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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.

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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.

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