Thoughts on the Market Podcast

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.

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, the first of two episodes tackling a fascinating and complex question. Is American market dominance ending? And what would that mean for investors?

It's Wednesday, July 30th at 4pm in London.

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

Andrew Sheets: Lisa, it's so great to talk to you again, and especially what we're going to talk about over these two episodes. , a theme that's been coming up regularly on this podcast is this idea of American exceptionalism. This multi-year, almost multi-decade outperformance of the U.S. economy, of the U.S. currency, of the U.S. stock market.

And so, it's great to have you on the show, given that you've recently published on this topic in a special report, very topically titled American Exceptionalism: Navigating the Great Rebalancing.

So, what are the key pillars behind this idea and why do you think it's so important?

Lisa Shalett: Yeah. So, , I think that that when you think about the thesis of American exceptionalism and the duration of time that the thesis has endured. I think a lot of investors have come to the conclusion that many of the underpinnings of America's performance are just absolutely inherent and foundational, right?

They'll point to America as a, economy of innovation. A market with regulation and capital markets breadth and depth and liquidity a market guided by, , laws and regulation, and a market where, , heretofore we've had relatively decent population growth.

All things that tend to lead to growth. , But our analysis of the past 15 years, while acknowledging all of those foundational pillars say, ‘Wait a minute, let's separate the wheat from the chaff.’ Because this past 15 years has been, extraordinary and different. And it's been extraordinary and different on at least three dimensions.

One, the degree to which we've had monetary accommodation and an extraordinary responsiveness of the Fed to any crisis. Secondly, extraordinary fiscal  policy and fiscal stimulus. And third, the, the peak of globalization a trend that in our humble opinion, American companies were among, , the biggest beneficiaries of exploiting, despite all of the, political rhetoric that considers the costs of that globalization.

Andrew Sheets: So, Lisa, let me go back then to the title of your report, which is the Great Rebalancing or navigating the Great Rebalancing. So, what is that rebalancing? What do you think kind of might be in store going forward?

Lisa Shalett: The profound out performance, as you noted, Andrew, of both the U.S. dollar and , American stock markets have left the world, , at an extraordinarily overweight position to the dollar and to American assets.

And that's against a backdrop where, , we're a fraction of the population. We're 25 percent, , of global GDP, and even with all of our great companies, we're still only 33 percent of the profit pool. So, we were at a place where not only was everyone overweight, but the relative valuation premia of American equity assets versus, , equities outside or rest of world was literally a 50 percent premium.

And that really had us asking the question, is that really sustainable? Those kind of valuation premiums – at a point when all of these pillars, fiscal stimulus, monetary stimulus, globalization, are at these profound inflection points.

Andrew Sheets: You mentioned monetary and fiscal policy a bit as being key to supercharging U.S. markets. Where do you think these factors are going to move in the future, and how do you think that affects this rebalancing idea?

Lisa Shalett: Look, I mean, I think we went through a period of time where on a relative basis, relative growth, relative rate spreads, right? The, the dispersion between what you could earn in U.S. assets and what you could earn, , in other places, and the hedging ratio in those currency markets, , made owning U.S. assets, , just incredibly attractive on a relative basis.

As the U.S. now kind of hits this point of inflection when the rest of the world is starting to say, okay, in an America first and an America only policy world, what am I going to do?

And I think the responses are that for many other countries, they are going to invest aggressively . in defense, in infrastructure, in technology, , to, , respond to de-globalization, if you will.

And I think for many of those economies, it's going to help equalize not only growth rates between the U.S. and the rest of the world, but it's going to help equalize, , rate differentials. Particularly on the longer end of the curves, where everyone is going to spending money.

Andrew Sheets: That's actually a great segue into this idea of globalization, which again was a major tailwind for U.S. corporations and a pillar of this American outperformance over a number of years.

It does seem like that landscape has really changed over the last couple of decades, and yet going forward, it looks like it's going to change again. So, with rising deglobalization with higher tariffs, what do you think that's going to mean to U.S. corporate margins and global supply chains?

Lisa Shalett: Maybe I am, , a product of, my training  and economics, but I have always been a believer in comparative advantage and what globalization allowed. True free trade and globalization of supply chains allowed was for countries to exploit what they were best at – whether it was the lowest cost labor, the lowest cost of natural resources, the lowest cost inputs. , And America was aggressive at pursuing those things, at outsourcing what they could, , to grow profit margins. And, , that had lots of implications.

And we weren't holding manufacturing assets or logistical assets or transportation assets necessarily, , on our balance sheets.

And, , that dimension of this asset light and optimized supply chains, , is something in a world of tariffs, in a world of deglobalization, in a world of create manufacturing jobs onshore, , where that gets reversed a bit. And there's going to be a, a financial cost to that.

Andrew Sheets: It's probably fair to say that the way that a lot of people experience American exceptionalism is in their retirement account.

In your view, is this outperformance sustainable or do you think, as you mentioned, changing fiscal dynamics, changing trade dynamics, that we're also going to see a leadership rotation here?

Lisa Shalett: Our thesis has been, , this isn't the end of American exceptionalism. , point blank, black and white. What we've said, however, is that we think that the order of magnitude of that outperformance is what's going to close, , when you start burdening, , your growth rate with headwinds, right?

And so, again, not to say that that American assets can't continue to, to be major contributors in portfolios and may even, , outperform by a bit. But I don't think that they're going to be outperforming by, , the magnitude, kind of the 450 - 550 basis points per year compound for 15 years that we've seen.

Andrew Sheets: The American exceptionalism that we've seen really since 2009, it's also been accompanied by really unprecedented market imbalances. But another dimension of these imbalances is social and economic inequality, which is creating structural, and policy, and political challenges.

Do these imbalances matter for markets? And do you think these imbalances affect economic stability and overall market performance?

Lisa Shalett: People need to understand what has happened over this period. When we applied this degree of monetary and fiscal, stimulus, what we essentially did was massively deleverage the private sector of America, right?

And as a result, , when you do that, , you enable and create the backdrop, , for the portions of your economy who are less interest rate sensitive, , to continue to, , kind of invest free money. And so, , what we have seen is that this gap between the haves and the have nots, those who are  most interest rate sensitive and those who are least interest rate sensitive – that chasm is really, , blown out.

But also I would suggest an A economic policy conundrum. We can all have points of view about the central bank, and we can all have points of view about the current chair. , But the reality is if you look at these dispersions in the United States, you have to ask yourself the question, is there one central bank policy that's right for the U.S. economy?

I could make the argument that the U.S. GDP, right, is growing at 5.5 percent nominal right now. And the policy rate's 4.3 percent. Is that tight?

Andrew Sheets: Hmm.

Lisa Shalett: I don't know, right? The economists will tell me it's really tight, Lisa – [be]cause neutral is 3. But I don't know. I don't see the constraints. If I drill down and do I say, can I see constraints among small businesses?

Yeah. I think they're suffering. Do I see constraints in some of the portfolio companies of private equity? Are they suffering? Yeah. Do they need lower rates? Yeah. Do the lower two-thirds of American consumers need lower rates to access the housing market. Yeah.

But is it hurting the aggregate U.S. economy? Mm, I don't know; hard to convince me.

Andrew Sheets: Well, Lisa, that seems like a great place to actually end it for now and Thanks as always, for taking the time to talk.

Lisa Shalett: My pleasure, Andrew.

Andrew Sheets: And that brings us to the end of part one of this two-part look at American exceptionalism and the impact on equity and fixed income markets. Tomorrow we'll dig into the fixed income side of that debate.

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. 

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 will discuss what's driving my optimism on stocks.

It's Tuesday, July 29th at 11:30am in New York. 

So, let’s get after it.

Over the past few weeks, I have been leaning more toward our bull case of 7200 for the S&P 500 by the middle of next year. This view is largely based on a more resilient earnings and cash flow backdrop than anticipated. The drivers are numerous and include positive operating leverage, AI adoption, dollar weakness, cash tax savings from the Big Beautiful Bill, and easy growth comparisons and pent-up demand for many sectors in the market.

While many are still focused on tariffs as a headwind to growth, our analysis shows that tariff cost exposures for S&P 500 industry groups is fairly contained given the countries in scope and the exemptions that are still in place from the USMCA. Meanwhile, deals are being signed with our largest trading partners like Japan and Europe that appear favorable to the U.S.

Due to the lack of pricing power, the main area of risk in the stock market from tariffs is consumer goods; and that’s why we remain underweight that sector. However, the main tariff takeaway for investors is that the rate of change on policy uncertainty peaked in early April. This is the primary reason why earnings guidance bottomed in April as evidenced by the significant inflection higher in earnings revisions breadth—the key fundamental factor that we have been focused on.

Of course, the near-term set up is not without risks. These include still high long-term interest rates, tariff-related inflation and potential margin pressure. As a result, a correction is possible during the seasonally weak third quarter, but pull-backs should be shallow and bought. In addition to the growth tailwinds already cited, it’s worth pointing out that many companies also face very easy growth comparisons.

I’ve had a long standing out of consensus view that the U.S. has been experiencing a rolling recession for the last three years. This fits with the fact that much of the soft economic data that has been hovering in recession territory for much of that period as well—things like purchasing manager indices, consumer confidence, and the private labor market. It also aligns with my long-standing view that government spending has helped to keep the headline economic growth statistics strong, while much of the private sector and many consumers have been crowded out by that heavy spending which has also kept the Fed too tight.

Meanwhile, private sector wage growth has been in a steady decline over the last several years, and payroll growth across Tech, Financials and Business Services has been negative – until recently. Conversely, Government and Education/Health Services payroll growth has been much stronger over this time horizon. This type of wage growth and sluggish payroll growth in the private sector is typical of an early cycle backdrop. It's a key reason why operating leverage inflects in early cycle environments, and margins expand. Our earnings model is picking up on this underappreciated dynamic, and AI adoption is likely to accelerate this phenomenon. In short, this is looking more and more like an early cycle set up where leaner cost structures drive positive operating leverage after an extended period of wage growth consolidation.

Bottom line, the capitulatory price action and earnings estimate cuts we saw in April of this year around Liberation Day represented the end of a rolling recession that began in 2022. Markets bottom on bad news and we are transitioning from that rolling earnings recession backdrop to a rolling recovery environment.

The combination of positive earnings and cash flow drivers with the easy growth comparisons fostered by the rolling EPS recession and the high probability of the Fed re-starting the cutting cycle by the first quarter of next year should facilitate this transition. The upward inflection we're seeing in earnings revisions breadth confirms this process is well underway and suggests returns for the average stock are likely to be strong over the next 12-months. In short, buy any dips that may occur in the seasonally weak quarter of the year.

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!

Welcome to Thoughts on the Market. I’m Nick Lord, Morgan Stanley’s Head of ASEAN Research.

Today – Singapore is about to celebrate its 60^th year of independence. And it’s about to enter its most transformative decade yet.

It’s Monday, the 28th of July, at 2 PM in Singapore.

Singapore isn’t just marking a significant birthday on August 9th. It’s entering a new era of wealth creation that could nearly double household assets in just five years. That’s right—we’re projecting household net assets in the city state will grow from $2.3 trillion today to $4 trillion by 2030.

So, what’s driving this next chapter?

Well, Singapore is evolving from a safe harbor for global capital into a strategic engine of innovation and influence driven by three major forces. First, the country’s growing role as a global hub. Second, its early and aggressive adoption of new technologies. And last but not least, a bold set of reforms aimed at revitalizing its equity markets.

Together, these pillars are setting the stage for broad-based wealth creation—and investors are taking notice.

Singapore is home to just 6 million people, but it’s already the fourth-richest country in the world on a per capita basis. And it's not stopping there.

By 2030, we expect the average household net worth to rise from $1.6 million to an impressive $2.5 million. Assets under management should jump from $4 trillion to $7 trillion. And the MSCI Singapore Index could gain 10 percent annually, potentially doubling in value over the next five years. Return on equity for Singaporean companies is also set to rise—from 12 percent to 14 percent—thanks to productivity gains, market reforms, and stronger shareholder returns.

But let me come back to this first pillar of Singapore’s growth story. Its ambition to become a hub of hubs. It’s already a major player in finance, trade, and transportation, Singapore is now doubling down on its strengths.

In commodities, it handles 20 percent of the world’s energy and metals trading—and it could become a future hub for LNG and carbon trading. Elsewhere, in financial services, Singapore’s also the third largest cross-border wealth booking centre, and the third-largest FX trading hub globally. Tourism is also a key piece of the puzzle, contributing about 4 percent to GDP. The country continues to invest in world-class infrastructure, events, and attractions keeping the visitors—and their dollars—coming.

As for technology – the second key pillar of growth – Singapore is going all in. It’s becoming a regional hub for data and AI, with Malaysia and Japan also in the mix. Together, these countries are expected to attract the lion’s share of the $100 billion in Asia’s data center and GenAI investments this decade.

Worth noting – Singapore is already a top-10 AI market globally, with over 1,000 startups, 80 research facilities, and 150 R&D teams. It’s also a regional leader in autonomous vehicles, with 13 AVs currently approved for public road trials. And robots are already working at Singapore’s Changi Airport.

Finally, despite its economic strength, Singapore’s stock market had long been seen as sleepy — dominated by a few big banks and real estate firms. But that’s changing fast and becoming the third pillar of Singapore’s remarkable growth story.

This year, the government rolled out a sweeping set of reforms to breathe new life into the market. That includes tax incentives, regulatory streamlining, and a $4 billion capital injection from the Monetary Authority of Singapore to boost liquidity—especially for small- and mid-cap stocks.

We also expect that there will be a push to get listed companies more engaged with shareholders, encouraging them to communicate their business plans and value propositions more clearly. The goal here is to raise

Singapore’s price-to-book ratio from 1.7x to 2.3x—putting it on a par with higher-rated markets like Taiwan and Australia.

So, what does all this mean for investors?

Well, Singapore is not just celebrating its past—it’s building its future. With smart policy, bold innovation, and a clear vision, it’s positioning itself as one of the most dynamic and investable markets in the world.

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.

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

Today – how the world may fund $3 trillion of expected spending on AI.

It's Friday July 25th at 2pm in London.

Whether you factor it in or not, AI is rapidly becoming a regular part of our daily lives. Checking the weather before you step out of the house. Using your smartphone to navigate to your next destination, with real time traffic updates. Writing that last minute wedding speech. An app that reminds you to take your medication or maybe reminds you to power off your device.

All of these capabilities require enormous physical infrastructure, from chips to data centers, to the electricity to power it all. And however large AI is seen so far, we really haven't seen anything yet. Over the next five years, we think that global data center capacity increases by a factor of six times. The cost of this spending is set to be extraordinary. $3 trillion by the end of 2028 on just the data centers and their hardware alone.

Where will all this money come from?

In a recent deep dive report published last week, a number of teams within Morgan Stanley Research attempted to answer just that. First, large cap technology companies, which are also commonly called the hyperscalers. Well, they are large and profitable. We think they may fund half of the spending out of their own cash flows.

But that leaves the other half to come from outside sources. And we think that credit markets – corporate bonds, securitized credit, asset-backed finance markets – they're gonna have a large role to play, given the enormous sums involved.

For corporate bonds, the asset class closest to my heart, we estimate an additional $200 billion of issuance to fund these endeavors. Technology companies do currently borrow less than other sectors relative to their cash flow, and so we're starting from a relatively good place if you want to be borrowing more – given that they're a small part of the current bond market. While technology is over 30 percent of the S&P 500 Equity Index, it's just 10 percent of the Investment Grade Bond Index.

Indeed, a relevant question might be why these companies don't end up borrowing more through corporate bonds, given this relatively good starting position.

Well, some of this we think is capacity. The largest non-financial issuers of bonds today have at most $80 to $90 billion of bonds outstanding. And so as good as these big tech businesses are, asking investors to make them the largest part of the bond market effectively overnight is going to be difficult.

Some of our thinking is also driven by corporate finance. We are still in the early stages of this AI build out where the risks are the highest. And so, rather than take these risks on their own balance sheet, we think many tech companies may prefer partnerships that cost a bit more but provide a lot more flexibility. One such partnership that you'll likely to hear a lot more about is Asset Backed Finance or ABF. We see major growth in this area, and we think it may ultimately provide roughly $800 billion of the required funding.

The stakes of this AI build out are high. It's not hyperbole to say that many large tech companies see this race to develop AI technology as non-negotiable. The cost of simply competing in this race, let alone winning it – could be enormous. The positive side of this whole story is that we're in the early innings of one of the next great runs of productive capital investment, something that credit markets have helped fund for hundreds of years.

The risks, as can often be the case with large spending, is that more is built than needed; that technology does change, or that more mundane issues like there not being enough electricity change the economics of the endeavor.

AI will be a theme set to dominate the investment debate for years to come. Credit may not be the main vector of the story. But it's certainly a critical part of it.

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.

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

Ariana Salvatore: And I'm Ariana Salvatore, U.S. Public Policy Strategist.

Michael Zezas: Today we're diving into the administration's newly released AI action plan. What's in It, what it means for markets, and where the challenges to implementation might lie.

It's Thursday, July 24th at 10am in New York.

Things are not all quiet on the policy front, but with the fiscal bill having passed Congress and trade tensions simmering ahead of the new August 1st deadline, clients are asking what the administration might focus on that investors might need to know more about.

Well, this week it seems to be AI.

The White House just unveiled its sweeping AI Action Plan, the first big policy-signaling document since the administration canceled the implementation of former President Biden's AI Diffusion Rule. So, Ariana, what do we need to focus on here?

Ariana Salvatore: This document is basically the administration signaling how it intends to cement America's role in the global development of AI – through a mix of both domestic and global policy initiatives. There are over 90 policy actions outlined in the document across three main pillars: innovation, infrastructure, and global leadership.

Michael Zezas: That's right. And even though there's still some important details to flesh out here in terms of what these initiatives might practically mean, it's worth delving into what the different areas are outlining and what it might mean for investors here.

Ariana Salvatore: So first on the innovation front. The plan calls for removing regulatory barriers to AI development, encouraging open-source models, and investing in interpretability and robustness. There's also a push throughout the document to build world class data sets and accelerate AI adoption across the federal agencies.

Michael Zezas: Infrastructure is another main pillar here, and keeping with the theme of loosening regulation, the plan includes fast tracking permits for data centers, expanding access to federal land, and improving grid interconnection for power generation. There's also a call to stabilize the existing grid and prioritize dispatchable energy sources like nuclear and geothermal.

But that's where we may see some of these frictions emerge. As our colleague Stephen Byrd has talked about quite a bit, the grid remains a major constraint for power generation; and even with some of these executive orders, the President's ability to control scaling power capacity is somewhat limited.

Many of these policy tools to increase energy production to facilitate more data centers will likely have to be addressed by Congress, especially if any of these policy changes are to be more durable.

Ariana Salvatore: One area where the executive actually does have pretty broad discretion to control is trade policy, and this document focused a lot on the U.S.’ role in the world as we see increasing AI competition on a global scale.

So, to that point, the third pillar is around global leadership. Specifically, the plan calls for the U.S. to export its full AI stack – hardware, models, standards – to allies, while simultaneously tightening export controls on rivals. China's clearly a focal point here, and that's one that is explicitly called out in the document.

Michael Zezas: Right. And so, it all seems part of a proposal to form in International AI Alliance built on shared values and open trade; and the plan explicitly frames AI leadership as a strategic priority in the multipolar world.

It calls for embedding U.S. AI standards and global governance bodies while using export controls and diplomatic tools to limit adversarial influence. But you know, importantly, something we'll have to track here is what exactly are these standards going to be and how that will shape how industry in the U.S. around AI has to behave. Those details are not yet forthcoming.

So, there's a couple of threads here across all of this; deregulation, pushing for more energy generation, trade policy aspects. Ariana, what do you think it all means for investors? Are there key sectors here that face more constraints or face more tailwinds that investors need to know about?

Ariana Salvatore: Yeah, so really two key takeaways from this document. First of all, AI policy is a priority for the administration, and we're seeing them pursue efforts to reduce regulatory barriers to data center construction. Although those could run into some legal and administrative hurdles. All else equal reduction in data center, build time and cost benefits owners of natural gas fired and nuclear power plants. So, you should see a tailwind to the power and utility sector.

Secondly, this document and the messaging from the President makes AI a national security issue. That's why we see differentiated treatment for China versus the rest of the world, which is also reflected in the administration's approach to the broader trade relationship and dovetails well with our expectation for higher tariffs on China at the end of this year versus the global baseline.

Michael Zezas: Right. So, if AI becomes a national and economic security issue, which is what this document is signaling, it's one of the reasons you should expect that these tariff increases globally – but with a skew towards China – are probably durable. And it's something that we think is reflected in the sector preferences or equity strategy team, for example, with some caution around the consumer sector.

Ariana Salvatore: That's right. So, plan to watch as this unfolds.

Michael Zezas: That's it for today's episode of Thoughts on the Market. If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.

Welcome to Thoughts on the Market. I’m Ben Swinburne, Morgan Stanley’s U.S. Media and Entertainment Analyst. Today – GenAI is poised to shake up the entertainment business.

It’s Wednesday, July 23, at 10am in New York.

It's never been easier to create art for anyone – with a little help from GenerativeAI. You can transform photos of yourself or loved ones in the style of a popular Japanese movie studio or any era of visual art to your liking. You can create a short movie by simply typing in a few prompts. Even I can speak to you in several different languages. I can ask about the weather:

 Hvordan er været i dag?

 Wie ist das wetter heute?

 आज मौसम कैसा है?

In the media and entertainment industry, GenAI is expected to bring about a seismic shift in how content is made and consumed. A recent production used AI to de-age actors and recreate the likeness of a deceased performer—cutting what used to take hundreds of VFX artists a year to just a few months with a small team. There are many other examples of how GenAI is revolutionizing how stories are told, from scriptwriting and editing to visual effects and dubbing.

In music, GenAI is helping music labels identify emerging talent and generate new compositions. GenAI can even create songs using the voices of long-gone artists – potentially extending revenue far beyond an artist’s lifetime.

GenAI-driven tools have the potential to reduce TV and film production costs by 10–30 percent, with animation and post-production among the biggest savings opportunities. GenAI could also transform how content reaches audiences. Recommendation engines can become even more predictive, using behavioral data to serve up exactly what listeners want—sometimes before we know what we want.

And there’s more studios can achieve in post production. GenAI can already dub content in multiple languages, even syncing mouth movements to match the new dialogue. This makes global distribution faster, cheaper, and more culturally relevant.

With better engagement comes better monetization. Platforms will use GenAI to introduce new pricing tiers, targeted advertising, and personalized superfan content that taps into niche audiences willing to pay more.

But all this innovation brings up profound ethical concerns.

First, there’s the issue of consent and copyright. Can GenAI tools legally use an actor’s name, likeness or voice? Then there’s the question of authorship. If an AI writes a script or composes a song, who owns the rights? The creator or the GenAI model?

Labor unions are understandably worried. In 2023, AI was a major sticking point in negotiations between Hollywood studios and writers’ and actors’ guilds. The fear? That AI could replace human jobs or devalue creative work.

There are also legal battles. Multiple lawsuits are underway over whether AI models trained on copyrighted material without permission violate intellectual property laws. The outcomes of these cases could reshape the entire industry.

But here’s a big question no one can ignore: Will audiences care if content is AI-generated? Some consumers are fascinated by AI-created music or visuals, while others crave the emotional depth and authenticity that comes from human storytelling. Made-by-humans could become a premium label in itself.

Now, despite GenAI’s rapid rise, not every corner of entertainment is vulnerable. Live sports, concerts, and theater remain largely insulated from AI disruption. These experiences thrive on real-time emotion, unpredictability, and human connection—things AI can’t replicate. In an AI-saturated world, the value of live events and sports rights will rise, favoring owners of sports rights and live platforms.

So where do we go from here?

By and large, we’re entering an era where storytelling is no longer limited by budget or geography. GenAI is lowering the barriers to entry, expanding the creative class, and reshaping the economics of media. The winners in this new landscape will likely be companies that can scale—platforms with massive user bases, deep data pools, and the engineering talent to integrate GenAI seamlessly. But there’s also room for agile newcomers who can innovate faster than the incumbents and disrupt the disrupters.

No doubt, as the tools get better, the questions get harder. And that’s where the real story begins.

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 Chetan Ahya, Morgan Stanley’s Chief Asia Economist.

Today – an issue that’s gaining traction in boardrooms and trading floors: the three big decisions Asia investors are facing right now.

It’s Tuesday, July 22nd, at 2 PM in Hong Kong.

So, let’s start with the big picture.

Over the past 13 years, Asia’s international investment position has doubled to a $46 trillion. A sizable proportion of that is invested in U.S. assets.

But the recent weakness in the U.S. dollar gives rise to three important questions for investors across Asia: Should they diversify away from U.S. assets? How much of Asia’s incremental savings should be allocated to the U.S.? Or should they hedge their U.S. exposure more aggressively?

First on the diversification debate. Investors are voicing concern over the U.S. macro outlook, given the twin deficits. At the same time, our U.S. economics team continues to see growth slowing, as better than expected fiscal impulse in the near term will not fully offset the drag from tariffs and tighter immigration policies.

This convergence in U.S. growth and interest rates with global peers—and continued debate about the U.S. dollar’s safe haven status has already led to U.S. dollar depreciation. And our macro strategists expect further depreciation of the U.S.D by another 8-9 percent by [the] second quarter of next year. 

So what is the data indicating? Are investors already diversifying?

Let’s look at Asia’s security portfolio as that data is more transparently available. Out of the total international investment of $46 trillion dollars, Asia’s securities portfolio alone is worth $21 trillion. And of that, $8.6 trillion is in U.S. assets as of [the] first quarter of 2025. Now here’s an interesting point: China’s holding had already peaked in 2013, but Asia ex-China’s holdings of U.S. assets has been increasing. Asia ex-China’s U.S. holdings hit a record $7.2 trillion in the first quarter, largely driven by equities.

In other words, in aggregate, Asia investors are not diversifying at the moment. But they are allocating less from their incremental savings. Asia’s current account surplus remains high—at $1.1 trillion in the first quarter. And even if it narrows a bit from here, the structural surplus means Asia’s total international investment position will keep growing.

However, incremental allocations to the U.S. are beginning to decline. The share of U.S. assets in Asia’s securities portfolio peaked at 41.5 percent in the fourth quarter of 2024 and started to dip in the first quarter of this year. In fact, our global cross asset strategist Serena Tang notes that Asian investors have reduced net buying of U.S. equities in the second quarter.

Finally, let’s talk about hedging. Asian investors have started to increase hedging of their U.S. investment position and we see increased hedging demand as one reason why Asian currencies have strengthened recently. Take Taiwan life insurance—often seen as [a] proxy for broader trends. While their hedge ratios were still falling in the first quarter, they started increasing again in the second. That lines up with the sharp appreciation of [the] Taiwanese dollar in the second quarter.

Meanwhile, the currencies of other economies with large U.S. asset holdings have also appreciated since the dollar’s peak. These are clear signals to us that increasing hedging demand is influencing foreign exchange markets.

All in all, Asia’s $46 trillion investment position gives it an enormous influence. Whether investors decide to diversify, allocate less or stay the course, and how much to hedge will affect currency trends going forward.

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.