Stephen Grambling explains how changes in booking habits could redirect billions in travel industry spending.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I’m Stephen Grambling, Morgan Stanley’s U.S. Gaming, Lodging, and Leisure analyst.Today: how AI could transform hotel bookings and reshape the economics of the travel industry.It's Monday, November 2nd, at 10am in New York.So, we all love dreaming about and going on vacations, right? But you know what we don’t love as much? Scrolling through dozens of hotel listings, comparing prices across websites, contemplating where and how much we can use our rewards or maximize points or wondering if we’re getting the best deal for the right experience.So, imagine the relief of having an AI assistant understand you and your families’ preferences, all of your status and loyalty points, aggregated details and reviews of all the hotels you’ve ever travelled to and might want to travel to – and all you need to do is evaluate locations? Then it finds the right hotel and books it for you.That future is coming into focus, and it could reshape the economics associated with the marketing and distribution behind the $640 billion global hotel industry.We estimate that every year the lodging industry spends between $22 to $55 billion on marketing. Add roughly $30 billion in fees collected by online travel agencies, or OTAs, and we're talking about $55 to $85 billion in spending that AI could influence.Today, when you book through a third-party travel website, hotels typically pay commissions of 10 to 20 percent if it’s a branded hotel, or 20 to 30 percent if it’s independent. Booking directly through a hotel's website costs the brand closer to only 5 percent. That difference can have a meaningful impact on profitability for their owners.As AI agents increasingly help travelers find hotels, compare options, and potentially book on their behalf we could see a major pivot in brand preference and booking channel. In our analysis of hotel searches across eight U.S. destinations, traditional search engines directed travelers to official hotel websites just 13 percent of the time. With AI-powered searches, that jumped to 97 percent.But perhaps the most interesting finding involves loyalty programs. When we told the AI agent that a traveler belonged to a hotel loyalty program, 100 percent of the resulting links pointed to official hotel websites. When we specified a membership in an online travel agency's loyalty program, the results shifted entirely to that third-party booking platform. That means the AI agent is already factoring in your rewards, memberships and loyalty preferences into travel recommendations.We saw similar effects in Europe.For major hotel brands, this creates a significant opportunity. Their large loyalty programs and established customer relationships could help drive more direct bookings at a lower cost. And even small shifts add up. We estimate that moving just 1 percent of bookings from third-party platforms to hotel websites could boost hotel owners' EBITDA by roughly 0.1 percent to 0.5 percent.Looking ahead, we expect hotel margins to start benefiting from these savings in the second half of 2027, with further gains in 2028.Independent and boutique hotels could also profit as AI gets better at matching travelers with unique properties that fit their preferences. Meanwhile, online travel agencies aren't going away. Their extensive hotel inventories, loyalty programs, and scale in payments and fulfillment remain important competitive advantages.For now, AI-driven referrals still account for only a small fraction of travel website traffic. But as AI platforms develop their own advertising and commission models, the economics could change.So, what does this mean for the travel industry?AI could help hotels attract guests at a lower cost while making it easier for travelers to find the right stay. Hotel brands have an edge with their loyalty programs; whereas online travel agencies can leverage unique inventory, boosting independent hotels. It's too early to declare an outright winner but expect more from us as this battle evolves.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.

It appears that credit investors have gotten most of what they’ve wished for over the last decade. Our Global Head of Fixed Income Research Andrew Sheets considers whether there could be unintended consequences.Read more insights from Morgan Stanley.----- Transcript -----  Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.Today, how spooked should we be about the credit markets?It's Friday, October 30th, at 2pm in London.I grew up watching The Simpsons, and I've always had a soft spot for their Halloween episodes. One in particular that's burrowed pretty deep in my memory involves a cursed monkey's paw. It technically granted wishes to whoever held it, but with unintended consequences. For example, Lisa wishes for world peace, the entire planet disarms; and then aliens invade and take over. That sort of thing. Keep that monkey's paw in mind.   Credit markets are going through their own jittery episode. After a long period of support, central banks are raising rates and shrinking their balance sheets. Thanks in part to this shift, global yields have risen. And since bond prices move inversely to yields, they've driven negative total returns. Then there's the AI boom, maybe the defining economic story of 2026. Morgan Stanley estimates that close to $900 billion of CapEx will happen this year, roughly double what we saw last year and triple the levels of 2024. And we think this growth continues, with hyperscaler capital expenditures reaching about $1.5 trillion next year – almost the size of the entire U.S. defense budget. All that spending requires financing, and credit markets have been a key source of it. Heavy supply from this relatively new sector – technology – has pushed up both yields and spreads, especially because these issuers have often been willing to price their debt pretty cheaply, relative to the rating. These higher yields haven't slowed down the largest tech companies, given their considerable financial resources. But it has caused ripples further down the chain. Lower-rated credits with more leverage and slower growth are being more impacted by these higher borrowing costs. And the presence of these new technologies has increased fears of disruption to existing business models, especially in sectors like telecom. And as a result, the dispersion between credits has increased. Scary stuff. Or is it? If you'd spoken to a credit investor over the last 10 to 15 years, you would have heard a litany of wishes. If only central banks stopped intervening in markets, compressing credit risk premiums. If only yields weren't so low. If only the growth backdrop was better. These investors wish that the technology sector would finally issue bonds, given its extremely low weight in credit markets, which are heavily skewed towards slower-growing sectors like banks, utilities, and telecom. They wished for new bonds that were highly rated, yet also would have high spreads. They wished for a new issue premium, which had compressed sharply. And maybe, just maybe, in their wildest dreams, they hoped they could get it all. New bonds that were highly rated in a fast-growing sector issued at a large new issue premium. And hopefully a lot of it. They also from a business sense wanted dispersion. The case for active credit management relies on the idea that there are differences in credit performance that a skilled analyst can capture. If everything just moves together, well, just buy the index. We got our wish. Yields are high, with investment-grade credit yielding close to 6 percent in the U.S. and over 4 percent in Europe. Spreads have widened, and there's no central bank intervention to distort this. The AI boom is resulting in record levels of highly rated bond supply in a new sector, often at a significant discount for the rating. And all of this, and more, is driving significant dispersion.Granted, like the monkey's paw, the reality of this wish may feel different from what investors imagined. But unlike it, we don't think this is a Halloween tale. The fact that current conditions check so many boxes of what investors were looking for and address so many underlying needs is a good, healthy thing in our view. The path is hardly straightforward.But for now, we're less frightened of this story. 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. And of course, Happy Halloween.

Our Head of Digital Asset Strategy Amy Oldenburg joins Global Digital Asset Strategist Felix Stratmann discuss how tokenization, regulation, and the convergence of traditional and digital finance could reshape global markets.Read more insights from Morgan Stanley.----- Transcript -----  Felix Stratmann: Welcome to Thoughts on the Market. I'm Felix Stratmann, Global Digital Asset Strategist with Morgan Stanley Research. Amy Oldenburg: And I'm Amy Oldenburg, Head of Digital Asset Strategy. Felix Stratmann: Today, we're looking beyond crypto prices to explore how digital assets could transform the way financial markets operate. It's Thursday, October 29th at 2pm in London. Amy Oldenburg: And 10am in New York. Felix Stratmann: So, we're used to being able to send money, shop, and access information anytime, anywhere online, right? But much of the financial system still operates on infrastructure built decades ago, with limited trading hours and transactions that can take days to settle. Digital assets could fundamentally change that. Amy, your work focuses on how financial institutions put digital asset technology to use. When people hear digital assets, they still mainly think of Bitcoin. But what bigger shift in financial infrastructure are they missing? Amy Oldenburg: One thing I would focus on is – while Bitcoin may have showcased the technology for us, there's a much bigger innovation story here that we need to focus on, and this is really what's going to create the future of efficiencies and new products for our clients. We've seen many other industries get disrupted by innovation and technology. And now it's coming for financial services. And we're really dealing with this in many different ways today. Felix Stratmann: Yeah, and I guess as that infrastructure changes so could the competitive landscape, right? So which parts of the existing financial systems stand to benefit the most, and which could face the greatest disruption from your perspective? Amy Oldenburg: Yeah, I think it's good to look at some of the different points we've seen in history. Even if we think about some of the parallels to the internet era. While many of those early activities were simpler in terms of what happened, just digitizing company information for the first time. We're also seeing that simpler product design happening within digital assets. We're tokenizing equities and we're tokenizing treasuries. And that's simply to get them in digital form. It's really the future of programmability, really embedded in some of these products that will be the powerful force that we'll see in the future. So I think areas where you have high friction and even a heavier administrative burden, that's areas where we may see some of the biggest transformations happen in this space. So Felix, I'm looking at this sector from the strategy side. Curious from your research perspective, where are you seeing the clearest signs of tokenization moving from concept to real market activity today? Felix Stratmann: So I mean, look, we are early in the tokenization game. You know tokenized real world assets are about [$] 30 to 40 billion today. But they're growing quickly. That number was essentially nothing just a couple of years ago. And recently we put out a forecast saying we expect them to reach [$] 2.3 trillion by 2030. What’s driving that? A couple things I would say. Really it comes down to where traditional financial infrastructure has the most friction. One of those areas being collateral management. Getting your collateral where it needs to go, whether that be 24/7 or internationally, this is a big opportunity for tokenized assets. And we're seeing growing interest in and demand for related products like tokenized money market funds or government securities, which are one of the fastest growing areas of tokenization. And again, these can potentially move more easily between institutions or be used as collateral. And this is especially important, I would say, as markets move towards 24/7, right? One thing related to that where we're seeing increasing activity is tokenized stocks. You know, I would say they're not necessarily representing a more efficient state of the equity market yet, but they're an important step towards testing and demonstrating, you know, the benefits of tokenized assets in global distribution and also enhanced utility, right? And then elsewhere, I think, we need to look at digital money as well. So, we've talked about the assets, but the cash side of the equation is equally as important. And that's also starting to operate at a larger scale. Still largely crypto focused, but stable coins are increasingly being used in real payment activity, right? So, we see that growing, and approaching [$] 100 billion or so a month right now. And yeah, maybe changing gears here just a bit. This progress we've been discussing is happening against a backdrop of a bit of regulatory uncertainty, right? The CLARITY Act hasn't advanced as proponents had hoped. How do institutions balance that uncertainty against the need to keep investing in new infrastructure? Amy Oldenburg: Felix, I have to say regulatory topics have been just the theme of 2026 this year. It's not only [the] CLARITY Act. You had highlighted digital money, which is also wrapped up in the Genius Act, which will go in force in January of 2027. And then we've seen innovation exemptions also come to market in the last few weeks. You know, the future requires new tech, and how we're focused on this. We're not picking blockchain winners or even standards at this stage. We're really focused on building out the core infrastructures, because beyond regulation, there are certain non-negotiables that we just have to be ready for a future of 24/7 trading, real-time data, and the world ahead of us, which all of the regulations are really pointing towards a future of. And Felix, I'll turn it back on you as we talk about regulatory uncertainty. It doesn't necessarily affect every part of the market the same way. Where do you think it could hold back adoption? And where do you see progress that may continue even under the existing frameworks?Felix Stratmann: Yeah, so look, CLARITY specifically was primarily a crypto market infrastructure build, right. And it could have provided a framework for how crypto trading is regulated. And also what regulations are relevant to decentralized financial applications. But, really that’s only one part of this digital assets theme, right. Tokenization, for example, you know, that could continue to progress because tokenizing existing security – that does not fundamentally change what that security is, right. Stock remains a stock; security is a security. Unit ownership is recorded in the blockchain. So, there’s already scope to develop, you know, things like tokenized funds, payment infrastructure, and institutional settlement under existing legal frameworks. I would say that, you know, firms are still looking for clarification from regulators. But that’s rather than wholesale new regulation being necessary. And look, to that point, we've already seen the SEC and CFTC very engaged in proposing rules and guidance post CLARITY. And then you also have the Genius Act, and the associated rulemaking from the relevant regulators. And that's paving a path for stablecoin usage and adoption. So look, yes, progress can definitely continue, particularly for the financial use cases of digital asset technology, even without comprehensive legislation. But you know, maybe let's think about what that means in practice, right? Even with the regulatory uncertainty, firms are still making decisions about when to modernize. So Amy, from your perspective, what can previous shifts in financial technology, like electronic trading, maybe, teach us about the risks of waiting too long to invest? Amy Oldenburg: Felix, I love your example of electronic trading, and there's so many periods in history where we lived through some of these transformations and impacts to financial services. Where we can take some of the lessons learned and really make sure we keep those in mind. But I think there's another one that we really need to also keep in mind, and that's really on the execution and managing the internal culture and workforce shifts that we'll also see with some of this innovation that takes place. These are critical because, you know, with many of these eras of transformation, you don't just flip a light switch to turn much of this on. We're living through many years of transformation, and I see digital assets being a multi-year transformation, just as we saw some of those other periods in history take many years to actually deploy over time. Felix Stratmann: Yeah that modernization, kind of, brings us to another important theme. The convergence of traditional finance and digital assets. What does that actually mean in practice? Are we heading towards two financial systems operating side by side? Or one increasingly integrated system? Amy Oldenburg: Oh, yeah. That's a really tough question, and I think one of the things we always love to try to determine a black-and-white outcome. But I think that one of the things that's pretty clear to us today is that for a number of years, we'll be living in and supporting a hybrid world as we work through the transformation that I even just talked about earlier. There's definitely operational efficiencies and, and strong product design that we really need to stay focused on. And that will be hard for our clients and even our firms to ignore going forward. So I think just like, AI is gonna impact our future, we have to think about how this integration comes together. And I think we may see not only integration or a unified system going forward. But we may even see financial services products distributed in different ways. And Felix, I'm going to turn it back over to you. What is your research show in terms of the clearest evidence for traditional and digital finance coming together? Do you see established financial institutions adopting blockchain faster than maybe many people realize? Felix Stratmann: Yeah absolutely, I mean we are early in the adoption of this technology. But the momentum is very much real, right. I looked through press releases from global financial companies and I found that roughly quarter by count, and some 60 percent by market cap, you know, had announced, piloted or launched digital assets initiatives. So, institutions are seriously behind this. And then you also see opportunity in 24x7 follow-the-sun type of Treasury management, you know, that digital money enables. And that could be highly relevant, you know, for corporate treasuries. So, yeah, I think absolutely firms are adopting this technology. And I think convergence is increasingly what we're seeing because these products are being issued on public blockchains. And firms are experimenting how to incorporate them into decentralized financial protocols. And yeah, I mean, it's very much a case of financial institutions using the technology while crypto native platforms are trying to figure out how to better cater towards regulatory compliance and privacy needs, right? And while it's early, look, it’s not like the early days of crypto, entirely, right, which was very much trying to replace the financial system. Now I think we're increasingly seeing this convergence with the existing system to make it more efficient. But maybe let's look ahead now. What needs to happen before digital assets become an everyday part of how financial markets operate? Amy Oldenburg: To your point that you brought up earlier on building out blockchains, the entire industry right now is really trying to invest and build this infrastructure. But it's not only the infrastructure, it's redesigning workflows, it's upgrading policies, looking at the governance impacts of this future. And that is a lot of work for many of our firms to take on, especially with so many competing innovation topics in the news right now. It may slow some of that adoption in the near term, I think what we'll see is suddenly – as much of this work is done and it starts to come to market, slowly, we will transition from not talking about the future of finance. But really that this will just become finance. And that's a path that we feel we're clearly on at this stage. Felix Stratmann: Well, look Amy, I know we could sit here talking about this for hours. But I think that'll wrap us up for today. Amy, thanks very much for joining me. Amy Oldenburg: Thanks, Felix. Felix Stratmann: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.Amy Oldenburg is a member of Morgan Stanley Firm Management. She is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.Digital assets, sometimes known as cryptocurrency, are a digital representation of a value that function as a medium of exchange, a unit of account, or a store of value, but generally do not have legal tender status. Digital assets have no intrinsic value and there is no investment underlying digital assets. The value of digital assets is derived by market forces of supply and demand, and is therefore more volatile than traditional currencies’ value. Investing in digital assets is risky, and transacting in digital assets carries various risks, including but not limited to fraud, theft, market volatility, market manipulation, and cybersecurity failures—such as the risk of hacking, theft, programming bugs, and accidental loss. Additionally, there is no guarantee that any entity that currently accepts digital assets as payment will do so in the future. The volatility and unpredictability of the price of digital assets may lead to significant and immediate losses. It may not be possible to liquidate a digital assets position in a timely manner at a reasonable price.Regulation of digital assets continues to develop globally and, as such, federal, state, or foreign governments may restrict the use and exchange of any or all digital assets, further contributing to their volatility. Digital assets stored online are not insured and do not have the same protections or safeguards of bank deposits in the US or other jurisdictions. Digital assets can be exchanged for US dollars or other currencies, but are not generally backed nor supported by any government or central bank.Before purchasing, investors should note that risks applicable to one digital asset may not be the same risks applicable to other forms of digital assets. Markets and exchanges for digital assets are not currently regulated in the same manner and do not provide the customer protections available in equities, fixed income, options, futures, commodities or foreign exchange markets. Morgan Stanley and its affiliates do business that may relate to some of the digital assets or other related products discussed in Morgan Stanley Research. These could include market making, providing liquidity, fund management, commercial banking, extension of credit, investment services and investment banking.

With Election Day a week away, our Head of U.S. Public Policy Research Ariana Salvatore and Wealth Management's Monica Guerra explain why the aftermath of the midterms may matter more to markets than who wins.Read more insights from Morgan Stanley.----- Transcript ----- Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of U.S. Public Policy Research at Morgan Stanley.Monica Guerra: And I'm Monica Guerra, Head of Policy and Geopolitical Strategy for Morgan Stanley Wealth Management.Ariana Salvatore: Today we're going to be talking about the upcoming midterm elections and what investors should be watching from both an institutional and individual investor perspective.It's Wednesday, October 28th, at 10am in New York.Well, Election Day is just about a week away. Investors are obviously increasingly focused on what a potential change in congressional control could mean for markets. And Monica, you and I are kind of grappling with this question through slightly different lenses. And that's why I thought it'd make sense to bring you in today.We both agree that what happens after the election is probably more important than the outcome itself. But let's start with the election backdrop. Your team has developed a Midterm Signal Monitor. What are the indicators telling us?Monica Guerra: Well, Ariana, affordability has really emerged as the defining issue for voters this cycle. Our monitor tracks four indicators positively correlated with midterm election outcomes: the generic congressional ballot, presidential approval, consumer sentiment, and gasoline prices.Democrats lead the generic ballot by about eight points, and presidential approval is 38.8 percent, just below the 40 percent historical reference point when the opposition political party tends to gain momentum.Now, consumer sentiment in October is the lowest of any October before a midterm election in the University of Michigan survey's entire history. And gasoline prices in September were up 37.6 percent from a year ago.So taken together, these signals point to a challenging environment for the incumbent party, really driven by affordability. Persistent inflation, elevated borrowing costs, and renewed energy price pressures tied to the conflict with Iran are all weighing on household purchasing power. But importantly, these are directional indicators, not necessarily a forecast of the election outcome itself.Now, Ariana, when you're looking at the potential outcomes from your perspective, how much do you actually expect to change?Ariana Salvatore: Well, I think that's the key question, right? Because our view has been that the midterms are unlikely to fundamentally change the direction of U.S. policy. And that's because a lot of the uncertainty that markets have dealt with since the beginning of 2025 has come from the executive branch rather than Congress.So, regardless of the outcome, we think things like tariffs, deregulation, immigration, geopolitics, export controls – all of those variables will remain important sources of policy uncertainty. Where congressional control matters more is on fiscal policy.So, a divided government would make new legislation harder to pass, and that could mean more contentious negotiations over things like government funding, the debt limit, and defense spending.So, for institutional investors, it's a little bit less about which party wins and more about what the composition of Congress means for the policy agenda going forward. As well as leadership's ability to really organize and corral different members of the caucus to effectively use their leverage around some of these negotiations.So, Monica, I imagine the questions that you're getting from individual investors may be a little bit different. Talk us through some of those.Monica Guerra: Yeah, they are. I think the biggest question is what the election can mean for an individual's portfolio. And history does offer us some interesting perspective here.So, the S&P 500 has averaged about a 14 percent return in the calendar year following a midterm election, compared with roughly just 3 percent in the midterm year itself. And this year, as we all know, the index has already outperformed that typical second-year trajectory, which could heighten risks and opportunities for sectors sensitive to policy decisions.For example, recent strength in technology and energy combined with the narrow market breadth could amplify policy-related volatility, particularly in industries facing heightened scrutiny under the new Congress.Of course, that's not a forecast, and we caution against making portfolio decisions based on historical election patterns or political headlines alone; as the business cycle, corporate earnings, inflation, interest rates, and the AI investment cycle are likely to matter much, much more over the long run.But one area where I do think our perspectives really intersect is the growing focus on electricity costs and data centers.Ariana Salvatore: That's right, and it's actually one of the policy themes that we've been highlighting the most into the election. Our view is that the AI infrastructure build-out is unlikely to face broad federal prohibition, and that's regardless of who controls Congress.There's a bipartisan recognition right now in D.C. – of AI as a strategic priority, particularly given competition with China. But at the same time, we are seeing growing political resistance at the state and local levels, where concerns around electricity prices, water usage, and infrastructure costs are becoming increasingly important.So, where that all nets out, what we've been describing is a base case of a conditional build-out. The investment cycle continues, but both the pace and the geographic distribution of new projects could become more dependent on local policy decisions. And that distinction matters for investors exposed to utilities, power generation, and the broader AI infrastructure supply chain.So, Monica, how are you thinking about that issue specifically for wealth management clients?Monica Guerra: I think it's a really good example of how a national political issue can have very local investment implications. For individuals, the concern often begins at home with the electricity bill. But it can also have implications for local issuers and the municipal bond market – dependent on whether a community and local government captures the benefits of new investment or absorbs the infrastructure costs.And that's why we've been emphasizing the importance of following what state and local governments are actually doing rather than just reacting to every move out of Washington. The same applies for taxes, which is another area where we're getting a lot of questions.Ariana Salvatore: Yeah, let's talk about that because taxes are probably the clearest example of how the near-term and longer-term implications can differ. [Of] course, at the federal level, we don't expect a change in congressional composition to meaningfully reverse the tax policies enacted last year through the OBBA.The president will remain in the Oval Office for the next two years. That means that he retains veto authority, which from a mechanical perspective just creates a significant hurdle to major legislative changes. But at the same time, the midterms could start to lay the groundwork for a different tax debate heading into 2028 and [20]29, specifically around AI and the build-out.For markets, expectations can start changing well before legislation actually arrives.Monica Guerra: Exactly. And for individual investors, there's also a very important state level dimension. We're watching proposals involving wealth taxes, property taxes, and state income taxes, all of which could have implications for household financial planning and the muni[cipal] bond market.So even if federal tax policy remains relatively stable – which we think it will – investors still need to be attentive to potential changes that are closer to home.And I want to come back to that broader market implications for a moment and really dig into that with you, Ariana. Are there particular areas where you think investors could be underestimating the impact of the election?Ariana Salvatore: I think the biggest risk is actually assuming that [a] divided government automatically means less policy volatility. Typically, the blueprint here is divided government means gridlock. That constraint is actually clarity for markets, which can be a good thing. But in this case, of course, even if a change in congressional control occurs, you might see additional oversight investigations and political scrutiny – but executive action can continue.And that could matter at the margin for sectors like technology and energy, which we've highlighted in terms of both the antitrust angle and deregulation more broadly. But I'd also distinguish between headline risk and actual changes to earnings or the macro-outlook.Not every political development is going to translate to a meaningful market impact, which is why we see this election as more of a micro than a macro catalyst.Monica Guerra: I agree, and from the wealth management perspective, that's why we really emphasize discipline. And lean into the idea that negative policy headlines often doesn't equal negative fundamentals.Election outcomes can change the policy backdrop and create sector-specific opportunities or risks. That individual investors should be careful about allowing short-term political developments to drive long-term asset allocation decisions.Ariana Salvatore: So maybe to wrap up, Monica, what's one thing that you'd encourage individual investors to watch after November 3rd?Monica Guerra: Yeah. I'd focus on the policy decisions that actually affect households and portfolios, especially energy costs and state and local developments. And I'd encourage investors to work with their advisors distinguishing meaningful policy change from that political noise.How about you?Ariana Salvatore: Well, from my perspective, I think there's a lot to watch in this lame duck period. Of course, the fiscal calendar, so government funding, potentially addressing the debt limit. We've got the NDAA, that's the bill that funds the Pentagon, coming due in December. You've got potential U.S.-China meetings.So, plenty to watch, I'd say, between now and the end of the year.But maybe just to kind of put a through line through all this, our broader takeaway is that the midterms probably won't alter fundamentally the direction of U.S. policy. But they could change where risks emerge and how quickly certain priorities can move forward.So, for investors, the important question isn't just who wins in November, it's actually what changes as a result.Monica, thanks for joining me.Monica Guerra: Thanks, Ariana. Great speaking with you.Ariana Salvatore: And thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.Monica Guerra is a member of Morgan Stanley’s Wealth Management Division. She is not a member of Morgan Stanley’s Research Department. Unless otherwise indicated, her views are her own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen look at what could speed up tightening, what’s next for Treasury yields, and how the Fed can skip a hike now while signaling that more are coming.Read more insights from Morgan Stanley.----- Transcript ----- Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy at Morgan Stanley.Michael Gapen: And I'm Michael Gapen, Chief U.S. Economist.Matthew Hornbach: Today, the challenge facing the Fed: to not hike rates while still convincing investors that you think rate hikes are coming.It's Tuesday, October 27th at 11am in New York.So Mike, how do you think the Fed and Chairman Warsh in particular is going to deal with this challenge?Michael Gapen: Well, I think the way that he can do it is to say, ‘Obviously we already did hike. So, we've started a process. You know we're serious about bringing inflation down in a timelier fashion. So essentially the question is: Do we want to raise rates at every meeting or do we want to take an action, assess incoming data and take a different action?’So I do think the message here can be balanced in a way that says, ‘We didn't hike rates today. We didn't feel a tremendous sense of urgency to raise rates today. But we think more work is needed.’ So I'm not sure that there's urgency to raise rates every meeting. But you can still suggest that rates are going to go higher.You can see I'm having trouble articulating the story as well. Warsh may have some of the same difficulty, but I think that's the basic message is – taking an action, assessing its effect, deciding to take another action.Matthew Hornbach: At the Jackson Hole Symposium in August, Chairman Warsh gave a speech, and in the speech, he invoked this imagery of going on a hike around the mountains of Jackson Hole.And he told us that there were, in essence, two types of hikes that one could go on around Jackson Hole. A more leisurely hike and a more aggressive hike around the mountains. Presumably because we don't think the Fed will hike rates at this meeting. Presumably the idea that he has in his head today is to go on a leisurely hike.But if that's the case, how long does a leisurely hike last? How…Michael Gapen: They can both be the same.Matthew Hornbach: … long will the hike be.Michael Gapen: Yes. So I think that I would interpret the leisurely hike also as the difference between, I think, what economists euphemistically call a recalibration of the policy stance – as opposed to a more aggressive tightening cycle.So one's kind of leaning against the wind while the other one is trying to change the course of the economy. So I think you're right. And he called the leisurely hike the Ben Bernanke hike and as opposed to the Don Kohn aggressive hike. That's inside Fed speak if you know your former Fed staff.And I think what the data is telling the Fed, on one hand growth is certainly resilient, and inflation is sticky. But the labor market doesn't look like it's overheating. We're only adding about 50,000 jobs a month. The unemployment rate is low, that's true. But wage growth is actually decelerating.So from my perspective, and I think their perspective, even with the AI investment boom, there's not a lot of evidence the broader economy is overheating. And that's where I think the urgency story fits in. Are they behind? Do they need to get on top of something?I think the answer to that is no. So you end up with this measured recalibration: Hey, we cut 75 basis points last year to support the labor market, should probably reverse those. That's what we should be thinking. We're not thinking we need to go all the way back to 2023 highs, which would be the more aggressive tightening cycle.That's the way I split it out.Matthew Hornbach: So what would have to happen with the weather in Jackson Hole to change the mind of the committee to go on a more aggressive hike? Maybe to get back into the lodge before the weather really turns inclement? What would have to happen in the economic data, do you think, to change their mind?Michael Gapen: Well, I think that the most likely story there. I mean, what macro data would make them do that sooner than later would just be inflation has a lot more momentum than they think. Rather than being flat or decelerating slowly, it actually starts to firm.So, the actual data that they have in hand, they wouldn't even have to decide where it's coming from. But if inflation's firming, they have to get on top of it. That could certainly shift them to hikes every meeting. So, I'll put that down as the most likely.The other would be just what I said about the labor market. You would need evidence that says, "Wow, look at that labor market. Employment growth is picking up, the unemployment rate's moving lower, and wage growth is turning and starting to firm."So that would tell you what was kind of a narrow business spending story is now a broad-based overheating story. That's likely to be a much-more-slower-moving train. But certainly that could get the Fed to more rate hikes in 2027 than we're thinking.Matthew Hornbach: On the inflation point that you're raising here. One of the statistical quirks in how the Bureau of Labor Statistics and the Bureau of Economic Analysis put together the inflation data is that in the first month or two of the year, you typically have seen the seasonally adjusted inflation data come in much stronger. And then in the final couple of months of the year, you've tended to see inflation data come in lower than what you might otherwise expect – because these statistical agencies have had difficulty properly seasonally adjusting the data.So presumably, because this has been going on for a couple of decades, we'll see this “residual seasonality" again in 2027. Of course, we may not. But if we do, how do you think the Fed will deal with that? Because that could very well show us that inflation is picking back up…Michael Gapen: That residual seasonality, you're correct, it's still present in the data. There are many firms in different industries that raise their prices once a year. It varies over time. That's why the seasonal adjustment process doesn't capture it.So we get big, kind of, one-off annual increases in January and February. The Fed knows this, you know this, I know this. But the point is to decide either to stop raising rates, or maybe even at some point to cut rates, you have to ascertain where the underlying trend is. So this makes it harder for them to know what the underlying trend is.So in our view, it actually means you still get one additional rate hike in March, then after that, it only starts to become clear that inflation is decelerating and the Fed stops hiking.So in my view, I think the way that they deal with it is they have to wait and get more data to decide that inflation's either going in the direction they want or it's not going in the direction they want.So Matt, I'd like to turn it back to you if I can. We've seen a lot of volatility in the Treasury market. As you know, for many months yields were backing up. The 10-year Treasury yield peaked above 5.25. It's now back down to about 5 percent. How do you read what's happening in the Treasury market today?Matthew Hornbach: So the biggest explanatory factor in the sell-off in the Treasury market since, really since the beginning of March, has been a combination of what has happened with energy prices. Both outside of the country and within the country. And then, how the central bank ended up shifting its perspective on rate policy as a result of the effects of these higher energy prices on underlying inflation.And so, as the Fed transitioned from easing monetary policy in 2025 to now tightening monetary policy in 2026, and on your forecasts into 2027, the bond market had to reprice. And this is a typical behavioral response to a big change in monetary policy expectations.The more recent price action in the Treasury market, where the 10-year yield went from 5 percent up to 5.25 percent, we think was driven much more by technical flows related to a very large fixed income marketplace that includes more than just U.S. Treasury securities.Of course, we have agency mortgage-backed securities. There's a huge corporate bond market as well. And so, we see the last 25 basis points as more of a technical dynamic that was driving yields to those peak levels. And once those technical flows stopped, then we saw yields settle back down to a level that was more aligned with fair value, given how the Fed is expected to behave with monetary policy.But what that means, though, is that as the data come in over the course of the next several quarters, how the market thinks about the path of Fed policy over the course of 2027 will become an increasingly important factor in the Treasury market once again.So if the investor base decides that maybe the Fed, after having delivered these rate hikes that you're expecting, is comfortable keeping rate policy where it is. And as the disinflationary process resumes, might even consider reversing some of these rate hikes that they have put into place, I would expect 10-year Treasury yields to fall alongside – of those expectations for monetary policy.So ultimately, we have had a big move in the U.S. Treasury market this year. It has been very much aligned with how investors have thought about the changing narrative around Fed policy. And so 2027 will likely hold more of the same.As we make our mind up about where the Fed is heading with monetary policy, we will very likely see the bond market move in sympathy with that. And I guess we'll keep an eye on inflation, the labor market, as well as the Treasury market as we look forward towards the next FOMC meeting in early December. And considering the question again: hike or no hike?Thanks for this, Mike.Michael Gapen: Thanks for having me on, Matt.Matthew Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.

Is the end of the correction in sight? Our CIO and Chief U.S. Equity Strategist Mike Wilson looks at what could bring this pullback to an end.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Is the end of this equity market correction in sight? Today on the podcast, I’ll share what I think could turn the tide.It's Monday, October 26th at 11:30 am in New York.  So, let’s get after itThe correction that began in June is now well advanced beneath the surface. But I believe the high-quality S&P 500 index may still have some unfinished business. Until that plays out, I don’t think we can say the adjustment is complete.The real question to ask: how bad does it have to get before it gets better?We have described this correction as a classic mid-cycle transition. The peak rate of change in earnings revisions arrived right on schedule, about a year after the recession troughed. And the market responded the way that it usually does: early-cycle leaders with more operating and financial leverage started to underperform, while higher-quality, asset-light, services-oriented businesses moved to the front.This quality rotation is now well understood though, and positioning has followed it. Ironically, the final step is usually a convergence between the resilient high quality S&P 500 index and the weaker breadth beneath. We may already be seeing the beginning of that meeting in the middle. If the index does move lower, I believe 7100-7200 on the S&P 500 is where the correction should find material support.The reason I believe we will ultimately have a positive resolution to this transition is that a lot of damage has already occurred. Roughly 60 percent of Russell 3000 stocks are down more than 20 percent since June. And the hit has been even more severe in early-cycle areas like Semiconductors, Autos, Consumer Cyclicals, and Capital Goods.At the same time, hedge-fund positioning has come down meaningfully leaving us near the lows for the past 12 months. That is encouraging, but sentiment overall is not yet at the kind of extreme that typically marks a durable low. I think we are close but we’re not quite there.So, what gets us there? I see three clearing events ahead.The first is AI. Investors are questioning the eventual return on capital, the cost of capital, and whether credit markets can fund all the spending that has been promised. Over the next few weeks, the market will need to absorb more supply, and lower-quality players may continue to see wider spreads and even lower stock prices.I view the supply as the event itself. Once it clears, the risk should begin to fade. Semiconductors remain at the center of this concern, and may offer a good benchmark to monitor for the broader market correction. Specifically, I see another 10 to 15 percent lower for the Semiconductor index into mid-November.The second clearing event is the midterm elections. Markets dislike uncertainty, and this election has plenty. A blue wave is not a surprise anymore though. The larger overhang is what may happen after the vote, including the possibility of a renewed military escalation in Iran.I have no special edge in forecasting geopolitics. But I do know that these kinds of shocks often create very good buying opportunities. Historically, post-midterm returns have been very strong, so I would be ready to embrace a sharp downdraft in stocks in the days and weeks around election day.The third, and most important, clearing event is liquidity. Financial conditions have tightened sharply through a combination of higher rates, slower balance-sheet growth, stronger demand for capital, and higher energy prices.The tightening is beginning to resemble 2018, and it is not far from what we experienced in 2022 despite very modest tightening from the Fed so far. In fact, the market may be doing the Fed’s tightening for it; and if that tightening begins to create funding stress or destabilizes credit markets, the Fed and Treasury have tools to respond. The question is whether conditions need to deteriorate further before they act.Bottom line, I think the correction in equity markets that began in June is in the final stages, but the final stage can be very uncomfortable. We may still need one more index-level drawdown and bout of volatility. Or one more moment when investors conclude that something has broken. That may be exactly what clears the path for the Fed to pivot and the next leg higher for stocks.For now, I want to stay with quality stocks that have already corrected more than the index in areas like capital goods. More importantly, if these clearing events create a sharp downdraft, I would view it less as a reason to run from risk and more as the opportunity we have been waiting for to buy. So be ready.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!

The energy shock is global, but the policy response isn’t uniform. In the second of our two-part roundtable, our economists unpack the forces shaping interest rates across the U.S., Europe and Asia. Read more insights from Morgan Stanley.----- Transcript ----- Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research.  Michael Gapen: I'm Michael Gapen, Chief U.S. Economist.  Jens Eisenschmidt: I'm Jens Eisenschmidt, Chief Europe Economist. Chetan Ahya: And I’m Chetan Ahya, Chief Asia Economist.  Seth Carpenter: Yesterday, we talked about why global growth is continuing to power on, why investment is playing a larger role, and how that investment cycle is spreading across regions. Today, we're going to take a deeper dive and think about monetary policy and what's going on. It's Friday, October 23rd, at 10am New York. Jens Eisenschmidt: 4pm in Frankfurt. Chetan Ahya: And 10pm in Hong Kong. Seth Carpenter: When I look around the world and think about especially developed market central banks, well, they're kind of all tightening at the same time – but maybe for somewhat different reasons.  Let's start with just a really broad policy question. Why are the Fed, the ECB, the Bank of England, and the Bank of Japan all tightening policy when their economies look so different?  Mike, I'm going to start with you back here in the U.S. with the Fed. How are you thinking about what the Fed is doing right now? Are they just recalibrating the stance of policy? Or is this a fundamental change where they're trying to rein in growth in the economy?  Michael Gapen: The way I look at it is this is a story about persistent inflation, and I would look at it as a recalibration of policy. I think the majority of participants on the FOMC know the Fed can't pump more oil or get, you know, oil through the Strait of Hormuz. So, it's about leaning against second-round effects. Inflation is gradually moving lower. They've characterized this as dissatisfaction with the speed of convergence to the target.  So, I think the Fed is tightening based on persistent inflation, and it appears to me to be more about a recalibration than it is about meaningfully tightening policy and leaning into demand.  Seth Carpenter: All right, Jens. Same question coming to you, and I have to say the energy shock is a global shock. So how do you think about what's going on with the tightening of the ECB and the Bank of England?  Jens Eisenschmidt: Yeah. No, I mean, first of all, if you sort of talk about both central banks – and here again, I guess the Fed comparison also matters. The starting point is important. The ECB was the only central bank that got inflation back to target, and so was already well advanced in its sort of rate normalization cycle, had cut back rates to 2 percent – which by most measures is sort of neutral, maybe leaning a little bit towards expansionary side of things.  And so, it was probably easiest for that central bank, when the supply shock came to tighten again, simply by getting a little bit towards the restrictive end of the neutral range, say. I think that is probably what has happened here, more than anything else. And for the Bank of England, of course, the discussion is a different one. They were running for a long time a relatively restrictive monetary policy. And so there was more scope to wait it out, essentially. A little bit like the Fed, essentially. This is where the similarities come in.  Now, if you look ahead, essentially, it becomes a question of how strong is your economy holding up? And, you know, the strength of that holding up in the face of a certain given energy shock will determine how much of the inflation that you experience today will be inflation of tomorrow, carried to the next period through stronger wage agreements.  I think that's basically the policy problem facing both central banks here. And I guess that in the end results in essentially a resolve to at least gradually further tighten the stance. I think that has to be the expectation. And so, from that perspective, this is where we arrive at essentially a current positioning that is not super hawkish, if you think about it. So, it's not like we have to gung ho every sequential meeting increase rates. But we see a gradual increase in rates. And so, for instance, for the ECB, we have a meeting around the corner next week. We don't think there will be an increase. But the risks have sort of stacked up and are really to the upside for inflation. So, it will be very hard to avoid a tightening for the ECB in the December meeting. So that's the gradual pace I was just referring to.  Seth Carpenter: Got it. Ok, Chetan, the developed market central bank in Asia that most people are staring at is the Bank of Japan. So big change there. 25 years of essentially stagnant nominal in GDP growth to now we're on a clear hiking path.  How far do you think the Bank of Japan is likely to go? What's driving it? And how important is this global energy shock to the Bank of Japan's plans? Chetan Ahya: We expect the BOJ to hike its policy rate twice, first in December and then again in March next year. This compares with market pricing of three more rate hikes. So, what explains our dovish forecast? Well, we think that Japan's inflation has been largely driven by FX weakness and higher commodity prices and not due to demand-side pressures. To elaborate, Japan's real consumption is still one percent below pre-COVID levels. Hence, we think BoJ will avoid taking up more aggressive policy tightening.  Seth Carpenter: So, Mike, let me come back to you for the U.S. We have seen globally a rise in interest rates. The long end of the curve has sold off everywhere. Some of that is being driven by energy prices. We've seen credit spreads in the U.S. start to widen.  Some of that's being driven by hyperscaler debt issuance, among other factors. But I guess what's important is when Chair Warsh first took over the helm of the Fed, his characterization of how restrictive monetary policy and financial conditions were – was not particularly forceful, right? He said it's hard-pressed to say that it's uniformly restrictive. But the world feels a little bit different now than it did when Chair Warsh took over. So how does the Fed need to react to the fact that longer-term interest rates have sold off and that credit spreads are starting to widen?  Michael Gapen: Financial conditions have tightened. We would characterize financial conditions as, let's call it moderately restrictive.  So, I think the Fed needs to look at that and then ask itself essentially, "Where is this inflation coming from? What inflation are we trying to stop?" I don't think there's a tremendous amount of evidence that points to an overheating labor market. Rates have risen, but long-run inflation expectations remain stable.So, I still think the right answer is to lean against potential second-round effects from the energy price shock. And here, I think that would show up in airfares, apparel, new and used cars, motor vehicles and parts.  We got some evidence in the September inflation report that these other goods prices were firm. We'll see if that continues, and this is an early sign of energy pass-through into other parts of core. But with financial conditions already moderately restrictive, it doesn't suggest they have a tremendous amount of work to do unless there's evidence that AI spending is broadening out to greater labor demand and higher wages. Then it would be a different story.  For now, I think a few more rate hikes – we have two more rate hikes penciled in, and 75 basis points of rate hikes in total – is probably where we think the Fed will be going by March of next year.  Seth Carpenter: Jens, let me turn that to you as well because rates in Europe have also gone up. And importantly, we've seen spreads for French sovereign debt over German debt widen a lot. So, OAT spreads are pretty high. How much has the tightening in financial conditions done the work of the ECB for it?And as a result, is that a reason to maybe expect less in the way of rate hiking than what the market has priced in? Jens Eisenschmidt: I think that's exactly the debate that I would expect to be raging in the governing council next week. We have already seen indications in the accounts in September that it was brought up.Since then, it hasn't gotten better. So, there is tightening. We had seen Philip Lane coming out essentially saying in very simplistic ways, ‘Well, this is AI. This is good for the U.S. It's not so clear it's as good for Europe. But, you know, rates have increased here too, and so we need to be super careful.’ That this is not representing us with much more tightening than we actually can stomach. So, to your point, indeed, I think the market is pricing too many rate hikes. We have one more at this stage in December, and that's it.  We have to acknowledge that since we made that change in call, we have seen more inflation and probably also more resiliency than we had thought. So that would push us at the margin to maybe one more in March.But then again, we have seen the tightening at the long end. If that continues, we may very well end up being right with that call without any need to change it. Again, that has to be closely watched. It will very likely depend on the growth outlook in the end.  But yeah, long story short, the market currently prices 3/25. I still think this is too much from the ECB here. Seth Carpenter: So, Chetan, maybe I’ll wrap up with you because we focused on some of the bigger central banks of the bigger economies. But there are different outcomes across different central banks. Here in the Americas, for example, down south, the Brazilian Central Bank, the BCB, is still easing, albeit gradually. Banxico in Mexico is holding rates, not hiking.  So, when you think about other central banks, across Asia, like say maybe Korea and India, where we're still seeing some strong domestic growth. Are they conforming to the same stories we've talked about for these major DM central banks?  Chetan Ahya: Yeah, the situation in Asia is somewhat different. They don't have a big inflation problem, but we are seeing strength in growth coming in because of exports. And so, for most central banks, we are expecting them to take up rate hikes. But those will be more countercyclical in nature. As such, core inflation, except for Australia and Korea is pretty much in the central bank's comfort zone. And so, we don't expect them to react to higher inflation. But to the extent to which, you know, U.S. rates are going up, growth is strong, most central banks will take up countercyclical rate hikes in the coming quarters. Seth Carpenter: That's super helpful, and that helps make, I guess, a key observation or theme about what's going on. Inflation is a global phenomenon. We are seeing somewhat resilient growth, and major central banks generally are tightening. But it is not a uniform story in every single place. And so, there are some interesting nuances in all of the details here.  That point also means that the endpoint for hiking cycles at different central banks might not be fully synchronized either. And it will depend, I suspect, in different jurisdictions on the specific evidence that each central bank is looking at – be it inflation itself, wage dynamics, what's going on in labor markets, domestic demand, foreign demand, external demand for exports, depending on the economy. And of course, as we touched on a bit, what's going on in financial conditions. Well, Mike, Jens, Chetan, thank you so much for helping us connect all of those dots. And to the listener, thank you for listening. And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

In the first of a two-part discussion, our roundtable explores how AI investment, trade and consumer spending are sustaining global growth, and what could put that resilience at risk.Read more insights from Morgan Stanley.----- Transcript ----- Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. Michael Gapen: I'm Michael Gapen, Chief U.S. Economist. Jens Eisenschmidt: I'm Jens Eisenschmidt, Chief Europe Economist. Chetan Ahya: And I'm Chetan Ahya, Chief Asia Economist. Seth Carpenter: And today, our fourth quarterly economic roundtable discussion is going to try to take a wide-angle view on the global economy – and it has held up despite higher interest rates, higher energy prices, geopolitical uncertainty, you name it. It's Thursday, October 22nd at 10am in New York. Jens Eisenschmidt: And 4pm in Frankfurt. Chetan Ahya: And 10 pm in Hong Kong. Seth Carpenter: All right then. Let me start with that big question Why has global growth held up better than maybe would have been expected given everything that we've seen ? Mike, maybe I'll start from the U.S. perspective with you. What do you think has mattered most? What is driving – if I dare use an overused word – the resilience of the economy? Michael Gapen: Most of us believe AI-related spending is interest rate insensitive and geopolitically insensitive. And certainly, I think the data has borne that out. And in the direct translation of AI hypercaler Capex spending to growth, we find that AI is accounting for 4/10 to 6/10 contribution to growth in any given quarter. You could nudge that a little higher if you think it’s creating productivity, which we do. And that spending is underpinning asset market appreciation – or certainly has for the past several years. And that is underpinning resilient spending by upper income households. So, I think in the U.S. the clear answer is AI-related spending, but also its linkage to asset markets and upper-income households. Seth Carpenter: Jens, let me come to you for the European view. I mean the AI story has been a little bit different in Europe. I think consumer behavior sometimes can differ in Europe than in the United States. What would you say is the story behind the resilience of economic growth there in Europe? Jens Eisenschmidt:  It’s similar in the sense that there is a clear element of also of AI-related external demand.  That even in Europe now the phones are ringing, given that we are more typically seen as on the more higher cost end of the spectrum. So, I think there was clearly in the second quarter data, export-led growth elements related to AI or delivery into that. There was also an element of geopolitical tensions helping some of those producers – say, chemical industry in Germany comes to mind – that would deliver products that would previously be delivered out of the Strait [of Hormuz]. So, that is another element. And then, yeah, the consumer held up better than had expected. Or that you could have expected given the rise in energy prices. So all in all, that got us a relatively solid second quarter print. And we expect this to be more or less repeated also in the third. Seth Carpenter: Chetan, the export story is pretty important. You've been writing about a big CapEx cycle and big industrial cycle in Asia. So, when you think about the Asia story and why the economic growth held up in spite of the global shocks, how would you characterize that? Chetan Ahya: Yeah. So, Asia is benefiting from a strong pickup in CapEx, which initially was led by the tech sector, but is now broadening out to energy, defense, and broader industrial investments. Exports are strong, and showing some signs of broadening out from tech to non-tech goods too. This has meant that the region has faced positive terms of trade situation despite higher oil prices. Higher export prices have boosted corporate profits and in turn government tax revenues, offsetting the fiscal pressures from higher fuel subsidies. And when you're thinking about higher interest rates that you are seeing globally and also in Asia, what is different in this cycle is that the macro stability indicators are in a good place. Current account surpluses in the region have widened quite significantly. In fact, it is $1.6 trillion or 4.2 percent of GDP. Also what we have is the private sector balance sheets outside of China are quite healthy. So, all in all, both higher oil prices and interest rates have not disturbed the CapEx and growth cycle in the region. Seth Carpenter: Is there a lot of dispersion across sectors, across countries for this cycle that you’re talking about? Can you go a little deeper there? Chetan Ahya: Yeah. So let me start first with the story on investment versus consumption So initially, the growth story in the region started with a pickup in exports and CapEx. But what we have seen is that this has now broadened out into a dynamic where we see an improvement in the labor market and therefore consumption growth.So, we have this recovery broadening out from exports to CapEx to consumption. And within the region, when you're thinking about different economies. Initially, we saw very strong growth in Korea and Taiwan. But now we have seen growth being strong in all parts of the region, especially in economies like India, Japan, and also some of the Southeast Asian economies like Malaysia and Singapore.  Seth Carpenter: I want to stay on this broadening theme, Michael. Is all of the CapEx spending, all the investment spending, by business in the United States, is it just an AI story? Are we seeing any broadening of the investment story in the U.S. beyond AI? Or should we just resign ourselves that the rest of the economy is going to stagnant? Michael Gapen: No, I do think we are seeing evidence of some broadening out. It is most clear in manufacturing. So, I do think it points to some broadening out in the AI story beyond the narrow AI story into something that is broader that both Chetan and Jens have referenced about in a multipolar world needing to build out redundancies in supply chain. Maybe there's some incentive to do some reshoring. So, whether it's a spillover effect from AI or a spillover effect from geopolitics writ large, I do think there's some evidence that we're seeing the broadening out. I would just caution and say, just remember, manufacturing in the U.S. is relatively small. It's only about 10 percent of output and maybe 10 percent of employment. But nonetheless, it's there. So, it's not just an AI story. I think you can characterize it as a bit broader. Seth Carpenter: Let me come to you, Jens, on this. We've seen an investment story play out for a while in Europe. There was a lot of discussion about defense especially in Germany –infrastructure especially in Germany. Is that still an important part of spending in Europe, the investment side of things? And how important is investment relative to household? Jens Eisenschmidt: Yeah. No, I mean, I think in, in terms of the shares; and GDP shares in spending, you're talking about 50 percent versus 20 percent. So, consumption is the more important one…If you talk about relative expectations, so I think there your question really points at a key component of the forecast. If anything, you could expect maybe some more dampening from here, given that energy prices have increased further, and at some point the consumer will just capitulate. Or at least, need to show some signs of retracement. While investment has so far, in the aggregate at least, not shown any signs of a big revival. And if anything, this is what we would expect more investment from here – be it related to, you know, a progressive AI build out. Or be it because we anyway expect some more positive investment dynamics given where we are in the cycle and given that the ECB has decreased rates last year. And at some point, this typically shows up in investment demand. So, long story short, the relative importance as a growth driver should increase of investments, vis-a-vis consumption. I think that is that is relatively clear. The question is just the magnitude here. Seth Carpenter: How much do you worry then that not only is investment going to become bigger share of growth? That consumption could weaken even more because energy prices chip away at purchasing power of households? Is that a relevant factor for Europe? Jens Eisenschmidt: I think that has to be the number one growth worry going forward So essentially, you come down in terms of wage increases from very high level that were reflective of past inflation. So, the European wage setting process always lags inflation, and so basically today's wage agreements are reflective of yesterday's inflation. But now we are going above 4 percent, very likely on our forecast. Not an awful lot above 4 percent, but still above. Then it becomes a question of how long this is going to persist. If you just believe the future curves in energy markets – not long. But then if you look at more details in terms of, for instance, where diesel prices are likely heading, you can become more pessimistic, and ultimately, this is what matters for the consumer. So long story short, big risks here, of course. Seth Carpenter: All right. So, a consumer that's not exactly pulling its weight leads me back to China. Key economy in the world, one of the biggest economies going. But when it comes to demand, aggregate demand, China has been in this deflationary cycle for a while. The household sector has been pretty soft in terms of its demand. What are we looking at there in terms of the consumer in China, the demand side of things in China? is that likely to change anytime soon? And can the global economy look to China as a source of extra demand to keep this expansion going? Chetan Ahya: Unfortunately, I think the short answer to your question is no. We are still very cautious on China's consumption outlook. And what we have been characterizing the China growth story as it's going through a K-shaped recovery. On one side, you have the strength in exports and AI CapEx. And on the other hand, we have a very weak consumer. Now, why is the consumption growth weak in China? So firstly, the property sector has still not completed the adjustment cycle. So, from consumer standpoint, they have still a weak labor market and wage income growth. On top of that, they have seen this massive decline in asset prices. And, so they are actually, de-leveraging at a very rapid pace. The outstanding debt for consumers is contracting at the rate of 1.5 percent. 1.5 percent is not a big number, but just to see that contraction is quite surprising. And so therefore, all in all, China's consumption growth continues to remain weak. We do think that there is a possibility that the policymakers respond to this weak growth and provide some support. But we're not expecting that support to be big fiscal expansion in a way that you get a major surprise on the consumption outlook for China. Seth Carpenter: But as we started off saying, things are holding up, and so that fact brings up a question in my mind. Where are the risks? Where are the downside risks? And so, Mike, maybe I'll start with you. What do you think would lead to a downturn in the U.S.? Where's the biggest vulnerability? What do we have to look out for? Michael Gapen: Well, I think in the, the near term, I do think higher rates pose a vulnerability. So, I would say if the central bank has to shift to a much more dramatic tightening cycle and interest rates go a lot higher, that would be a near-term vulnerability. But I think if we look further out, if the resiliency of the economy is driven by the AI investment cycle, then I think a potential over-investment cycle is the greater risk. Seth Carpenter: Alright. Jens, what about in, in Europe? Jens Eisenschmidt: Clearly we have a discussion among European, in particular monetary policymakers, as evidenced by the latest accounts of the ECB about the degree to which long rates have increased. Maybe, too much and, you know, present a significant tightening of financial conditions. And juggling that in a good way will certainly be a risk and reason to be cautious. So, I would say, here the three risks. Again, consumption because of energy prices, interest rates, or a too tight monetary policy stance. And of course, the investment cycle overall. Seth Carpenter: Chetan, you get the last word in Asia Chetan Ahya: So, I would say, Seth, two risks. One is higher oil prices and the second one is, if you see a contraction in AI investments in the U.S. and therefore in Asia as well.So, on oil prices, I would say a threshold of $130 to $150 of oil would be a problem for the region. It would make the governments finally do resort to higher oil prices for the consumers.  And if you get a combination of higher oil prices and lower AI investments, that would be quite a big shock to the region's growth outlook. Seth Carpenter: Super helpful. And I think that's probably a good place for us to stop for today. We talked about global growth. It's been holding up really well. Sources of that resilience probably differ a bit across regions, but investment is important and becoming probably more important over time. And that investment boom is spreading through trade. Domestic demand in parts for Asia. Europe has got its own story going on. And obviously, the consumer around the world matters a lot. That current outlook though, of a reasonably strong economy with this shock from energy that's driving up inflation, means that the policy side of things, especially monetary policy, is now becoming kind of complicated. So, what should a central bank do? When we come back tomorrow, we're going to ask questions about the Fed, the ECB, the Bank of England, the Bank of Japan. How they're thinking about what's going on, the tightening that needs to be done, whether or not this is going to be a fully synchronized hiking cycle. And I guess most of all, what's going to tell us when the policy hiking has gone far? Mike, Jens, Chetan, thanks so much for joining today. And to the listener, thank you for listening, and be sure to tune in tomorrow for part two of our conversation. And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

Can markets absorb this much new debt? Our panel examines strong demand for investment-grade bonds, stress in high-yield debt and the macro risks that could shape the next six to twelve months in credit markets.Read more insights from Morgan Stanley.----- Transcript ----- Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Anish Shah: I'm Anish Shah, Global Head of Debt Capital Markets. Rehan Latif: I am Rehan Latif, Global Head of Credit Trading. Samer Oweida: And I'm Samer Oweida, Global Head of Foreign Exchange and Emerging Markets. Andrew Sheets: Today, a discussion of historical levels of bond issuance and how it could affect the broader markets. It's Wednesday, October 21st at 9am in New York. Gentlemen, it's great to talk with you. I think what we're talking about is an issue that really cuts across all parts of Morgan Stanley's businesses, from issuance to credit trading to macro markets and beyond. And I'd like to get into it, but just quickly to kind of frame where we are. Anish, we are in the midst of a historic investment cycle in AI CapEx. We're in the midst of a very large pickup in M&A activity that I also want to make sure we get into. But you sit at the intersection of our capital markets businesses. Talk a little bit about what we're seeing in the bond issuance space. Anish Shah: Sure, Andrew. I look after all of our new issue capital markets business in credit, and that's across the credit spectrum and across geographies. And I'm constantly looking to Rehan for the latest in investor sentiment and how we can deliver the right product for our issuing clients. And to Samer on macro views that impact our clients every day. We are in the midst of a significant decommoditization of new issue credit markets and a decompression in credit. It's really driven by four important factors. One is, as you note, unprecedented levels of issuance. Investment grade debt volumes are up almost 25 percent on the year. That's driven by the AI CapEx theme and a resurgence in M&A. Number two is the rate backdrop has been, to date, pretty constructive for credit. We've seen $100 billion of new cash come into investment grade credit. We've seen new pools of investors drive tremendous new capacity into credit markets, whether it be insurance, capital fueled by annuity investments or other private credit. We're also seeing an increase in complexity, and that's driven by the AI CapEx cycle and the interconnectedness between hyperscalers, the chip makers, the neo clouds, the data centers, and that's requiring an unprecedented level of innovation in structuring new solutions for issuers. And the last is the market is grappling with supply-demand dynamics and winners and losers in the AI thematic. Andrew Sheets: Rehan, that's actually a great place to turn to you because you're on the other side of this. You're focused on can markets absorb all of this supply? And I often kind of hear two narratives. You know, one is everything is great. You've got record issuance and record supply into the credit markets. And the other is cracks are forming. You're seeing widening of CCC spreads. You're seeing some headlines around some issuers running into more trouble. From your perch, how do you see things? Rehan Latif: So, Andrew, instead of two, I'll give you three narratives within public credit trading. One, I agree with Anish. I think first of all, I've got to thank Anish because it's never been busier on the public credit side because of the amount of issuance coming through. But there are, really, three different themes coming through. One, investment grade has been incredibly strong. The higher quality part of the credit market is benefiting from all this new investor money coming through at these higher rate levels. For the longest period of my 20-year career, 20-plus year career, we were in a zero-rate environment. At current yield levels, investment grade has never looked like a more attractive proposition. You add in growth in the U.S. and across the rest of the world, the reality is that investment grade looks like a very interesting investment thesis. And I think spreads continue to be appropriately priced for the risk. On the CCC side of the market, that's where we're seeing real dispersion. Where we're seeing investors from the distressed community, from the high yield community, really have to figure out how to refinance some of these names. And that's been where the real challenge has been from a credit perspective. And then obviously, you've got the hyperscalers that have come through in significant wave across many different parts of the capital market. So, one thing Anish mentioned was the number of different financings that are available to the hyperscalers. So, I do think that given the cash flows that these hyperscalers actually have, you've managed to be able to attract a new investor base to our market as well. Andrew Sheets: Samar, we just heard that, you know, Anish has never been busier. Rehan has never been busier. There's clearly a very credit-specific story here. But, you know, this is something that I imagine is also top of mind in the macro markets. You've got all of this supply. You've got AI that's kind of driving the market, but you've also got all these other broader issues around energy and deficits. How do you see the historic wave of credit supply fitting into the macro piece? Samer Oweida: Well, maybe I'll start by also thanking Anish because our corporate derivative business, where we hedge exposure, whether it's on a deal basis or on a normal course basis for these issuers, has never been busier. And part of that is because of the historic issuance that's been discussed. But part of that, Andrew, is also about the uncertainty that you mentioned in these markets. And so, this epic wave that we're seeing around hyperscalers and AI is happening at a time where energy prices are high, inflation is sticky, fiscal concerns abound, and there's a lot of uncertainty in the forward. And so, what we've seen from a behavioral standpoint is clients having much more appetite to engage on these discussions because of the uncertainty and hedge that exposure. What we've also seen is a lot of re-racking of traditional macro models and how do we think about what is the rate level that the economy can handle? What does that rate level mean for winners and losers by jurisdiction or by sector, as Rehan mentioned earlier? And we've seen that manifest itself in a lot of the invested decisions that our clients have made over the course of the year, where we've seen capital and engagement go up with names both corporate and sovereign. Where there's a positive commodity story and there's a positive AI hyperscaler story. And we've seen less investment around the jurisdictions and the names where that story is not the case. And so we're seeing some amount of divergence, but I think also given that the economic background globally, and particularly in the U.S., continues to be strong. We've just seen very high levels of activity coming out of our corporate and sponsors-based businesses. Andrew Sheets: So, Anish, that brings me to a question I wanted to ask you about – which is, you know, Samer, you mentioned this, really important macro question is: at what point do higher rates slow down activity? And yet, so far, activity's still been very solid, and it's not just AI. We've also seen a lot of strategic activity, a lot of M&A activity. I would love for you to take us inside the conversations that you're having with these companies – and how they're thinking about the environment. How much these current levels of interest rates are impacting their decision-making? Anish Shah: Andrew, you could probably break that question down into two pieces.One is in the AI ecosystem, where, you know, certainly there's a lot of optimism on the return on these investments. And so, sitting in the shoes of a hyperscaler or a data center developer or a chip maker, there's a lot of optimism that – notwithstanding the current higher rate environment, that the long-term return on these investments is going to be very, very attractive. And so, we're seeing a relative level of insensitivity on rates from the issuer's perspective in accessing capital. The first wave of all of the AI CapEx has predominantly been in the investment-grade bond market. That's the deepest, most liquid, fastest way to raise capital and speed. Now you're seeing some of these companies diversify into different currencies and different products, and that's been a really healthy technical for the markets. From an M&A context, I think a lot of the resurgence in activity is driven by the fact that there's a meeting of the minds in terms of valuation. So, for the first time in many years, we're seeing large-scaled sponsor private equity-owned assets come to market and be acquired by an investment-grade corporate strategic. Yes, they are borrowing at higher rates than they would have a few years ago. But the view is that they're able to acquire these assets at an appropriate valuation, and it makes long-term strategic sense, and we're seeing just a big pickup in that activity. I think that also has another implication for credit markets, which is some of these assets that have been long held by private equity sponsors had multi-billion dollar debt complexes that are going to be repaid as part of these transactions. That's a recycling of credit. That's going to free up some capacity in the leverage finance markets as well.Andrew Sheets: And yeah, Rehan, how do you think about that? Because, you know, again, we have these big macro forces of AI CapEx, and then these very micro company-specific stories around M&A. How do you see that impacting your backdrop? Rehan Latif: Within credit, the biggest driver is always growth. You pay the rate that you pay simply because there's an expectation towards growth. When Anish talks about some of these developments that are happening within the market, these are all, you know, big paradigm shift in growth. And, AI investment the reality is that we are at the forefront of creating the capital for that. And the reality is that the yield that is being paid; or the coupon that is being paid is essentially the price for that investment. Investors are seeing that across all these different markets. I think we have to be very deliberate about the difference between investment-grade, investments in newer sectors, and what is actually happening within the more distressed part of the credit market. Simply because that market has been challenged for a long time. That market was held together to a certain degree by a zero-rate environment. And that has changed quite dramatically as rates went higher and as the global economy has evolved as well.So, from my perspective, this is all very healthy. Rehan Latif: Samar, I'll let you have the last word here. You know, Anish and Rehan have talked about these historic waves of credit issuance. Part of that's coming from AI, but part of it's coming from M&A and strategic transactions. You know, we're sitting here on the eve of our Morgan Stanley Credit Symposium in New York. It's tomorrow. We have over 1,000 investors attending. I think that indicates just the amount of interest and focus on this space. And yet, as you hear Anish talk about kind of the almost insensitivity of rates for some of these key borrowers, how does this impact how you're thinking about macro markets and how they could trade over the next six to twelve months? Samer Oweida: I think it speaks to what both Anish and Rehan said in that between the growth and the higher level of rates, there are going to be winners and losers. And what we can't predict is what energy markets or political developments or fiscal developments might have in store. But generally speaking, macro markets are responsive to underlying growth, inflation, and policy discipline. And I think as we go into the depths of what is one of the most consequential CapEx cycles in post-Industrial Revolution history, the governments, the jurisdictions, and the corporates that have discipline and capacity around this growth will be the winners. We think so. We see that as on the go forward. And those that don't have a clear policy will suffer the consequences. I think that is still a very early innings discussion to be had. Lots of data still has to come through. I think what we know is what is on the docket for the next year or two in terms of how much capital needs to be raised and debt issued. But what we don't know is how does that affect underlying economic activity. And I think as that data manifests in conjunction with policy initiatives globally, there's a lot to be excited about. And there's a lot to be quite concerned about. And looking at how policy mistakes one way or the other might affect a lot of the behavioral patterns in credit markets and from an issuer standpoint. Andrew Sheets: Gentlemen, thank you for taking the time to talk, and see you tomorrow at the conference. And thank you for listening. If you enjoy Thoughts the Market, please take a moment to rate and review us wherever you listen and tell a friend or colleague about us today.Anish Shah is a member of Morgan Stanley’s Global Capital Markets Division. Rehan Latif and Samer Oweida are members of Morgan Stanley’s Fixed Income Division. They are not members of Morgan Stanley’s Research Department. Unless otherwise indicated, their views are their own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

With AI startups scaling at record speed, our analysts Sabrina Hao, Adam Wood and Brian Nowak share takeaways from Morgan Stanley's Spark Conference on AI returns, competitive moats and implications for public markets. Read more insights from Morgan Stanley.----- Transcript -----  Sabrina Hao: Welcome to Thoughts on the Market. I'm Sabrina Hao, Morgan Stanley's AI and Tech Thematic Equity Strategist. Adam Wood: And I'm Adam Wood, Head of U.S. Software Research at Morgan Stanley. Brian Nowak: And I'm Brian Nowak, Head of U.S. Internet Research. Sabrina Hao: Today, what private companies are telling us about the AI opportunity and what it means for public markets. It's Tuesday, October 20th, at 10am in New York. Last week, we were at our Spark Private Company conference in California, bringing together more than a hundred startups across software, robotics, AI infrastructure, and beyond. There was even a company helping to manufacture pharmaceuticals in space. It was a really interesting week to be at the conference given everything that was happening in the market. But really, we came away feeling even more positive about the AI cycle. While public market investors are waiting for returns to justify trillions of dollars in AI spending, we're already seeing that pay off in private markets. AI demand is real, companies are delivering tangible returns for customers, and startups are scaling faster than ever. Adam, let's start with growth. We heard from startups scaling at extraordinary speeds. One was approaching [$] 4 billion in annual recurring revenue in two years, another reaching a billion in under a year. What really stood out to you about the pace of AI adoption, and why aren't we necessarily seeing that same growth at established software companies? Adam Wood: So yeah, absolutely, the pace was remarkable. And clearly one of the standouts from the conference when we used to discuss how quickly a company could get to a $1 billion so-called unicorn valuation. And now we're discussing how quickly they can get to a unicorn revenue run rate of a billion dollars, which for me is quite incredible. But I think I wouldn't make the debate simply about private versus public companies. I'd make the distinction between two different types of software. I think we have to make a distinction between largely coding and inference tools. There were a number of coding and inference software companies at the conference, and application software. And I think there's a big difference in terms of time and complexity to bring these products to market. I think the coding and inference, which tends to be the building blocks, as I would call them, underneath the application layer, they can be constructed much more quickly. And I think because we can adopt when we're still building bespoke, which I think is a lot of the phase we're in today, we're still building bespoke software rather than buying off the shelf. They can be adopted earlier as well. So, we've got faster time to build and faster time to adopt by companies. So, I think it's natural you can see very fast growth in those types of businesses very quickly. I think in the application landscape, it's a little bit different because those applications have to deliver complete business solutions for customers. In finance and customer service, that means integrating data, understanding workflows, and putting controls in place. There's much more to build and much more to implement, and generally, the adoption of those tools takes place a little bit later. After we've gone from the bespoke phase where companies are building themselves, we go to a phase where companies see that there are off-the-shelf packages that are available, that companies have built out. So, I think it's both a complexity of build debate and also, a time in terms of where we are in the software adoption cycle. The second thing I'd say is, you know, in public software companies that have a big incumbent existing business, sometimes there can be that big incumbent business that's not growing very quickly. And a very fast-growing AI business in there as well. And that very fast AI growth business can be hidden a little bit by that large public software company that exists. So, I don't think it's as straightforward as just saying, you know, private's growing very quickly, public not. I think there's a couple of layers of complexity in there in terms of what type of software you're dealing with. And then how big the existing kind of business is in a software company and what is kind of existing software growing a little bit less quickly. And then the AI bit that could potentially be growing very fast. Sabrina Hao: Absolutely. It makes a ton of sense. Maybe on this theme of full stack solutions, you know, Brian, we heard about the shift from AI assistants to agents that can actually execute work. You've done a lot of work on this, both across consumer and enterprise. What did you learn about how quickly agents are advancing? And how does it shape the outlook for the internet names that you cover? Brian Nowak: This is a very exciting time for agentic adoption on both the consumer side and the enterprise side. You know, we've sized potential addressable markets of $30 to $40 trillion of spend on both the consumer side and the enterprise side that we think can be addressed by agentic tools. On the consumer side, people are shopping, they are planning their travel, they're planning their holiday shopping. On the enterprise side, we're seeing both vertical specific agents start to emerge. So, agents within the legal area or agents within the healthcare area. And then we're also seeing broad-based agents from some of the larger private companies also start to bud through. So, there is a smattering of agents that are popping through. On the consumer side, Muse is your early leader, and we do expect more to come in 2027. And then I think on the enterprise side, they're both vertical specific as well as broader based agents expected to grow. Sabrina Hao: Agents really raise an important question around disruption. Maybe for Adam, you've written about the moat and the journey in software. It's not just about if a company has a competitive advantage, but how it navigates that transition to an AI-driven world. Did Spark change your thinking about which software incumbents are best positioned to defend their businesses or capture new growth? Adam Wood: So, I think Spark really confirmed a lot of our views on that moat and journey framework that we've put forward. The moat protecting the existing business that you have and the journey turning AI into new growth opportunities. And in some ways, the deeper the moat for businesses, the longer that journey can be. An incumbent embedded in complex mission-critical workflows is hard to replace because of the data integrations and customer trust it has by definition. But those same requirements can make introducing AI into its platform more demanding. You can't compromise the reliability of that work. So that's why we've separated the durability of the business from the speed of its AI transition. For some of the coding inference businesses we heard from – again, these incredibly fast run rate, fast growth businesses, the monetization has obviously moved very, very quickly. And I think there the investor debate's going to be a little bit the opposite way around. How durable and how big a competitive advantage have these companies built on that very fast-growing revenue base? And that's not to say these businesses can't have moats. They can. You know, performance, model customization, and integration can create real differentiation. But I think there is a big difference to be made between rapid growth and defensibility. And, you know, to give a couple of examples here in terms of the moat that some of these AI native vertical and business software companies are leveraging. You know, there's a legal AI company that's hiring former lawyers to become forward deployed lawyers. We had forward deployed engineers, now we've got forward deployed lawyers. But the reason there is they bring that understanding of legal workflows to the product and its implementation. So, the value isn't just access to the model. It's making the model and the technology work in the customer's business and understanding in depth those business workflows. Sabrina Hao: And we've talked about this theme of AI adopters, and really what we need to get this trade to work are those quantifiable benefits from AI. So open weights are a key part of that. Maybe to pull on another thread, and you, kind of, alluded to this, the models themselves are increasingly becoming table stakes rather than moats. And the value is shifting to everything around the model – whether that's your data, your workflows, the tools that make AI useful. So where did you see this most clearly at Spark? And does it change your view on where durable value will accrue in software? Adam Wood: So again, I mean, I think I'd come back to the growing importance of open weight models. I mean, it was a recurring theme at the conference. Almost every company spoke to us and spoke to, you know, the implementation. And again, it reinforces that view of a multi-model world. You’ve got the inference companies talking about bringing down the costs of using the models. Again, that diffusion concept we talk about. At the application layer, a legal software company said it benchmarks 18 models across 200 criteria to decide which model should run the task. So, you know, you're getting incredible gains in efficiency. I think there are two implications for public software vendors. I think, you know, first of all, there's an opportunity here for software companies to help their customers with orchestration. So, there's going to be a layer around how do we get the right task to the right model at the right price. And I think a lot of the public software companies, you know, at the hyperscaler level, they can help at a broader enterprise adoption level. And then down at the application layer, whether we're talking about CRM, ERP, HR, there's an opportunity for software companies to help with orchestration at that layer as well. I think the second thing, which is probably a little bit less talked about, is maybe there is a gross margin opportunity here. I think in software, all we've discussed so far is the pressure that's going to come on gross margins from having to include the cost of running tokens in a software business model and offer that to customers as part of the package. If we can bring down inference costs dramatically, and you can hold on to some of the pricing as a software company – maybe there could be a little talked about bull case in the medium term. That maybe software margins are not going to be as pressured as people think. And we can maybe see gross margins hold in a lot better than people think. Sabrina Hao: Brian, I want to end with something that may seem counterintuitive. In a world where software's becoming easier to build, some of the strongest competitive advantages may actually be in the physical world. The conference had many companies, whether that was logistics, manufacturing, real-world operations. You know, why is that intersection of the digital and physical world so defensible? And how does it influence your view of who ultimately wins in an agentic world? Brian Nowak: I think it's important for people to remember that AI is not just software. AI is going to get physical through new types of robots that impact the entire globe. We're seeing it in multiple industries already. We're seeing it on the defense side with drones and other types of mechanisms that are going to change the way that we build out our overall defense tools. We're seeing it on the industrial side, in warehouses, on delivery. We're seeing it on the agriculture side, the way that we're going to the future of farming. And so over the long term, while I think we will have humanoids and we will have robots in our homes, I think it's important for people to keep in mind there are going to be a lot of physical and robotic implementations of AI over the next two, three, five years that are going to really change the way we do a lot of business. Sabrina Hao: Absolutely. Lots of exciting things happening. Adam, Brian, thanks for joining me. And thank you for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen and share the podcast with a friend or colleague today.