Thoughts on the Market

Recorded live at the Morgan Stanley and MUFG Japan Summit, our Global Chief Economist and Head of Macro Research Seth Carpenter led a discussion on Asia’s exposure to the energy shock and Japan’s bullish outlook.
Read more insights from Morgan Stanley.

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Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And on today's episode, we're bringing you a live taping direct from Morgan Stanley and MUFG's Japan Summit to discuss the macroeconomic overlook. And, in particular, Japan's moment: reflation, reform, and the case for a structural re-rating.
I am joined by Chetan Ahya, our Chief Asia Economist; Takeshi Yamaguchi, our Chief Japan Economist; Jonathan Garner, our Chief Asia and EM Equity Strategist; Koichi Sugisaki, who is our Head of Japan Macro Strategy; and Sho Nakazawa, who is our Japan Equity Strategist.
Seth Carpenter: I will say we have just collectively published our mid-year outlook. So twice a year, Morgan Stanley Macro Research puts together our forecast. We take the time to debate with each other, to pressure test our views on the outlook for the next year and a half to two years.
And I have to say this version of the outlook process may have been the most difficult one that I can remember. And in no small part because one of the key fundamental drivers of the outlook globally for growth, for inflation is oil, oil prices. And the swings there have been pretty dramatic.
And so, as a result, we put a lot of effort into not just our baseline forecast, but also scenarios and the ways in which our baseline forecast could be wrong.
But Chetan, let me start with you. Tell us a little bit about the exposure in Asia to, to the energy shock.
Chetan Ahya: So Seth, you're right. Asia is one of the more exposed part of the world. But I would say that we've been surprised in the way this energy shock has been managed. One is, of course, at the global level, two big swings happened. US exports increased dramatically by 3.8 million barrels per day. Just to give you perspective, global consumption of oil is about 100 million barrels, so it's simple math in terms of how big this number was. And then China parallelly also reduced its imports by 3.5 million barrels. So, we had a 7 million barrel swing from a global oil demand balance perspective.
And, secondly, as far as gas is concerned, that is where actually we were more concerned about Asia because Asia was very dependent on Middle Eastern gas. And on that front, China single-handedly has bailed out the region. So, China cut its gas imports by about 45 percent, and that had at least avoided the shortages that we were worried about. We can manage oil prices, but shortages is something very difficult to manage.
So that's at the global level. And within the region, what every economy did is to switch to an alternative source of fuel, whether it is electricity generated through coal or other renewable sources. And particularly that happened in China and India, which are the two big importers of fuel in the region.
And then additionally, what we also saw is that everybody managed the fuel price increase quite well. So, on an average, if I look at the stats as of today, only about 25 to 30 percent of the underlying fuel price increase has been passed on to the consumer. So, the governments are taking it, so there is a burden on the fiscal front that is building up.
But as far as the consumers are concerned, this has been a help, and therefore you have not seen a big spike in inflation across the region.
Seth Carpenter: Okay. So, a lot of comments about Asia in general. Let's go more specific to here in Japan. And so, Yamaguchi-san, you were an early adopter of the Japan reflation view. If we go back a year, two years, three years, you were probably more optimistic, more bullish about growth in the market than consensus. More recently, you've been a little bit more cautious about where growth is going. And so, can you tell us a little bit first why you're a bit more cautious now relative to where I suspect the market is? And then when it comes to the energy shock, how do you see it playing out with the Japanese economy? And should we worry about it derailing this whole reflation trade?
Takeshi Yamaguchi: We think Japanese underlying economic fundamentals remain resilient in the sense that, you know, nominal GDP recovery will continue as a trend. But for this year, I think there's a, you know, short-term slowdown, both in terms of real GDP growth and nominal GDP growth, due to the terms of a trade shock.
So far, you know, thanks to the government energy subsidies and Japan's relatively large strategic oil reserves, the direct impact on households has been limited. But we are already seeing a big increase in producer prices in the April data. It jumped to 4.9 percent {year-over-year], and we expect this producer price index will continue to go up due to the higher oil prices, but also because of the NAFTA-related supply side, you know, disruptions in areas, you know, such as, you know, construction materials, plastic products, and industrial solvents and so on.
That said, we still believe that, you know, underlying economic fundamentals remain resilient in the sense that there's a structural labor shortage. So, wage growth may somewhat slow, but still I think a solid, you know, base up increase will continue next year, especially among young workers. Also, I think this structural tight labor market [is] encouraging companies to step up labor-saving investment. And, I think, together with government's initiatives for domestic investment, I think, domestic CapEx will also likely remain resilient.
So, this year for nominal GDP growth, we expect, you know, slightly negative growth due to the terms of trade loss. But the next year, we are expecting above 4 percent nominal GDP growth. So, the overall, you know, story remains unchanged despite the short-term headwinds.
Seth Carpenter: Okay. So fundamental story remains unchanged. We're pretty optimistic, but it's a matter of long term versus short term Jonathan, let me turn to you. Equity markets are generally optimistic, I would say, these days, but there is a bit of a divergence between views on equities here in Asia, between Japan on the one hand, and EM overall. In the mid-year outlook, you have expressed a preference for Japanese equities over EM.
Can you talk a little bit about that view? Why that preference? Are there sectors or specific stocks that matter more? How are you thinking about this sort of allocation across equity markets for you in Asia?
Jonathan Garner: So, certainly, as Seth indicated and Chetan and Yamaguchi-san said, it's really an environment where the sector call, particularly the CapEx, super cycle call should drive portfolios. And that naturally leads you in Asia more to North Asia, where Japan is very richly endowed in beneficiaries of the CapEx super cycle. And obviously markets like Korea and Taiwan, and much less so to South Asia, where the larger markets are much more populated by consumer and services stocks.
So, in our portfolio, we're essentially overweight capital spending, underweight the consumer. And when you look at the Japan market, one of the things that my colleague Daniel Blake has done a lot of work is, is the sort of thematic exposures that exist within our coverage. The four core Morgan Stanley research themes of multipolar world, AI, tech diffusion, future of energy and societal shifts, they map into about 75 percent by stock number of our coverage for the Japan market, and they're quite nicely distributed across the stock coverage.
Obviously, some stocks have more than one aspect to them. And that is highly advantageous and much more advantageous than in fact any other large market. Europe of course, doesn't have AI, tech diffusion, or it largely lacks the beneficiaries, the upstream beneficiaries. The US has legacy, sort of, software service, business models and consumer exposure.
Now, it's not to say that all is sort of rosy in the garden. There are large auto OEMs here in Japan where the earnings numbers are challenged. So, it's all about the kind of the dispersion that's going on within the portfolio. But just on the base case targets, 4300 for topics, that's set by Nakazawa-san and myself. It's about 12 percent upside in the base.
In the two weeks since we published the report, EM has fallen back somewhat, so there's about 8 percent upside to our EM target. But on a kind of risk-adjusted bull-bear skew, bear in mind that EM is much more skewed in terms of the earnings drivers of that market. Essentially, if you strip Korea and Taiwan out, there's no earnings growth in EM right now. You would ultimately have to favor Japan. So, Japan should be at the core of any Asia portfolio at the moment.
Seth Carpenter: And can you just give us a little insight as to what you're seeing about how the market is or maybe is not pricing the threat from the energy shock? What are you seeing in equity markets, top line, down into sectors? Do you think there's enough concern? Do you think there's room for that to get, sort of, rerated just on the energy shock situation?
Jonathan Garner: So, what you're seeing is that anything that is consumer-related is really struggling in terms of revisions. I think there are six different subcomponents of the consumer that we can track. Every single one of them has downgrades. And the upgrades are in energy, upstream energy, which isn't that well represented in Japan. There are a couple of names.
In materials, really across the board. In semis and IT across the board, and broadly, tech hardware. And then in the defense capital goods space. And that dispersion in revisions within the Japan market or within Asia as a whole is something that I've never seen before.
It does maybe to some extent question the resilience of the consumer in terms of the way that the numbers are being downgraded. So, I'll just leave that hanging a little bit.
Seth Carpenter: Alright, thank you very much to my colleagues. And this is where I have to shift back into podcast mode to say thank you for listening. And if you enjoy Thoughts on the Market, please share it with a colleague or friend today. Thank you very much everybody.
Voice: That was Part 1 of a special two-part episode from Morgan Stanley and MUFG’s Japan Summit. Join us tomorrow for Part 2 of the conversation.

Our Global Head of Fixed Income Research Andrew Sheets and Chief UK Economist Bruna Skarica discuss why they see a more constructive UK outlook than markets do, despite energy, fiscal and political risks.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Bruna Skarica: And I'm Bruna Skarica, Morgan Stanley's Chief UK Economist.
Andrew Sheets: Today, the debate around growth and debt in the United Kingdom.
It's Wednesday, May 20th at 2pm in London.
Bruna, I'm so glad you could join us today because I actually really did want to talk about what's going on here in the United Kingdom. I don't think it's an exaggeration to say that this is the country where you hear some of the strongest divergence of opinions.
Pessimists point to political uncertainty, vulnerability to oil prices from the Strait of Hormuz, and rising bond yields. And yet, UK growth this year has been pretty good. Inflation is set to come down, and the currency's been pretty stable, hardly the stuff of big instability.
So, Bruna, I was hoping you could help us set the scene. Let's start with how you see the economy.
Bruna Skarica: I actually think your framing is perfect. For the past five years, there has been a striking divergence of opinion on the UK, which I do think mimics to a degree some of the divisions on the Bank of England's Monetary Policy Committee.
The question really is – has the country underwent structural changes in the past decade of supply-side shocks such that its potential growth is very low, perhaps as low as 1 percent on the year. And has the inflationary process shifted in such a way that, for example, we need much higher jobless rate in order to generate enough economic slack to get inflation down to 2 percent?
Or the other question is, has the UK just had a unique string of external shocks amplified perhaps by domestic policy choices, which mean that we have seen a prolonged period of low growth and high inflation – but again, without major structural changes.
We are in the more constructive structural camp. I actually think that's probably Morgan Stanley's biggest out of consensus call in the UK. In recent years in particular, we have seen quite robust CapEx. And last year, actually very healthy private sector productivity gains. When you adjust for accurate labor market data, UK's private sector productivity growth is just under 2 percent as of the end of 2025, actually not too far off from the U.S.
But for these good structural trends to persist and continue to improve, we do need a more supportive cyclical environment. And there, unfortunately, given the rise in oil prices, it's hard to be overly constructive about growth and inflation in the UK this year.
We've downgraded our growth forecasts to around 1 percent over [20]26 and [20]27, and we have lifted our inflation projections by around 150 basis points at their peak to a peak of around 3.5 percent later in the year.
Andrew Sheets: So, Bruna, how much does the price of oil or the price of natural gas matter for this outlook, especially as the Strait of Hormuz remains effectively shut?
Bruna Skarica: It does matter a fair bit. We use Morgan Stanley's commodity team's forecasts in our own scenario analyses for the UK economy. Now, their base case still sees a gentle decline in oil prices this year, which leads to outcomes I've already mentioned.
The activity flatlines from the second quarter, we have a rise in inflation from April onwards, but we don't have a recession. However, if we fail to see any movement lower in oil, and as you rightly pointed out, natural gas prices as well; or if we even saw a move higher over the summer, we do think that risks of a recession would be quite pronounced in the second half of the year.
UK consumers are already in for a year of flat real disposable income growth. Higher prices of food and energy than in our base case could result in even lower discretionary spending growth than what we're already modeling. And if the Bank of England had to hike rates in this inflationary scenario, we think they would act twice in this kind of a scenario. We also have these tight financial conditions which would weigh on household spending.
Andrew Sheets: So, Bruna, I think that's a great segue into that out-of-consensus call that we have on the Bank of England. You know, the market is expecting the Bank of England to raise interest rates. We think that they'll be on hold.
And if you take a step back, it's a view that, kind of, puts the UK and the Bank of England a little bit between the Federal Reserve, which we think is going to be lowering rates over the next twelve months modestly, and the European Central Bank, which we think will raise rates in the near term.
Could you talk a bit more about why you think it will remain on hold? And why you differ from what the market's seeing?
Bruna Skarica: Yeah, absolutely. So, in our base case, the one where we do see a bit of a decline in oil and gas prices over the course of this year, we think the Bank of England remains on hold. It's important to remember that they were about to cut rates, prior to the closure of the Strait of Hormuz. So, there is a bit of restrictiveness there in the starting stance, which we think can just be maintained for a longer period of time than would've otherwise been the case. And so, for the Bank of England to avoid having to tighten rates.
Now, with respect to the market, I think it's fair to say that the market price is a probability-weighted outcome, where there is some chance, a non-negligible one, that the Bank of England will have to hike rates aggressively if oil prices were to rise from here. To give you a bit of clarity here, bank's own analyses suggests that in a scenario where oil prices were to rise towards $130 per barrel and stay there for a few months, the bank could hike rates by four times.
Now, it's interesting that in this scenario, the bank actually doesn't forecast a recession. Now, we think that in the case of such elevated commodity prices, as I've already mentioned, we would certainly see high inflation, potentially as high as 6 percent, but also recessionary impulses. So, even in the scenario of elevated oil prices, we think the bank could only deliver around two hikes.
And so, this kind of probability-weighted outcome that we have, which differs a little bit from our model case, even that is actually fairly lower than what the market is pricing. So, I think that's maybe one of the main differences that we have versus the market. The market is expecting a repeat of 2022, so elevated inflation with growth just about holding on. We disagree that's possible because there's far less scope for a fiscal response to shield growth from an inflationary external shock.
Andrew Sheets: But Bruna, maybe I'll take even a bigger step back here because to borrow a British phrase, it almost seems like some of these debates over oil prices are kind of small beer compared to these two big questions around the UK. Which are, you know, concerns over a lack of productivity growth and concerns that the UK economy is just, kind of, poorly positioned over the long term – especially in the wake of Brexit and concern over the fiscal situation. And this idea that, well, government debt is historically high for the UK, concern that that will continue.
And I think it’s no exaggeration to say that when you talk to investors about the UK, those are often, kind of, two of the big questions that hang over the debate. So, your brief thoughts on both of those issues. And again, where you think the market might be potentially surprised?
Bruna Skarica: So, one of the most interesting things when I talk to clients is when I mention some of these statistics around measured cyclical productivity growth last year, they're often very, very surprised. And we do think it's more important to talk about this because there is evidence, I would say nascent evidence, that UK is benefiting from the AI tailwind. We are seeing more CapEx adoption. We are seeing slower hiring, but more resilient growth, which, as I say, results in cyclical productivity growth that looks very robust, especially in UK's historical context. In the last ten years, of course, UK's productivity growth has been very lackluster.
So, over the course of this year, I think that's actually my primary focus to see how much of this uplift in productivity last year is cyclical and perhaps will dissipate over 2026 with the slowdown in growth. And how much of it was actually structural.
Now, in terms of the fiscal question, you know, one thing that's interesting to mention is the UK is, per IMF calculations, in the middle of the most severe fiscal consolidation amongst its G7 peers. Medium-term fiscal plans deliver a decline in deficit to below 2 percent of GDP by 2030. Again, this is hard to square with gilt yields where they currently stand.
So, it's fair to say that the market is just more focused on the risks of delivery. For example, departmental spending settlements look challenging to deliver. Ministry of Defense is looking for a [£]30 billion top-up to its budgets. Labor backbenchers have recently come out seeking for a bit more capital expenditure. Political volatility is high.
We are actually quite confident around our 2026 fiscal forecasts. We're looking for a deficit at 4 percent. But when it comes to 2027, I think it's fair to say that risks here really depend on the political trajectory with risks skewed, I think, towards a slightly higher deficit than around 3.5 percent, which we have in our base case.
Andrew Sheets: But Bruna, just to be very direct, is it fair to say that for investors who are very concerned about productivity growth in the UK, you'd argue that that actually could be a bit better than people are expecting as capital deepens? And that for investors afraid of the fiscal trajectory, that actually could be one of the best fiscal trajectories In the G7?
Bruna Skarica: Yeah, absolutely. I mean, one of our recent outlook titles was “Everything is Relative,” and that's exactly the point that we always try to make with the UK. It seems like it has a lot of idiosyncratic fiscal problems, but I would say a lot of its fiscal challenges are very similar to other DM countries – demographic aging, slowing in potential GDP growth.
And when it comes to productivity growth, I’m not trying to argue that we're likely to see UK's potential GDP growth in excess of 2 percent anytime soon. However, we do think that the picture is actually much better in terms of productivity growth than perhaps what the average market participants think is the case.
Andrew Sheets: Finally, Bruna, just a word on politics. I'm mindful that we have a global audience. And for those less steeped in the latest UK news, what's been happening? And what are the developments that investors are watching out for?
Bruna Skarica: Yeah, absolutely. So, we had local elections in the UK in early May, and they delivered quite sizable losses for the governing Labour Party.
Since then, a number of Labour MPs, Members of Parliament, just under 100 of them, called on Prime Minister Starmer to resign. Now, challenging a Labour leader and a prime minister in this case is not an easy process to trigger.
However, Manchester Mayor Andy Burnham is now looking to enter the House of Commons. He will be contesting a by-election, most likely on June 18th. I would say that's the key date to watch out for from here.
Andy Burnham has previously said UK politicians should be less focused on the bond market, but perhaps it's worth reiterating. More recently, he said he supports the current fiscal rules, which of course require debt-to-GDP ratio to be on the declining trajectory over the next five years.
Now, Andrew, for you, what stands out in the pricing of the UK story?
Andrew Sheets: Well, Bruna, I really think this is the country where across everything that we look at, there's the biggest gap, I think, between kind of conventional wisdom and what we at Morgan Stanley are forecasting.
The market's conventional wisdom is that productivity growth is going to be very weak and very bad. That's not what you see in the numbers and is in our forecast. The market thinks the government finances are very weak. As you mentioned, relative to the G7, they're on a pretty good trajectory and at a pretty good level.
And I think this is also a market where you have some interesting risk premium. I mean, again, we talk a lot in this podcast about how little risk premium there is in a lot of different asset classes. That's not the case in the UK. The government bond market, in our view, is offering a lot of risk premium to take on the risk of owning the government debt.
And, you know, one example of that is, you know, you look at what interest rate is implied on a UK 10-year government bond 10 years from now. It's implying that yield is 6.6 percent. That's a very high yield, especially if you think that growth is going to be weak in this country. So, I think it's a really interesting macro story.
It's one certainly where we at Morgan Stanley differ, and where there's some risk premium on offer. So, I'm so glad you could join us today to dig into it in more detail.
Bruna Skarica: Absolutely. Thank you so much for the invite.
Andrew Sheets: And 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.

Despite recent pressure on stocks, our CIO and Chief U.S. Equity Strategist Mike Wilson argues that earnings and AI’s impact remain stronger than many investors appreciate.
Read more insights from Morgan Stanley.

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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 our bullish mid-year outlook and why stocks have been under pressure more recently.
It's Tuesday, May 19th at 1:30 pm in New York.
So, let’s get after it.
Every cycle has a moment when investors become so focused on the last risk that they miss the next opportunity. I think we’re in one of those moments right now. The first half of this year has had a familiar feel to it. The market weakened under the surface well before the headlines got loud, investors discovered the new risks after prices had already moved, and sentiment got worse just as the forward setup was getting better.
In other words, it’s déjà vu all over again – but with some important twists.
The biggest twist is where we are in the cycle. Last year, we were still coming out of the tail end of a rolling recession. Today, we’re in a rolling recovery and that is still underappreciated. This matters, because it changes how we should interpret the correction earlier this year and a powerful rally.
In the first quarter, many investors looked at the S&P 500’s less-than-10 percent price decline and concluded the market was complacent. I think that really misses the point. Roughly half of the Russell 3000 saw drawdowns of 20 percent or more, and the S&P 500 forward Price Earnings multiple fell by 18 percent from its peak as forward earnings continued to rise. That is not complacency. That is a market doing what it does best – discounting risk before the narrative catches up.
And those risks were not small. We had private credit concerns, and a major debate around AI disruption to labor markets as well as a new war that drove oil prices up by 100 percent. In many of the areas most directly exposed to these risks, the market delivered 40 percent-plus corrections.
So the provocative question I would ask now is this: what if the biggest risk from here is not being too bullish, but being too cautious after the market has already done the work?
We address these questions in our recently published mid-year outlook. Specifically, we raised our 12 month S&P 500 price target to 8,300 based solely on higher earnings forecasts. In fact, we assume some further valuation compression. We raised our S&P 500 EPS by approximately 5 percent as operating leverage from the rolling recovery, AI adoption, fiscal support and a capex cycle that continues to broaden.
That earnings point is critical. In prior cycles when oil shocks ended the business cycle, earnings were already decelerating or contracting outright before the shock hit. Today, the opposite is happening. Earnings are accelerating from already strong levels. First-quarter median S&P 500 earnings surprise was 6 percent, the strongest in four years; and earnings revisions breadth has moved back up to 22 percent from just 5 percent at the start of reporting season. That is a very different backdrop than the traditional late-cycle oil shock playbook.
AI is another area where I think the consensus has evolved. The labor market disruption narrative has moved faster than the actual implementation. The enterprise application layer is still early, and for now, AI looks more like a margin tailwind than a labor-market wrecking ball. Companies are running leaner, hiring less, and beginning to quantify real benefits rather than simply firing everyone. While true adoption of this technology is likely to be slower than anticipated, the apprehension to over-hire is real and that is driving higher profitability in an indirect way.
Monetary policy and liquidity are still the main risks to this bull market rising unimpeded. With the Fed becoming less dovish and liquidity needs rising, interest rates are on the rise and the equity-rate correlation is negative again. The 4.5 percent level on the 10-year Treasury remains important for valuations.
We don’t need Fed cuts for the equity market to work. History suggests that when earnings growth is strong and the Fed is on hold, returns can still be very solid. The real risk is liquidity – whether the Fed and Treasury underestimates how much capital the private economy now needs to fund investment and recovery.
Ultimately, the Fed and Treasury have tools to address these liquidity needs and they have been using them aggressively this year. However, these provisions can ebb and flow and we are currently in a window where it’s going to ebb, leaving stocks vulnerable in the short term.
If the correction persists, investors should use that as an opportunity to add exposure to the parts of the market that benefit from a rolling recovery, specifically Industrials, Financials, Consumer Discretionary Goods. The breadth of the earnings and capex cycle remains under-appreciated, not to mention the recovery from the rolling recession that ended with Liberation Day a year ago.
The bottom line is simple. The correction earlier this year was more significant than most appreciate in terms of valuation and the earnings story is only getting better. The path won’t be smooth, so use any corrections to position for the continued broadening in earnings that we believe will continue.
Just remember, by the time the evidence feels obvious, the opportunity is usually gone.
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!
And I wish my wife a happy birthday.

Our Global Head of Banks and Diversified Finance Research Betsy Graseck explains how digital assets could reshape market infrastructure and how money moves, without overthrowing wholesale banking.
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Betsy Graseck: Welcome to Thoughts on the Market. I'm Betsy Graseck, Morgan Stanley's Global Head of Banks and Diversified Finance Research.
Today, we are looking out to 2030 to estimate what we expect the impact of digital assets could be on global wholesale banking.
It's Monday, May 18th at 3:30 PM in New York.
We live in a world where money can move instantly. A payment or transfer can happen in a matter of minutes, if not seconds, in real time. But much of the financial system runs on older networks for moving cash and securities. These networks are what the industry calls rails. We expect clients will be looking for faster settlement across global banking services, driving the industry to adopt digital asset rails over the next decade.
We see three key drivers pushing this today. Number one, market support is out there for fintechs, which is increasing their competitiveness. Number two, global legislation and regulation is clarifying requirements for enabling digital asset services led by the U.S. with the Genius Act in 2025, and with the forward motion being made on the Clarity Act in 2026. The third driver of digital asset transformation is that exchanges are extending hours and moving towards offering 24/7 capabilities over the next several years.
Now, we expect digital assets will have two major impacts on global wholesale banks. First, as banks lean into servicing crypto assets, we see the potential for an additional $1.5 [billion] to $8 billion in revenues in 2030, which adds up to 1 percent to our global wholesale banks revenue forecast of $770 billion in 2030.
Second, impact on global wholesale banks is a risk. There is risk when money is in motion, and money could be set in motion as clients migrate revenues from traditional asset rails to digital asset rails. We anticipate this could impact $21 billion to $82 billion of revenues in 2030, primarily in cross-border payments, liquidity management, collateral management, businesses.
Now, while this transformation is likely to impact the industry over the next decade as more services go digital, we expect several catalysts in the second half will focus investor attention on these changes now. What are those catalysts? Number one, Clarity Act. The Clarity Act passing Congress would open up the door for wholesale banks to service crypto asset class more holistically.
Second catalyst, the DTCC, which is a major infrastructure player for securities markets in the U.S. The DTCC will be adding tokenized products in the fall of 2026. And then lastly, Nasdaq and NYSE are planning to extend trading hours on December 6th, 2026, to 23 hours by five days a week.
Now, what should investors make of all of this? Number one critical to understand how the investments that you have today are positioned for this transformation. Are managements protecting their strengths by developing capabilities for an ecosystem increasingly run on digital rails?
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Chief Cross-Asset Strategist Serena Tang explains why investors should stay constructive in 2026, even as oil prices and geopolitics add volatility.
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Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Today: our mid-year market outlook across regions and asset classes.
It’s Friday, May 15th, at 10am in New York.
If you’ve winced at the gas pump, hesitated before booking a flight, or checked your 401(k) a little more often than usual, you already understand the forces driving markets now. Energy prices and geopolitics are creating real uncertainty. But underneath that uncertainty, companies are still investing, earnings are still holding up, and AI is becoming one of the biggest spending cycles in the global economy.
That’s why our message for the rest of 2026 is – be constructive, not complacent.
Let’s start with the constructive part. Across markets, macro and micro fundamentals support risk assets. In the U.S., growth should hold up. For investors, this suggests favoring stocks over core fixed income and developed-market equities — especially the U.S. – in particular. Our U.S. Equity Strategist’s S&P 500 target for mid-2027 stands at 8,300, supported by expected earnings growth of 23 percent in 2026 and 12 percent in 2027. The momentum in returns is coming from improving earnings.
Now, a striking data point: the median S&P 500 company delivered a 6 percent earnings surprise in the first quarter – the strongest in four years. Earnings revisions breadth also improved sharply.
AI explains a major part of that strength. It has become a capital spending story – and increasingly, a credit market story. A year ago, we projected combined capex for the biggest hyperscalers at around [$]450 billion in both 2026 and 2027. Now, that estimate has moved to roughly [$]800 billion in 2026 and [$]1.16 trillion in 2027. AI infrastructure – data centers, power, chips, networks – should shape equities, credit, rates and even commodities for years to come.
But here’s where the not complacent part matters.
There’s another side to the AI boom. Building all those data centers, chips, power systems and networks requires significant investment. And companies won’t fund all of it with cash. Many will borrow. That means more corporate bonds coming to market, especially from high-quality U.S. companies. Even if those companies look financially healthy, investors may demand better terms when they have so many new bonds to choose from. So, AI can support earnings, but it can also put some pressure on credit markets.
Energy prices also pose major risk. Our base case assumes de-escalation and a gradual reopening of the Strait of Hormuz, but the range of possible outcomes looks unusually wide. Oil prices and the duration of the Middle East supply shock are the single largest variable in our outlook. Higher oil effectively acts like a tax on consumers and businesses alike.
That’s why we recommend a balanced allocation with a risk-on tilt: overweight equities, underweight core fixed income, and hold other fixed income, commodities and cash at benchmark weight. Within equities, we favor the U.S. because earnings look strong and the risk-reward looks better than in other regions. Europe and Japan also offer upside, but Europe has more exposure to energy disruptions, and emerging markets lack a broad macro and micro narrative despite pockets of strength.
This is all to say the cycle has not run out of road. But the road looks bumpier, narrower and more energy-sensitive than it looked a few months ago.
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