind of turn from the economics over to the rates views. How did the rates market respond to the meeting, to the statement, to the press conference? How are you thinking about the market pricing of the policy path into your end?

Matthew Hornbach: So initially when the statement was released, as you noted, it had a dovish flavor to it. And so, we had a small repricing in the interest rate market, putting a little bit of a higher probability, on the idea that the Fed would lower rates in September. But then as Chair Powell began the press conference and started to articulate his views around both inflation and the labor market we saw the market take out some probability that the Fed would lower rates in September.

And where it ended up at the end of that particular day was putting about a 50 percent probability on a rate cut and as a result of 50 percent probability of no rate cut; leaving the data to really dictate where the pricing of that meeting would go from there.

That to me speaks to this data dependence of the Fed, as you've discussed. And I think that in the coming weeks we get more of this data that you talked about, both on the inflation side of the mandate and on the labor market side of the mandate. And ultimately, if they end up, going in September, I would've expected the market to have priced most of that in, ahead of the meeting. And if they end up not cutting rates in September, then naturally the market will have moved in that direction ahead of time.

And again, I think what ends up happening in September will be critical for how the market ends up pricing the evolution of policy in November and December. But to me, what I think is more interesting is your view on 2026. And in that regard, the market is still some distance away from your view, that the Fed goes about 175 basis points in 2026.

Michael Gapen: Yeah, I mean, we're still thinking the lagged effects of tariffs and immigration will slow the economy enough to get more Fed cuts than the market's thinking. But, you know, we'll see if that happens. And maybe that's a topic we can turn back to in upcoming Thoughts on the Market.

But what I'd like to do is ask you this. I've been reading some of your recent work on term premiums. And in my view, had this really interesting analysis about how the market prices Fed policy and how U.S. Treasury yields then adjust and move.

You highlighted that Treasury yields built in a term premium after April 2nd. What's happening with that term premium today?

Matthew Hornbach: Yeah. The April 2nd Liberation Day event catalyzed an expansion of term premia in the Treasury market. And ultimately what that means is that Treasury yields went up relative to what people were thinking about the path of Fed policy, and of course, the risks that they were thinking about in the month of April were risks related to trade policy. Those risks have diminished somewhat, I would argue in the subsequent months as the administration has been announcing deals with some of our trading partners. And then the market's focus turned to supply and what was going to happen with U.S. Treasury supply. And then, of course, the reaction of investors to that coming supply.

And I would say, given what the Treasury announced last week, which was – it had no intention of raising supply, in the next several quarters. In our view is that the U.S. Treasury will not have to raise supply until the early part of 2027. So way off in the distance.

So, investors are becoming more comfortable taking on duration risk in their portfolios because some of that uncertainty that opened up after April 2^nd has been put away.

Michael Gapen: Yeah, I can see how the substantial tariff revenue we're bringing in could affect that story. So, for example, I think if you annualize the run rates on tariffs, you'll get something over $300 billion in a 12-month period. And that certainly will have an impact on Treasury supply.

Matthew Hornbach: Indeed. And so, as we make our way through the month of August, we'll get an update to those tariff revenues. And also, towards the end of August, we will have the economic symposium in Jackson Hole, where Chair Powell will give us his updated thoughts on what is the outlook for the economy and for monetary policy. And Mike, I look forward to catching up with you after that.

Thanks for taking the time to talk today.

Michael Gapen: Great speaking with you Matt.

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

Economic data looks backward while equity markets are looking ahead. Our CIO and Chief U.S.  Equity Strategist Mike Wilson explains why this delays the Federal Reserve in both cutting and hiking rates – and why this is a feature of monetary policy, not a bug.

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 economic data can be counterintuitive for how stocks trade.

It's Monday, August 4th at 11:30am in New York. 

So, let’s get after it.

Since the lows in April, the rally in stocks has been relentless with no tradable pullbacks. I have been steadfastly bullish since early May primarily due to the V-shaped recovery in earnings revisions breadth that began in mid-April. The rebound in earnings revisions has been a function of the positive reflexivity from max bearishness on tariffs, the AI capex cycle bottoming, and the weaker U.S. dollar. Now, cash tax savings from the One Big Beautiful Bill are an additional benefit to cash flow which should drive higher capital spending and M&A.

As usual, stocks have traded ahead of the positive sentiment and the lagging economic data – which leads me to the main point for today.

Weak labor data last week may worry some investors in the short term. But ultimately we see that as just another positive catalyst for stocks. Further deterioration would simply get the Fed to start cutting rates sooner and more aggressively.

The bond market seems to agree and is now pricing a 90 percent chance of a Fed cut in September, and the 2-year Treasury yield is 80 basis points below the fed[eral] funds rate. This spread is not nearly as severe as last summer when it reached 200 basis points. However, it will widen further if next month's labor data is disappointing again.

While weaker economic data could lead to further weakness in equities, the labor data is arguably the most backward-looking data series we follow. It’s also why the Fed tends to be late with rate cuts. Meanwhile, inflation metrics are arguably the second most backward looking data, which explains why the Fed also tends to be late in terms of hiking rates. In my view, it's a feature of monetary policy, not a bug.

Finally, in my opinion, the bond market’s influence is more important than President Trump's public calls for Powell to cut rates.

The equity market understands this dynamic, too—which is why it also gets ahead of the Fed at various stages of the cycle. We noted in our Mid-Year Outlook that April was a very durable low for equities that effectively priced a mild recession. To fully appreciate this view, one must acknowledge that equities were correcting for the 12 months leading up to April with the average stock down close to 30 percent at the lows. More importantly, it also coincided with a major trough in earnings revisions breadth.

In short, Liberation Day marked the end of a significant bear market that began a year earlier. 

Remember, equity markets bottom on bad news and Liberation Day was the last piece of a long string of bad news that formed the bottom for earnings revisions breadth that we have been laser focused on. 

To bring it home, economic data is backward looking, earnings revisions and equity markets are forward looking. April was a major low for stocks that discounted the weak economic data we are seeing now. It was also the trough of the rolling recession that we have been in for the past three years and marked the beginning of a rolling recovery and a new bull market. 

For those who remain skeptical, it’s important to recognize that the unemployment typically rises for 12 months after the equity market bottoms in a recession. Once the growth risk is priced, it’s ultimately a tailwind for margins and stocks, as positive operating leverage arrives and the Fed cuts significantly. 

Based on this morning’s rebound in stocks, it looks like the equity markets agree.  

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!

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

Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.

Michael Zezas: Today  ongoing effects of tariffs on the U.S. economy.

It is Friday, August 1st at 8am in New York.

So, Michael, lots of news over the past couple of weeks about the U.S. making trade agreements with other countries. It's certainly dominated client conversations we've had, as I'm assuming it's probably dominated conversations for you as well.

Michael Gapen: Yeah  certainly a topic that never goes away. It keeps on giving at this point in time. And I guess, Michael, what I would ask you is,  what do you make of the recent deals ? Does it reduce uncertainty in your mind? Does it leave uncertainty elevated?

What’s  your short-term outlook  for trade policy?

Michael Zezas: Yeah, I think it's fair to say that we've reduced the range of potential outcomes in the near term around tariff rates. But we haven't done anything to reduce longer term uncertainties in U.S. trade policy.

So, consider, for example, over the last couple of weeks, we have an agreement with Japan and an agreement with Europe – two pretty substantial trading partners – where it appears, the tariff rate that's going to be applied is something like 15 percent. And when you stack up these deals on one another, it looks like we're going to end up in an average effective tariff rate from the U.S. range of kind of 15 to 20 percent. And if you think back a couple of months, that range was much wider and we were potentially talking about levels in the 25 to 30 percent range.

So, in that sense, investors might have a bit of a respite from the idea of kind of massive uncertainty around trade policy outcomes. However, longer term, these agreements really just are kind of principles that are set out for behavior, and there's lots of trip wires that could create future potential escalations.

So, for example, with the Europe deal, part of the deal is that Europe will commit to purchase a substantial amount of U.S. energy. There's obvious questions as to whether or not the U.S. can actually supply that amidst its own energy needs that are rising substantially over the course of the next year. So, could we end up in a situation where six months to a year from now if those purchases haven't been made – the U.S. sort of presses forward and the administration threatens to re-escalate tariffs again. Really hard to know, but the point is these arrangements have lots of contingencies and other factors that could lead to re-escalation. 

But it's fair to say, at least in the near term, that we're in a landing place that appears to be somewhat smaller in terms of the range of potential outcomes.  Now, I think a question for investors is going to be – how do we assess what the effects of that have been, right? Because is it fair to say that the economic data that we've received so far maybe isn't fully telling the story of the effects that are being felt quite yet.

Michael Gapen: Yeah, I think that's completely right. We've always had the view that it would take several months or more just for tariffs to show up in inflation. And if tariffs primarily act as a tax on the consumer, you have to apply that tax first before economic activity would  moderate.

So, we've long been forecasting that inflation would begin to pick up in June. We saw a little of that. But it would accelerate through the third quarter, kind of peaking around the August-September period. So, I'd say we've seen the first signs of that, Michael, but we need obviously follow through evidence that it's happening. So,  we do expect that in the July, August and September inflation reports, you'll see a lot more evidence of tariffs pushing goods prices higher.

So,  we'll be dissecting all the details of the CPI looking for evidence of direct effects of tariffs, primarily on goods prices, but also some services prices. So, I'd put that down as tthe first marker, and we've seen some,  early evidence on that.

The second then, obviously, is the economy's 70 percent consumption. Tariffs act as a regressive tax on low- and middle-income consumers because non-discretionary purchases are a larger portion  of their consumption bundle and a lot of goods prices are as well. Upper income households tend to spend relatively more money  on leisure and recreation services. So, we would then expect growth in private consumption, primarily led by lower and middle-income spending softening. We think the consumer would slow down. But into the end of the year.Those are the two main markers that I would point to.

Michael Zezas: Got it. So, I, I think this is really important because there's certainly this narrative amongst clients that we talk to that markets may have already moved on from this.  Or investors may have already priced in the effects – or lack thereof – of some of this tariff escalation. Now we're about to get some real evidence from economic data as to whether or not that view and those assumptions are credible.

Michael Gapen: That's right.  Where we were initially on April 2nd after Liberation Day was largely embargo level tariffs. And if those stayed in place, trade volumes and activity and financial market asset values would've collapsed precipitously. And they were for a few weeks, as you know, but then we dialed it back and got out of thatSo, yeah, , we would say it's wrong to conclude that the economy , has absorbed these tariffs already and that they won't have,, a negative effect on economic activity. We think they will just in the base case where tariffs are high, but not too high, it just takes a while for that to happen.

Michael Zezas:  And of course, all of that's kind of core to our multi-asset outlook right now where a slowing economy, even with higher recession probabilities can still support risk assets. But of course, that piece of it is going to be very complicated if the economic data ends up being worse than you suspect.

Now, any evidence you've seen so far? For example, we had a GDP report earlier this week. Any evidence from that data as to where things might go over the next few months?

Michael Gapen: Yeah, well, another data point on trade policy and trade policy uncertainty really causing a lot of volatility in trade flows.

So, if you recall, there's big front running of tariffs in the first quarter. Imports were up about 37 percent on the quarter; that ended in the second quarter, imports were down 30 percent. So net trade was a big drag on growth in the first quarter. It was a big boost to growth in the second. But we think that's largely noise. So, what I would say is we've probably level set import and export volumes now.

 So, do trade volumes from here begin to slow? That's an unresolved question. But certainly, the large volatility in the trade and inventory data in Q1 and Q2 GDP numbers are reflective of everything that you're saying about the risks around trade policy and elevated trade policy uncertainty.

Second, though, I would say, because we started out the quarter with Liberation Day tariffs, the business sector, clearly – in our mind anyway – clearly responded by delaying activity. Equipment spending was only up 4 to 5 percent on the quarter. IP was up about 6 percent. Structures was down 10 percent. So, for all the narrative around AI-related spending, there wasn't a whole lot of spending on data centers and power generation in the second quarter.

So, what you speak to about the need to reduce some trade policy uncertainty, but also your long run trade policy uncertainty remains elevated? I would say we saw evidence in the second quarter that all of that slowed down capital spending activity. Let's see if the One Big Beautiful Bill act can be a catalyst on that front, whether animal spirits can come back. But that's the other thing I would point to is that,  business spending was weak and even though the headline GDP number was 3 percent, that's mainly a trade volatility number. Final sales to domestic purchasers, which includes consumption and business spending, was only up 1.1 percent in the quarter.

So, the economy's moderating; things are cooling. I think trade policy and trade policy uncertainty is a big part of that story.

Michael Zezas: Got it. So maybe this is something of a handoff here  where my team had been really, really focused and investors have been really, really focused on the decision-making process of the U.S. administration around tariffs. And now your team's going to lead us through understanding the actual impacts. And the headline numbers around economic data are important, but probably even more important is the underlying. Is that fair?

Michael Gapen: I think that's fair. I think as we move into the third quarter, like between now and when the Fed meets in, September, again, they'll have a few more inflation reports, a few more employment reports. We're going to learn a lot more than about what the Fed might do. So, I think the activity data and the Fed will now become much more important over the next several months than where we've been the past several months, which is about, has been about announcements around  trade.

Michael Zezas: All right. Well then, we look forward to hearing more from you and your team in the coming months. Well Michael, thanks for taking the time to talk to me.

Michael Gapen: Thanks for having me on.

Michael Zezas: And to our audience, thanks for listening. If you enjoy Thoughts on the Market, please leave us a review and tell your friends about the podcast. We want everyone to listen. 

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.

Lisa Shalett: And I'm Lisa Shalett, Chief Investment Officer for Morgan Stanley Wealth Management.

Andrew Sheets: Today a today a concluding look at the theme of American exceptionalism and how it factors into fixed income.

It's Thursday, July 31st at 4pm in London.

Lisa Shalett:  And it's 11am here in New York.

So, Andrew, it's my turn to ask you some questions. And yesterday we talked a lot about equity markets, globalization, some of the broader macro shifts. , But I wanted to zoom in on the credit markets today and one of our themes in, in the American Exceptionalism paper was the constraints of debts and deficits and how they play in. With U.S. debts level soaring and interest costs rising, how concerned should investors be?

Andrew Sheets: So, you alluded to this a bit on our discussion yesterday that we are in a very interesting divide where you have, inequality between very well-off companies and weaker companies that aren't doing as well. You have a lot of division within households between those who are,  doing better and struggling more with the rate environment.

But you know, I think we also see that the large deficits that the U.S. Federal government are running are in some ways largely mirrored by very, very good private sector financial positions. In aggregate U.S. households have record levels of assets relative to debt at the end of 2024, in aggregate the financial position of the U.S. equity market has never been better.

And so, this is a dynamic where lending to the private sector, whether that is to parts of the residential mortgage market or to the corporate credit market, does have some advantages; where not just are you dealing with arguably a better trend of financial position, but you're just getting less issuance.

I think there are a number of factors that could cause the market to cause the difference of yield between the government debt and that private sector debt – that so-called spread – to be narrower than it otherwise would be.

Lisa Shalett: Well, that's a pretty interesting and provocative idea because, one of the, the hypotheses that we laid out in our paper is that perhaps one of the consequences of this extraordinary period of monetary stimulus of financial repression and ultra low rates, , of massive regulation of the systemically important banking system, has been the explosion of shadow banks, and the private credit markets. Our thesis is, they're a misallocation of capital. Has there been excess risk taking? And in that area. And how should we think about that asset class, number one? And,  number two, , are they increasingly, a source of. liquidity and issuance, or are they a drain on the system?

Andrew Sheets: This is, kind of, where your discussion of normalization is is so interesting because, in aggregate household balance sheets are in very good shape; in aggregate corporate balance sheets are in very good shape. But I do think there's a distinct tail of the market. , it's call it 5 percent of the high yield market, where you really are looking at a corporate capital structure that was designed for for a much lower level of rates. It was designed for maybe a immediately post COVID environment where rates were on the floor and expected to stay there for a long period of time.

And so, if we are moving to an environment where Fed funds is at 3 or 4. Or as you mentioned – hey, maybe you could justify a rate even a little bit higher and not be wildly off. Well then, you just have the wrong capital structure. You have the wrong level of leverage; and it's actually hard to do much about that other than to restructure that debt, or look to change it in a larger way.

So, I think we'll see a dynamic similar to the equity market where there is less dispersion between the haves and have nots.

Lisa Shalett: As we kind of think about where there could be pockets of opportunity in, in credit and in private credit, both public and private credit, , and where there could be risks. Can you just help me with that and explore that a little bit more?

Andrew Sheets: I think where credit looks most interesting is in some ways where it looks most boring. I think where the case for credit is strongest is – the investment grade market in the U.S. pays, 5.25 percent.

A 6 percent long run return might be competitive with certain investors’ long-term equity market forecasts, or at least not a million miles off.

I think though the other area where this is going to be interesting is. Do we see significantly more capital intensity out of the tech sector, And a real divide between fixed income and equities is that tech has so far really been an equity story.

Lisa Shalett: Correct.

But this data center build out is just enormous. I mean, through 2028, our analysts at Morgan Stanley think it's close to $3 trillion with a t.

And so there's a lot of interest in, in how can credit markets, how can private credit markets fund, , some of this build out and,  there are opportunities , and risks around that.

And you know, something that I think credit's going to play an interesting part of.

Lisa Shalett: And in that vision do you see the blurring of lines or a more competitive market between public and private?

Andrew Sheets: I do think there's always a little bit of a funny nature about credit where I. it's not always clear why a particular corporate loan would need to be traded every day, would need to be marked every day. I think it is a little bit different from the equity market in that way.

And I think you're also seeing a level of sophistication from investors who now have the ability to traffic across these markets and move capital between these markets, depending on where they think they're being better compensated or, or where there's better opportunities. So, I think we're kind of absolutely seeing the blur of these lines.

And again, I think private credit, , has until recently been somewhat synonymous with high-yield lending, riskier lending, lower rated lending.

Lisa Shalett: Correct. Yeah.

Andrew Sheets: And,  yet, the lending that we're seeing to some of this tech infrastructure is, you could argue, maybe more similar to Investment Grade lending – both in terms of risk, but also it pays a lot less. ,  And so again, this is kind of an interesting transition where you're seeing a, a broader scope and absolutely, I think more blurring of the line between these markets.

Lisa Shalett: So, let's just switch gears a little bit and pull out from credit to the broader diversified cross-asset portfolio. And some of those cross-asset correlations are starting to break down; and we go through these periods where stocks and bonds are more often than not positively correlated in moving together.

How are you beginning to think about duration risk in this environment? And have you made any adjustments to how you think about portfolio construction in light of, , these potentially, , shifting, , changes in correlations across assets?

Andrew Sheets:  I think there are kind of maybe two large takeaways I would take from this. First is I do think the big asset where we've seen the biggest change is in the U.S. dollar. The U.S. dollar, I think for a lot of the period we've been discussing on these two episodes, was kind of the best of both worlds. And recently that's just really broken down.

And so, I think when we think about the reallocation to the rest of the world, the, the focus on diversification, I think this is absolutely something that is top of mind among non-U.S. investors that we're talking to, which is almost the U.S. equity piece is kind of a separate conversation.

Andrew Sheets: The other piece though, is some of this debate around yields and equities – and do equities fear higher rates or lower rates?

Which one of those is the biggest problem? And there's a question of magnitude that's a little interesting here. Rates going higher might be a little bit more of a problem for the S&P 500 than rates going lower.

That rates going higher might be more consistent with the scenario of temporary higher inflation. Maybe rates go lower [be]cause the market gets more excited about Federal Reserve cuts.

But I think in terms of scenarios where – like where is the equity market really going to have a problem? Well, it's really going to have a problem if there's a recession.

So, even though I think bonds have been less effective diversifiers, , I really do think they're still going to serve a very healthy, helpful purpose around some of those potentially kind of bigger dynamics.  

Lisa Shalett: Yeah that very much the way we've been thinking about it, , particularly within the, the context of, of managing private wealth, where, , very often we're confronted with the, the question, what about 60-40? Is 60-40 dead? Is 60-40 back? Like, you talk about not wanting to hedge, I don't want to hedge, , either. But, but the answer to the question we agree is, is somewhat nuanced. Right?

We do agree that, this perfect world of, negative correlations between stocks and bonds that we enjoyed, , for a good portion of the last 15 years probably is over. . But that doesn't mean that bonds , and most specifically, that five to 10 year part of the curve doesn't have a really important role to play in portfolios.

And the reason I say that, , is that one of the other elements of this conversation that we haven't really touched on, , is valuation and expected returns.

I know that when I speak of the valuation-oriented topics and the CAPE ratio when expected 10-year returns, everyone's eyes glaze over and roll to the back of their head and they say, ‘Oh, here she goes again.’ , But look, I, I am in the camp that says an awful lot of growth has already been discounted and already been priced. And that it is much more likely that U.S. equities will return something closer to long run averages. So that's not awful.

The lower volatility of a, fixed income asset that's returning sixes and sevens has a definite role to play in portfolios for wealth clients who are by and large long term oriented investors who are not necessarily attempting to exploit, , 90-day volatility every quarter.

Andrew Sheets:   Without putting too fine of a point on it, I think when that question of is 60-40 over is phrased, I kind of think the subtext is often that it's the bond side, the 40 side that has a problem. And not to be the fixed income defender on this podcast, but you could probably more easily argue that if we're talking about, well, which valuation is more stretched, the equity side or the bond side. I think it's the equity side that has a more stretched valuation.

Lisa Shalett: Without a doubt, without a doubt.

Andrew Sheets:  Well, Lisa, thanks again for taking the time to talk.

Lisa Shalett: Absolutely great to speak with you, Andrew, as always.

Andrew Sheets: And thanks again for listening to this two-part conversation on American exceptionalism, the changes coming to that and how investors should position. And to our listeners, a reminder to take a moment to please review us wherever you listen. It helps more people find the show. And if you found this conversation insightful, tell a friend or colleague about Thoughts on the Market today.