Thoughts on the Market

Our Global Chief Economist Seth Carpenter concludes the two-part discussion with chief regional economists Michael Gapen, Jens Eisenschmidt and Chetan Ahya on the second order effects of the energy shock from tensions in the Middle East.
Read more insights from Morgan Stanley.

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Seth Carpenter: Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And once again, I am joined by Morgan Stanley's chief regional economists: Michael Gapen, Chief U.S. Economist, Chetan Ahya, the Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist.
Yesterday we focused on the immediate impact of the Iran conflict, how the energy shock is feeding through into inflation, and, as a result, shaping central bank decisions across the U.S., Europe, and Asia.
Today we're going to go a level deeper and talk about some structural issues in the global economy.
It's Wednesday, April 15th at 10am in New York.
Jens Eisenschmidt: And 3pm in London.
Chetan Ahya: And 10pm in Hong Kong.
Seth Carpenter: So, even as we're waiting to see whether or not oil prices stabilize following a temporary ceasefire – or not – the broader effects are still working their way through the global economy. Labor markets, supply chains, and then, of course, back to the more longer-term structural themes like AI driven growth.
So, the question, I think, has to be: what does this shock mean, if anything, for the next phase of global growth? And does it reshape it? Does it change it, or do we just wait for things to go through?
Mike, let me come to you first. One risk that we've been focusing on is whether this kind of shock really changes some of the structural positives in the U.S. economy. The U.S. has been, I would say, outperforming in lots of ways. We've had this AI driven CapEx cycle. We've had rising productivity; we've had strong consumer spending. What are you seeing in the data about those more structural trends?
Michael Gapen: I think what we're seeing in the data right now is evidence that oil is not disrupting the positive structural trends in the U.S. I think AI CapEx spending is largely orthogonal to what we've seen so far. It doesn't mean that we can't see negative effects, particularly if oil rises to say $150 a barrel or more where we think you might see significant demand destruction.
But with oil where it is right now, I would say the evidence is it will probably weigh on consumption. Gasoline prices are higher. It's going to squeeze lower- and middle-income households that way. But so far, the labor market appears to be holding up. And business spending around CapEx seems to be holding up. And the productivity story remains in place.
So right now, I'd say this is more of a break on consumer spending, maybe a modest headwind. But not an outright hard stop. And I think those positive structural elements and AI-related CapEx spending are going to stay with us in 2026.
Seth Carpenter: I hear in your answer part of what for me is always the most uncomfortable part of these conversations. Where I have to come back to say, ‘But of course it depends on how things evolve…'
Michael Gapen: Of course, It depends…
Seth Carpenter: So, then let me push you on AI specifically. You and your team have published a few pieces recently about AI. How AI is affecting the labor market, and maybe some hints as to how AI is likely to affect the labor market. So how should we think about that?
Michael Gapen: While it's still too early, I think, to draw firm conclusions, Seth, we do find that there's some evidence that AI is pushing unemployment rates higher in specific occupations that are exposed to task replacement. So, what we did do is we broke down the data by occupation, and it's clear that the unemployment rate has been rising. But that's just a general feature of the economy at this point in time. Over the last 18 to 24 months, the unemployment rate has gone higher.
So, what we did is a second-round effort at kind of controlling for cyclicality. And when you control for those, we do find evidence that the unemployment rate for occupations that have high exposure to AI is higher than you would expect, given the cyclical performance of the economy. But the effect is really small. It's maybe about 1/10th on the unemployment rate.
So, I don't want to be too Pollyannish and say, ‘Oh, there's no evidence here that AI is disrupting the labor market.’ We'd say that there is some evidence there. But, so far, it's mild and it's modest. It's a little more micro than it is macro. So, we'll see how this evolves. But that would be our initial conclusion so far.
Seth Carpenter: So, Mike, that's super helpful. When I think about the AI investment cycle, though, I have to come back to Asia because a lot of the AI supply chain is there in Asia, especially with semiconductors and others. But there's lots of supply chain around the world.
So, Chetan, if I think about different supply chains, different industries in Asia that are at risk, potentially being disrupted by the current shock, where do you focus? And then take a step further and tell me if you see a risk that there's a structural dislocation going on here in any of these sectors?
Chetan Ahya: So, Seth, there are two relevant points here from Asia supply chain perspective, particularly the tech sector. Number one, there are some concerns on the supply side issues in the context of helium and sulfur. But from what we see as of today, these companies who need that helium and sulfur are able to pay up. As you would appreciate, this is a sector which is, you know, making a lot of money for those economies, i.e. Korea and Taiwan. And they are able to bid up on gas prices, sulfur, and helium, and still managing their production lines.
So, we don't see a supply constraint as of now for their production, but there will be an implication for them if you do see damage on U.S. growth, which is quite meaningful. At the end of the day, these sectors are deep cyclical sectors. But if you do see that, you know, scenario of $150 of oil price and it brings global economy to near recession, then there will be implication for these companies and sectors in Asia as well.
Seth Carpenter: All right, so Jens, let me bring it to you then. Because when I think about Europe, I think about a couple things. One, kind of, the intersection of energy vulnerability now markets pricing in tighter policy, industrial exposure, which has been going on for a long time. Takes us back in lots of ways to the energy price shock that started in 2021 and went through all of 2022, where we did see, I think, a hit to European manufacturing that had kind of a long tail to it.
So, when you think about the current situation, what do you think this shock means for the medium term? How much of an effect do you think this energy price shock could have on the European economy going out a couple of years?
Jens Eisenschmidt: Yeah, I mean, just listening to you guys, I mean, really makes me a little bit more depressed still, in terms of being European economist here. Because I mean, it seems America, well, they have the same energy shock, but at least they have AI. In Asia while they have the same energy shock, but at least they have something to deliver into AI. Europe just has the shock, right? So, in some sense there could be one summary.
No, but I mean, going back to the comparison and the question. Of course, we have downgraded, as I said yesterday, our growth outlook. And that's predominantly on simply inflation high that is not great for consumption. Consumption is 50 percent of GDP. So, you want to take down a little bit your forecast and your optimism.
And then – to your point – where does this leave Europe? We do have already less energy intense manufacturing than before. So, not sure if you'll see much more, or much further downward pressure on this sector. But, of course, it is an uphill battle from here to get back. To get this industrial renaissance back that to some extent the Germans at least are hoping for.
In our growth outlook and our growth revisions, we looked into differentiated impacts. And, of course, one of these impacts is through trade. And again, the backdrop here probably globally is not great for trade – as at least you would not want to be super optimistic in that current backdrop. And that will hurt again Europe. So, to your question, we have an outlook, which is still positive growth; but much more muted than say, a month ago or two.
Seth Carpenter: Can I push you then a little bit and say that this shock to the European economy then isn't just a cyclical hit. There's probably an additional sort of structural headwind that might get introduced on the heels of, say, the earlier 2021-2022 energy shock?
Jens Eisenschmidt: I would say it's the same thing. It's just a reminder that this is still there, right? Europe needs to, kind of, find ways… I think it's best exemplified by the German economy, who was exporting to the rest of the world. And now it looks like as if China has taken over that role. And so, you have to find a new business model, simply speaking, because the ice cream shop next door is just better than you.
And so, this is something, what the European economy has just gotten another reminder, and it came through energy, in particular. So, this is where the similarities are. So that was a [20]22 shock. In the meantime, oil prices had nicely retraced, gas prices had nicely retraced. We have new contracts with different suppliers.
But still, I mean, the high energy prices expose us here. Because we are already a continent with very high electricity prices, which are derived from the fossil fuels. And so that is not going to end. And so, the continent really urgently has to address that weakness, that structural weakness. And so yeah, in that sense it's structural.
Seth Carpenter: Let me pull this together for maybe a final question for each of you. And I'd love it if you could just answer really quickly. Quick fire answers here. We've got a baseline scenario where energy prices are high. Oil is back up a little bit over $100 a barrel. But I think we, and most of the market, are assuming oil prices gradually come down later this year. Mike, what's the prognosis for the U.S. economy? If instead oil prices skyrocket, say they go through $150 a barrel for a couple of months in a row.
Michael Gapen: So, the risk there, Seth, is that you do get significant demand destruction. It's not just a gasoline price story for the consumer. It's about weak asset markets. It's about a pullback in hiring. So, at $150 a barrel or more, I would be afraid about recession risk in the U.S. The U.S. is well positioned to handle an oil price shock, but it also has limits.
Seth Carpenter: Got it. Jens, suppose instead we had a rapid de-escalation and all of a sudden in the next two months, oil prices are backed down to say $80 a barrel or so. How much of the damage that you envision for the European economy is already baked in the cake? And how much of it goes away if oil prices retrace over the next two months?
Jens Eisenschmidt: I would say a lot for this year is baked in the cake to use your words. While next year, we would be basically back to where we had been before in numbers. 1.2 instead of the 0.9 we are seeing currently. And importantly, the ECB could stay. It would not have to hike into that crisis.
Seth Carpenter: So, Chetan, , let me come back to you then to wrap up this whole conversation. We've talked about energy mostly in terms of price, but as we've discussed there is the quantity side of things. So, do you think there's a non-linearity? Is there something that's going to just fundamentally change if instead of the rationing being done by price, we get to a point where there's just simply no supply coming to Asia?
Chetan Ahya: Yeah, I think that's a very real risk, and that's particularly more important for Asia because there's a lot of dependence on Middle East, and both gas and oil coming in through the Strait of Hormuz. So yeah, I think there is a risk of non-linearity on Asia's growth dynamics if you see supply shortages.
Seth Carpenter: Super helpful. I think that's a great place to leave it. What started as a geopolitical shock is now evolving into something broader, touching everything from inflation, interest rates, possibly productivity and technology investment, and clearly global trade.
So, Mike, Chetan, Jens, thank you all for coming to help connect these dots. And to the listener, thank you for listening. If you enjoy the show, please leave us a review wherever you listen to podcasts and share Thoughts on the Market with a friend or a colleague today.

In this first of a two-part discussion, our Global Chief Economist Seth Carpenter leads a discussion with chief regional economists Michael Gapen, Jens Eisenschmidt and Chetan Ahya on impacts of the conflict in Iran and how central banks are responding.
Read more insights from Morgan Stanley.

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Seth Carpenter: Welcome to Thoughts in the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And today we're going to kick off our quarterly economic roundtable. And this is where we try to step back a little bit from the headlines and the day-to-day changes in markets and try to put the global picture together and frame it for you.
In the first of this two-part discussion, we're going to cover the implications of the oil price shock for energy, inflation, and for central bank policy.
As always, I'm joined by the Chief Regional Economists here at Morgan Stanley. I've got Michael Gapen, our Chief U.S. Economist, Chetan Ahya, our Chief Asia Economist, and Jens Eisenschmidt, our Chief Europe Economist.
It's Tuesday, April 14th at 10am in New York.
Jens Eisenschmidt: And 3pm in London.
Chetan Ahya: And 10pm in Hong Kong.
Seth Carpenter: So, let's just jump right into this. Over the past several weeks, global markets have been dominated by one story. The escalation, de-escalation, the news flow back and forth about the conflict in Iran and the ripple across energy markets, inflation, and growth. Our view has been that even if we don't see another huge leg up in the price of energy and another surge in volatility across financial markets, the persistence of the shock in terms of disrupted supply will be at least as important, if not more so for markets.
So, let me start here in the U.S., Mike. You and I have each had lots of conversations with clients about how the Fed's going to react. Market pricing moved a lot before, has retraced, and now is kind of looking at no change in policy for this year, give or take. Your baseline remains that the Fed will have an easing bias and that we'll end up with a couple of cuts later this year. Can you walk us through that thinking, and also where the debate is with clients?
Michael Gapen: Sure. So, the evidence in the data… This goes back, let's call it several decades now – that oil price shocks in the U.S. do tend to push headline inflation higher by definition. But they have very limited second round effects on core inflation. And the higher oil prices go, the more likely it is that you get some demand destruction, some weakness in spending, maybe even some weakness in hiring. So, there is a bit of a non-linearity here.
In our baseline where oil is elevated, but let's say not excessively high, I can completely buy the argument that the Fed is on hold assessing the evolution of the data and wondering are there second round effects on inflation? Or is this weakening demand?
So, Seth, our view is that the Fed is right in its assessment that tariff passed through to goods prices will eventually moderate. And that the oil price effect on headline will diminish. And later this year, core inflation moderates. That should open the door for the Fed to cut two times this year. I do think that the wrong thing to do in this situation is to raise rates into this…
Seth Carpenter: I agree with you.
Michael Gapen: Yeah. So, I think it's… The Fed's on hold or their cutting. If we're right on where inflation goes, that can open the door to cuts. But to your point, where is the investor debate right now? I think the knee jerk reaction from markets is – the Fed's on the sideline, for, let's call it the foreseeable future. Which as you noted in this market is day-to-day headline to headline. And the Fed will assess where to go later this year.
We think they can cut. But I think in general, the Fed is either on hold or cutting. I think the wrong thing to do right now is raise rates.
Jens Eisenschmidt: Yeah, let me jump in maybe here from Europe where in theory it's the same problem. Just that the answer that the central bank is likely to give in Europe is slightly different from the one in the U.S. So, the debate we have with clients is not so much about whether or not the ECB is going to hike rates. It's more about how much it will do or have to do this.
I mean, again, it has a lot to do with the way oil prices in the end, end up trading. It will be a lot more inflation or less. But it has also to do with the way the mandates are constructed. So, the ECB really has a single inflation mandate and not a dual mandate like the Fed in the case of the U.S. So, there's much more attention on inflation.
Next to that, we have stronger second round effects. Historically, we know that from the data. So, it's clear and understandable why ECB policy makers all came out cautioning against that inflation coming, and sort of mulling what had to be done there.
We had some leaks out of the governing council meeting in March that maybe [in] April, you've already seen rate hikes. We pushed strongly back against that notion. Since then, we had other policy makers coming out agreeing to that. Yet we likely have a discussion in the June meeting that may lead to a rate hike.
We currently forecast a rate hike in June and one in September.
Seth Carpenter: What about the growth risks to the euro area? Is that part of why you think the hikes might come later? Is that part of why the ECB might only hike two times this year? How do you think about the growth risks for the euro area in addition to the inflation risks?
Jens Eisenschmidt: Yeah, no, I think that's a fair question. We have just updated our growth outlook for this year. Next, we've downgraded growth, obviously. Again, all of that is dependent on the scenario in the end we are in. For now, we assume a scenario of elevated oil prices for this year, but then they will retrace.
Now the ECB will look at that in a very similar fashion. So first of all, they will have their new projections. They will see whether there is any hope, reasonable hope that we go back to close to target inflation. Mind you, we were below target, started the year on a very good footing here. And now are projecting we will more or less come out at above 3 percent this year and 2.4 next. Both are above the 2 percent target.
That already factors in a mild hit to growth. And I think here is really the crux of the matter. If the ECB has to see a more dramatic downward revision of its growth outlook, they may as well hold a little bit more back with rate hikes. At the same time, for now, all the indications are that the hit to growth will be relatively mild and herein lies if you want the basis for the rate hikes.
It's a bit of a signaling device. It's a bit of lowering growth, but not really as much. It's not – we see a central bank leaning strongly against inflation. We are seeing them mildly leaning against it in a bid to stabilize inflation expectations mainly.
Seth Carpenter: Alright, that's super helpful. Chetan, I'm going to come to you because we've talked with Mike and with Jens about the inflationary side of things and the growth side of things.
But when I think about energy and Asia, I think of Asia as being a bit more exposed than other big economies, definitely relative to the United States. And I think about a lot of sensitivity, not just to the consumer, but also to manufacturing. So how are you thinking about the exposure across your region, across Asia to this energy shock? Where are the biggest risks?
Chetan Ahya: So, Seth, first of all, I agree with you. I think Asia is the most exposed region. The best metric for assessing that is how much is the net oil imports of each of the regions in the world. And Asia is at around 2 percent of GDP. Europe is around 1.5 percent of GDP and U.S. is actually a minor surplus.
Now in terms of the transmission of this shock to growth, there are two elements to be considered. One is the price of oil and gas, and second is the supply shortages. And in fact, all my life when I have been doing this work of modeling on oil shocks to growth transmission, we've never had to really think about supply shortages. We've always been considering oil price increase and its impact.
But in this cycle, we have to also consider the supply shortages. So, when you consider both these factors, we think that there will be a meaningful growth damage to Asia from the evidence of oil price increase and gas supply shortages that we have seen so far. And we have just reduced our growth estimates for the region from 4.8 percent to 4.4 percent.
Mind you, first quarter was fine. So, this is all on account of the last three-quarters growth damage. And we are assuming that there will some kind of normalcy that we see in ships transiting through the Strait of Hormuz. And we are resuming oil prices average around $110 in second quarter and then come down to $90.
So, in that sense, our base case is still expecting some kind of a resolution very soon. But if that doesn't materialize and you see oil prices rising up to $150, then we think region will take a much bigger hit and growth will come down to 3.9 percent in 2026.
Seth Carpenter: So, Chetan, you've made a couple of really good points there. One I want to highlight is the difference between the quantities and the prices. I would say as economists, as people in markets, we're used to thinking about oil shocks as just about the price of oil and how that transmits through.
But I do think there's a real risk now, given the virtual shutdown of traffic through the Strait of Hormuz that we see physical shortages. And across different Asian economies, we have seen rationing already come into place. So, when you look across the region, how would you rank the specific economies that are most exposed? Especially if we have to think about physical shortages.
Chetan Ahya: Yeah, right. Seth. So, we've considered both the aspects, price effect as well as the supply shortages. And on that basis, we rank India, Taiwan, Thailand, Korea and Philippines are the ones which are most exposed. And on the other hand, China and Malaysia are least exposed. Japan and Australia are moderately exposed.
Seth Carpenter: Yeah, and that makes a lot of sense. But I can't let you get away from the discussion on Asia without thinking about China. What are you thinking specifically about China? How exposed is it? What's going to happen with growth there? And you know, one of the themes, you and Robin Xing, our Chief China Economist, had been talking about now for over a year is the deflationary cycle in China. So how should we think about the effects in China?
Chetan Ahya: So, I think, yeah, China is uniquely positioned in this cycle. We are expecting China's growth to be down by just 10 basis points. So, it almost is as if there is not much damage to China's growth estimates that we have made. And the reason why we see little damage in China's growth numbers is because of two reasons. Number one is that their net oil imports are relatively low. And second is that they have a lot of control on their supply chain. So, for example, they have coal gasification facility.
So, when crude oil prices rise above $100, they can activate this coal gasification facility and use that for all the areas where you can use fuel. And they are also quite good in terms of their own electricity distribution management. They have a lot of surplus thermal power capacity. They have a lot of surplus solar electricity capacity. So, they're able to toggle between gas-based electricity supply into coal and solar. So that gives them a lot of leeway to manage the shock and not have much growth damage.
Onto your second point on the impact on its deflationary situation. We think that there will be a rise in prices in China because of the input price increase. We still won't call that as winning this deflation challenge that China has been going through over the last three years. For us, if you want to have true sustainable reflation, you should see consumption demand picking up. At the same time, you should see improvement in corporate margins. And neither of those will happen when you have a rise in inflation because of rise in input prices.
Seth Carpenter: Yeah, that makes a lot of sense. As always China is an interesting but complicated story. So maybe this is a good place to stop for today.
We focused on the immediate effects of the shock, higher energy prices, central bank reaction. Tomorrow, I think we'll be able to dig in deeper into some of the second order effects, and then also ask the question, where are we going from here? What's going to happen to labor markets productivity – the more structural questions.
So, Mike Chetan, Jens, thank you 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 to podcasts and share Thoughts on the Market with a friend or a colleague today.

Our CIO and Chief U.S. Equity Strategist Mike Wilson shares his perspective on why investors should position for a stock market recovery despite ongoing uncertainty.
Read more insights from Morgan Stanley.

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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast I’ll be discussing why equity investors – sometimes – need to look away from the headlines.
It's Monday, April 13th at 11:30am in New York.
So, let’s get after it.
Today I want to talk about something I think a lot of investors are struggling with right now – and that’s timing. When I talk to people, markets still feel fragile to most. There’s uncertainty around geopolitics, central banks, oil… You name it. But when I look at what the market is actually doing; not what it feels like, but what it’s telling us – I come away with a very different conclusion. The market is further along than most people think in this correction.
In fact, over the past couple of weeks, we’ve seen the S&P 500 bounce meaningfully. Almost 7 percent from the lows after holding that critical 6300 to 6500 range that we’ve been focused on. To me, that’s not random. That’s the market carving out a low ahead of an all-clear signal. And stepping back, my broader view hasn’t changed.
I still think we’re in a new bull market that began last April, coming out of that rolling recession between 2022 and 2025. This correction is part of that cycle; not the end of it. And importantly, a lot of the heavy lifting has already been done.
Valuations have compressed significantly. Forward price/earnings multiples have fallen about 18 percent from top to bottom. And beneath the surface, more than half of stocks are down 20 percent or more. That’s a market that has already discounted a lot of risk – whether it’s the war, private credit concerns, or AI disruption.
At the same time, earnings are moving in the opposite direction. Trailing earnings growth is running around 15 percent, and forward earnings growth is up over 20 percent. That combination of falling multiples and rising earnings is a classic bull market correction behavior. Not a bear market. And that’s why I think many are misreading this environment.
One area where I think that’s especially clear is energy. If you look at the price action, energy stocks appear to have already peaked in relative terms. That’s often a signal that the underlying commodity – in this case oil – may also be peaking. Or at least it’s stabilizing.
Which brings me to what I think is really driving volatility now: rates.
We’re back in a regime where stocks and yields are negatively correlated. That means higher rates are a headwind for equities again, and the recent hawkish tone from central banks that’s focused on inflation is creating tighter financial conditions. In my view, that’s the final hurdle. Not the war. Not oil. But monetary policy. And here’s the interesting part. Tightening financial conditions are also what ultimately force central banks to pivot. So the very thing creating anxiety today may be what sets up relief tomorrow.
Now, if we’re in the later stages of this correction, the next question is positioning. For me, it’s still about a barbell. On one side, I like cyclicals like Financials, Industrials, and Consumer Discretionary – where the earnings remain strong and valuations have reset. On the other side is quality growth. In particularly the hyperscalers; where sentiment has been washed out, but fundamentals remain intact. That combination has worked well off the lows so far, and I think it continues to make sense here.
When I zoom out even further, there’s a bigger theme developing as well. And that’s the rebalancing of the economy, a core theme we discussed in our 2026 outlook back in November. We’re starting to see hard evidence that growth is shifting, from the public to the private economy. Private payrolls are strengthening, capital investment is picking up, and companies are behaving as if the current uncertainty is temporary – not structural. This is the rolling recovery on track.
At the same time, AI is acting more as a margin tailwind than a disruption, at least in the near term. And this supports operating leverage across many industries. All of that reinforces my view that the recovery is real. And still has room to run.
So when I put it all together, here’s where I land:
The market has already discounted a lot of bad news. It’s adjusted valuations, reset positioning, and absorbed market risks. What risk remains is policy, and how long rates and liquidity stay restrictive. But markets don’t wait for clarity on that. They move ahead of it.
So, here’s my advice. Take advantage of any further worries and put capital to work before it's obvious. Because the market waits for no one.
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!

Despite a historic disruption to global energy markets, the stock market remains resilient. Our Global Head of Fixed Income Research Andrew Sheets suggests U.S. markets may offer a steady course in the near term.
Read more insights from Morgan Stanley.

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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today on the program: Trying to square conflicting market signals.
It's Friday, April 10th at 2pm in London.
At one level, it is all still very serious. The world remains in the midst of – and this is not an exaggeration – the worst disruption to global energy markets in history. One-sixth of global oil production remains trapped behind the Strait of Hormuz. And the price of so-called ‘Dated Brent,’ the price that you pay to get oil delivered in the near term, is over $130 a barrel. More than double its price at the start of the year.
But markets? Well, year-to-date, U.S. stocks and bonds are roughly unchanged. Both have seen large swings only to return to about where they've started. An investor who only occasionally checks the markets could be forgiven for looking at their portfolio this weekend, assuming a pretty dull 2026, and going back to watching the Masters tournament.
How do we square this? For stocks, two dynamics are important. First, despite oil prices, earnings estimates, especially in the United States, continue to move higher. Those estimates may prove wrong. But analysts have been incrementally more optimistic, particularly as technological investment continues at pace.
Stocks are also fundamentally about the future. Current prices should reflect the discounted value of earnings between now and, well, forever. And so mathematically, if the longer-term outlook can hold up, a weak three-month period in the near term, say, due to energy disruption, simply doesn't have to matter as much – mathematically.
Bonds, in contrast, are currently stuck between two pretty strong opposing forces. Higher inflation driven by tariffs and oil is typically bond negative. But bonds also tend to do well if there are higher risk to growth.
And so, the key question is whether a prolonged energy shock finally forces central banks to prioritize these growth risks over currently elevated inflation. So far, 2026 has been anything but easy despite the lower headline changes in markets. Morgan Stanley data suggests that March was the second worst month for equity hedge funds in the last decade. And so, with some humility, we'd focus on three points.
First, we think U.S. stocks and bonds have an advantage at the moment over their global peers. U.S. earnings growth is stronger. The U.S. economy is less energy sensitive. And the U.S. central bank, the Federal Reserve, we think is more likely to cut rates faster if there's more weakness in growth.
Second, we think the bond markets ultimately resolve their tensions at lower levels of yield. A quicker resolution would reduce inflation risks while a more prolonged disruption is going to weigh seriously on growth. The bond unfriendly middle ground, where we are now, simply seems unlikely to persist.
Third, amidst the volatility, relative valuation still matters, and there are still interesting things. For example, credit spreads in Asia look extremely tight given the region's exposure to high oil prices. And by contrast, as my colleague Mike Wilson has commented on this program earlier, large cap technology stocks have derated significantly – and now trade at similar valuations to the consumer staple sector, despite having roughly three times the earnings growth as well as low energy exposure.
We are once again heading into an uncertain weekend. But preferring U.S. markets, expecting lower yields, and trying to stay focused on relative value are a few of the ways we're trying to navigate it.
Thank you as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Our U.S. Thematic and Equity Strategist Michelle Weaver breaks down the results of a new survey on U.S. consumer spending and confidence.
Read more insights from Morgan Stanley.

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Welcome to Thoughts on the Market. I’m Michelle Weaver, Morgan Stanley’s U.S. Thematic and Equity Strategist. Today, we’re bringing you an update on the U.S. consumer as we try and understand the outlook for the economy.
It’s Thursday, April 9, at 10 AM in New York.
You’ve probably noticed shopping these days feels like a mixed bag. You spend money on your everyday staples like groceries, personal care or clothes. But you might be second-guessing those big ticket items like a new piece of furniture or a new TV. And you're not alone. Our newest AlphaWise survey of U.S. consumers reveals a pretty mixed signal. On the surface, things look solid. Consumers are still spending. We’ve seen that borne out in some of the recent economic data. And our survey work reveals around 34 percent expect to spend more next month, compared to just 15 percent who expect to spend less. That leaves us with a net spending outlook of +18 percent, which is actually above the long-term average.
But when we start to dig in and look beneath the surface, the story shifts. Confidence is deteriorating. Nearly half of consumers expect the economy to get worse over the next six months, while only 32 percent expect an improvement. This results in a net outlook of -17 percent, a meaningful drop from what we saw last month.
So how do we reconcile that? That spending with that deterioration in confidence. It’s really a balance of timelines. Consumers are spending today, but they’re increasingly worried about tomorrow. And these worries are grounded in very real concerns. Inflation remains the dominant issue, with 57 percent of consumers citing rising prices as a key concern – reversing what had been a fairly short-lived improvement on consumers' view on prices.
At the same time, of course, with the tensions in the Middle East, geopolitical concerns are increasing quickly. They’ve jumped to 33 percent from 22 percent just last month. And concerns around the U.S. political environment remain elevated at 43 percent. When you combine all these pressures, it’s not surprising that consumers are becoming more cautious in how they plan to spend.
We’re also seeing that caution show up in the mix of expenditures. In the near term, consumers are still increasing spending across most categories – especially the essentials like groceries, gasoline, and household items. But when we look over a longer horizon, the outlook becomes more selective. Discretionary categories are weakening. Apparel spending expectations have dropped to -16 percent, domestic travel to -11 percent, and international travel to -14 percent. That shift – from discretionary to essentials – is something we tend to see when consumers are bracing for a more uncertain environment.
Now, one factor that’s supporting the near-term – a brighter spot here – is tax season. This year, 46 percent of consumers expect to receive a larger tax refund compared to last year. And what’s interesting about that is where people are going to put the money. About half of consumers plan to save at least a portion of the refund. About a third plan to pay down debt. And only around 30 percent intend to spend it on everyday purchases. So even when people receive a cash boost, the instinct isn’t to spend freely. It’s to shore up finances.
Putting it all together, the picture of the U.S. consumer today is one of resilience but also rising caution. Spending is holding up in the near term, supported by income and tax refunds. But confidence is weakening, savings behavior is increasing, and discretionary demand is softening. These divergent trends are important. We’ll continue to watch them closely and bring you updates.
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