Thoughts on the Market

Still six months out, the U.S. midterm elections are likely to influence government initiatives to deal with higher energy costs. Our Head of Public Policy Research Ariana Salvatore and Global Chief Economist Seth Carpenter discuss how the Congress and the Fed might react.
Read more insights from Morgan Stanley.

----- Transcript -----

Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research for Morgan Stanley.
Seth Carpenter: And I'm Seth Carpenter, the firm's Global Chief Economist and Head of Macro Research.
Ariana Salvatore: Today we're discussing the run up to the midterm elections and what it could mean for the macro outlook and policy response.
It's Wednesday, April 29th at 10am in New York.
Last week, Mike Zezas and I talked through the midterm elections and their potential consequences for the economy and markets. This week we figured it might be helpful to talk about the setup into November, especially as we're both increasingly being asked about the macro outlook and potential for targeted stimulus to offset the oil shock.
So, Seth, let's start there. we know cost of living is a key issue in elections, and we've seen a pretty meaningful oil shock feed through markets. How are you thinking about that in the context of the broader economy?
Seth Carpenter: Our U.S. economics team has estimated that the higher gas prices that we have now and likely to have for the rest of the year are going to be more than enough to offset any boost to consumer spending from the higher tax refunds this year. So, I think that's the first point.
If you're expecting a boost to come through that channel, you probably want to unwind that. And In fact, overall, what we've done is lowered our forecast for U.S. growth by about three or four tenths of percentage point worth of growth this year because of the higher energy prices. So, it's a drag on spending, I think, no matter how you cut it.
Ariana Salvatore: And that's not happening in isolation, right?
Seth Carpenter: No, that's exactly right. That's exactly right. We've also got at least somewhat restrictive monetary policy layered on top. So, financial conditions are already a little bit tight and the oil price shock sort of amplifies that tightening by weighing on spending. That's going to be really important.
I think an extra complication then is what does it do to inflation? For now, we don't think it's going to be that big of a deal. History says at least looking at the data that when energy prices go up, when oil prices go up, gasoline prices go up. It does boost headline inflation for sure, but the pass through to core inflation is pretty limited, and the effects tend to go away on their own without too much time.
So, I think the real hit here is going to be from the higher costs acting like a drag on consumer spending.
Ariana Salvatore: Right. And importantly, it's a very visible shock. Gasoline prices feed directly into how consumers and voters perceive the economy, which brings us into the political overlay as we approach the midterms…
Seth Carpenter: Yeah, I think that's exactly right. And whenever we economists are thinking about inflation and prices and consumers, we think about exactly that – what we call salience, just how visible are these prices. And gasoline prices tend to be some of those prices that stick out in people's minds.
So, if people are seeing it. And people are reacting to it, give me some idea of what the Congress can realistically do between now and the midterm elections.
Ariana Salvatore: Well, I would say in theory there's a range of options. Direct stimulus, targeted transfers. We tend to frame affordability policies across five vectors: energy, healthcare, housing, consumer credit and trade policy. But in practice, the constraints are pretty binding right now and as we've been saying, tariff policy is really the only lever the president can pull easily to have a real impact on voters.
Seth Carpenter: All right. So, you said constraints and constraints for the Congress. Can you walk us through what those constraints are?
Ariana Salvatore: Sure. So, the first and most obvious is deficits. We're already running large fiscal deficits in the U.S., and I would say there's limited political appetite to expand them meaningfully from here in the near term, especially heading into an election.
The second is procedure. If you want to pass something sizable, you're either looking at reconciliation, which requires political alignment in a number of procedural hurdles. Or bipartisan cooperation to get around the filibuster. Both seem difficult to us in this environment.
Seth Carpenter: So my experience in Washington for a couple decades of working on policy is that when things are difficult, they tend to take more time. So how does the timing component of all of this matter, and how does it fit into the way that you're thinking about it?
Ariana Salvatore: Timing is the third constraint. The legislative calendar in particular. What we see is as you get closer to midterms – really any election – the window for passing major legislation narrows pretty quickly. That's because lawmakers shift their focus toward campaigning, and the agenda itself just becomes more limited.
And then to finish off the constraints, the fourth I would say is implementation. Even if something were to pass, there's a lag between legislation and the actual economic impact. Getting funds out the door, whether it's checks or programmatic spending, tends to take time.
Seth Carpenter: Yeah, even well targeted policy might not hit the economy in time to have the desired effect before the election.
Would you agree with that?
Ariana Salvatore: Yeah, but for argument's sake, let's say we're wrong on that and Congress does manage to pass something. Maybe not a broad-based stimulus package, but let's say some form of targeted relief.
From a macro perspective, what do you think would matter most? Is it the size of the package, how quickly it gets implemented, or which consumers are targeted?
Seth Carpenter: Yeah, I'm going to have to say a little bit of all of the above. I mean, economic analysis really tends to show that tax cuts tend to simulate less than increased spending and transfers matter. But it matters to whom those transfers happen.
So, I do think if we're aiming at the lower end of the income distribution, probably has a higher propensity to spend; and so, you're more likely to see more of those dollars getting spent and faster – if that's where it's going. The size of the package has to matter as well, because more money out probably means more money getting spent. But I will add, there are two caveats this time around that we probably need to take into consideration.
First, with the increase in tax refunds that we've seen this year, survey suggests that households are using that money to pay down outstanding debt more than they would historically. And so, we might be in a situation because of the past couple of years of affordability issues where households are going to try to get ahead of things and pay down some of that debt. And as a result, maybe there's a more muted effect on spending.
And second, we are living in a world right now where inflation is well above the Fed's target. So, if the extra stimulus leads to extra spending at a time when prices are already high, well, there's a chance we might give an extra boost to inflation and then the Fed would have to reconsider what it's doing on monetary policy.
But you said Congress is probably constrained. So, let's shift then and ask, is there something that the president could do unilaterally with executive authority? And in particular, sometimes I get this question from clients, even if there's not clear, well-defined legal authority. We've seen something like that before with the tariff policy under the IEEPA authority. It was imposed and then later it was pulled back when it was judged by courts not to be the right authority.
So, why wouldn't we think – the argument goes; why wouldn't we think that some sort of large scale maybe rebates or direct payments, could get deployed quickly, even if the, let's say, legal authority is a little bit murky?
Ariana Salvatore: Yes, it's an interesting question, but I think there are a few important distinctions that make something like the administration sending out checks, for example, very different from tariff policy. First, fiscal transfers are much more clearly tied to congressional authority, legally speaking.
Spending power, as you know, resides in Congress, and that's a pretty firm constitutional boundary. And importantly, even something like tax refunds, which can look like direct payments aren't discretionary. They're preauthorized in the tax code, and Treasury is just returning overpayments under a standing appropriation. So, there isn't really a comparable mechanism the administration could use to send out broad-based checks, for example, without new legislation.
Now, trade authorities by contrast, have historically allowed for more executive flexibility, even if contested, like we saw with the IEEPA tariffs. Direct fiscal outlays are different. You generally need explicit appropriation. And then second, there's the operational side to all of this. Even if you were to set aside the legal questions, there isn't a standing mechanism for distributing very large sums of money quickly without legislative backing.
Seth Carpenter: Fair enough. And if we stay in this totally hypothetical world, what would you imagine would be the timing of any legal challenges if they did happen?
Ariana Salvatore: In a scenario like this, you'd likely see challenges fairly quickly and courts could intervene early in the process, potentially before funds are even fully dispersed. So, Seth, the idea that you could deploy something on a massive scale and only deal with the legal consequences much later is all the more uncertain.
But Seth, let's stay with the upside risk scenario for a moment. If Congress did pass something targeted instead, where would you expect policymakers to focus? Can we talk through maybe energy rebates, child tax credits, SNAP or nutrition support… Or do you think something else aimed at the most rate sensitive or cost of living sensitive households might make more sense?
Seth Carpenter: Yeah, I think you've laid out there a pretty rational strategy for trying to make things targeted for the people who are going to be feeling this affordability crunch the most. And so, the SNAP benefits, like you said, are nutrition support. That's lower income households, families with children, people who really are living paycheck to paycheck and noticing these higher prices.
Energy subsidies or some sort of tax rebate – again, trying to target where the pain is most acute; the higher electricity prices, the higher gasoline prices that people are noticing, that people are feeling. I think all of that seems very plausible.
I just want to flag though, that there is this possible hidden effect, which is the more these policies mask the higher cost, the economic pain from the higher energy prices – the more it allows people to keep spending despite the higher prices. And that spending with higher prices, well, that could easily lead to a tick up in inflation.
That could lead to a change in the Fed's reaction function. And if it was strong enough, if growth picked up enough and inflation picked up from here, you could easily see the Fed hiking rates instead of cutting.
Ariana Salvatore: So, in other words, even if the policy surprise is maybe good news for consumers in the near term, markets would still need to think through whether it extends the inflation problem or changes the expected rate path.
Seth Carpenter: I think that is exactly right. I think this is very much a case where good news could be good news, but there are going to be lots of details.
So maybe if we take a step back, we've got a constrained Congress, maybe limited scope for unilateral action and a macro backdrop because of inflation that's probably already under some pressure.
Ariana Salvatore: Which means the key drivers heading into the midterms later this year are likely to remain the ones that are already in place: energy prices, monetary policy, and underlying growth dynamics rather than potential new fiscal stimulus.
Seth Carpenter: And so that means for markets, focus needs to stay on the fundamentals.
Ariana Salvatore: Exactly. Elections can shape the policy path at the margin, but the macro cycle is doing most of the heavy lifting here. And we think that's the case following the midterms as well. If you'd like more detail there, please go ahead and listen to our podcast from last week on this topic.
Seth, thanks for taking the time to talk.
Seth Carpenter: Ariana, thank you for inviting me. And for the listeners, thank you for listening. If you enjoy Thoughts on the Market, please share it with a friend or colleague today. And leave a review wherever you listen to podcasts.

Tom Wigg and Stephen Byrd discuss the accelerating pace of AI breakthroughs, the forces driving them and why the next phase of development may look very different from anything we’ve seen so far.
Read more insights from Morgan Stanley.

----- Transcript -----

Tom Wigg: Welcome to Thoughts on the Market. I’m Tom Wigg, Head of Specialty Sales in the Americas at Morgan Stanley, and a sector specialist in Technology, Media and Telecom.
We wake up every day to new AI product releases, so it’s easy to lose sight of the unprecedented non-linear improvement in AI capabilities. But things are about to get weird.
 It’s Tuesday, April 28th at 8am in New York.
The market has been thinking about AI in linear terms. But we need to reframe that assumption of only incremental improvement and think about exponential improvement.
That was my takeaway from a conversation with Stephen Byrd, Global Head of Thematic and Sustainability Research at Morgan Stanley. In our conversation, we zeroed in on Stephen’s bull case for broader AI model improvements.
 Tom Wigg: First, I want to talk about one obsession that you’ve been writing about for the last several months – is this idea that we’re going to see nonlinear improvements in the frontier models coming out this spring.
Stephen Byrd: Yes.
Tom Wigg: There’s been, you know, some big headlines around new models, benchmarks coming out publicly. Is this, you know, your bull case playing out on these models? And what are the implications?
Stephen Byrd: Yes! Absolutely, Tom. So we have, to your point, we are obsessed. And I know I’m not shy about that – with the nonlinear rate of AI improvement. It is the most important impact to so many stocks that I can think of in the sense that it can impact all industries, all business models. So, what we’ve been saying for some time is, if you look back over the last couple of years at the relationship between the amount of compute used to train these LLMs and the capabilities, we have a very clear scaling law.
And approximately the law is, if you increase the training compute by 10x, the capabilities of the models go up by 2x. Now, as you and I’ve talked about this a lot; just meditate on that for a moment. I think things are about to get weird in the sense that on the positive side, we’re going to see all kinds of underappreciated capabilities across many industries. So this disruption discussion, I think, is going to spread, but it’s also going to require investors to, kind of, be more thoughtful about what they do with that concept. Meaning you can’t sell everything. In the sense that AI will disrupt some businesses.
I actually think this is healthy in some ways because now it forces investors to really look at each business model and assess which is going to get disrupted, which can get supported and enabled by AI, which are immune. Because there are some business models that actually are immune.
But essentially from here, Tom, I’d say we are expecting through the spring and summer to see multiple models that are able to perform a much greater percentage of the economy at better levels of accuracy at incredibly low cost. Which I know you and I have talked a lot about the cost of actually doing this work from the LLMs.
This is massive. This is going to impact so many industries. I think this is all to the good for the AI infrastructure plays because it shows the importance of getting more intelligence out into the world.
Tom Wigg: So, you mentioned the constraints we’re seeing across compute, memory and power. It seems like most of the CEOs of the labs and hyperscalers are talking about this. Investors are bullish in terms of the ownership in, you know, memory, optical, semi-cap, et cetera. But the question I’m getting more recently is around what’s the ROI on all this spending. And does the market action in these hyperscalers, which have been pretty bearish year-to-date, force a cut on CapEx? So, maybe if you can marry that with what you’re picking up on the ground in terms of compute spend and whether the frenzy still continues, you know, versus the ROI? And, like, what could happen?
Stephen Byrd: Yeah. The short answer – I’m going to go through detail – is I think the bullishness is going to get more bullish over the coming months. And let me walk you through a couple of the mathematics and then just what I’m seeing on the ground to your point, Tom.
So the mathematics. We have a token economics model that looks from the perspective of a hyperscaler or an LLM developer in terms of – if they sell their token at a certain price and you fully load the cost of a data center and all associated costs, financing, you name it – in what are the returns? And the bottom line is the returns are excellent.
The other element we spend a lot of work on, and you and I talk a lot about, is the demand for compute. In this world where the LLMs are increasing in capability and the token usage goes way up with agentic AI, video world models, all that stuff, we think that there is a massive shortage of compute. So, if you’re lucky enough to be a hyperscaler with the compute, with the power, we think that they will have a lot of pricing power on the tokens.
Let me explain why we see price power on the tokens. Now I’m going to flip to the perspective of an adopter. Let me give you just rough mathematics. There was a study last year from one of the big labs showing that on average, an enterprise user using an LLM might be able to replace work that would take about one and a half hours from a human. That would save about $55 of cost. A million tokens, depends on whether you’re looking at input or output – but let’s just call it $5 for a million tokens.
The average usage case today for a fairly complex agentic task in an enterprise setting is in the tens of thousands of tokens. Okay? So let’s just do that math again. $55 of savings. A million tokens cost $5, and a typical agentic usage is far less than the million tokens today, though that will accelerate. The economics are a home run for adopters.
So, we’re in a situation where compute is very scarce. I see pricing power all over the place for those who have the compute and have the power.
Tom Wigg: So, when you put it like that, Stephen, it seems so inevitable and obvious. But I wonder why the hyperscalers are trading the way they are? And when do they see the revenue inflection you’re talking about? Is this like a stay tuned kinda 2026 event? Is this something we have to wait for for 2027-2028?
Like, how do you think this flows through to the extent that the market will get more comfortable that all this free cash flow pressure is worth it on the other side?
Stephen Byrd: Yeah. This is, in short, I think this is a 2026 event. But let me dive into that because what you just asked is so important for so many stocks.
So, let’s talk through this. The capabilities of the models are advancing so fast that the average corporate user is not yet keeping up. There is this gap. But that will happen quickly, and we’re seeing signs from these labs of revenue at the lab level that is accelerating. So that’s a good sign.
What we’re seeing, though, among fast adopters is those adopters who really understand the capabilities are quickly realizing just how economically beneficial there is. An example, one of my best friends founded a software company many years ago. Last month was – that was the last month in which his programmers wrote code. They’re done with writing code.
The efficiency benefits for his business are absolutely massive. But he feels like he’s just scratching the surface, and he’s about as technically capable as anyone I know. He has two PhDs in the subject matter. He’s very, very good.
So long way to say that we’re living in almost two worlds where the fast adopters will show what’s possible. The average utilization for enterprises will still take some time. But I do think that the market will react to what they see from the fast adopters in the sense of – the tangible economic benefits are so big.
Now, on the ground, what I’m seeing on the infrastructure side, my friends in power tell me that a couple months ago is when they saw the sense of urgency from the AI community go up a couple of notches for them to get the infrastructure they need. So they saw this explosion in compute coming. In the last two months, the weekly usage of tokens according to OpenRadar is up a couple hundred percent in a couple months.
So, I do think we’re seeing this. So, this is; it’s happening quickly. What I would say is the market will have these signposts in every industry of early adopters showing this benefit. I think that’s enough for us to start to get bullish. We also… I just think when you look at the demand for compute, the compute numbers need to go up. And with that, you know, everything in the AI value chain, infrastructure value chain, the volumes need to go up.
Tom Wigg: One bear case that I wanted to interrogate was – there’s one view that, yes, there’s a token explosion right now. But it’s because the first use case is coding. Which is inherently, you know, very developer-friendly and token-intensive relative to other knowledge work.
Can you talk about, you know, whether you subscribe to that? Or whether the token intensity will be as high or lower as this expands to other areas of knowledge work in the next several years?
Stephen Byrd: Yeah, it’s a great question. The short version is that, yes, it’s true that software usage is more token intensive. However, what we’re going to be seeing – we’re starting to see it – is in almost every knowledge-based job, we’re going to move to agentic AI. And when we do that, you tend to see an explosion in compute.
Let me walk you through the numbers. There are a couple studies that show essentially when you go from a query-based usage of LLMs to an agentic use for any occupation, you see about a 10x increase in token usage per use of those models. And you can see why.
I’ve anecdotes of some of my friends who are newer to this – who set their agents loose overnight to do non-coding work. And in the morning they get some pretty amazing results. But they also used a lot more tokens than they’d expected … (laughs)
Tom Wigg: And a five grand credit card bill?
Stephen Byrd: Exactly. It’s like maybe next time you put a few parameters around that. But long way to say, it’s agentic across every workflow that I can think of that will still result in an explosion in token demand.
Tom Wigg: It’s definitely a good idea to put some parameters around your agentic workflow.
My thanks to Stephen for that conversation. And thank you for listening. Let us know what you think of the show by leaving us a review where you listen. And if you find Thoughts on the Market worthwhile, tell a friend or a colleague about us today.

Major U.S. stock indexes have rebounded sharply in recent weeks. Our CIO and Chief U.S. Equity Strategist Mike Wilson discusses the fundamentals that could support the continuation of the bull market.
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.
Today on the podcast, I'll be discussing why I remain bullish even after such a strong run in stocks.
It's Monday, April 27th at 11:30am in New York.
So, let’s get after it.
The U.S. equity market just experienced one of the most dramatic bounces in history from a technical standpoint. It went from oversold to overbought territory in just 12 days. Based on our conversations, the speed of this move has led some to express caution about the near-term path of equities – but that's the way it usually works. The market waits for no one once it decides to move on.
From our perspective, this feels like last year. Many investors are contemplating the lagging impacts of higher commodity prices on inflation just like they were thinking through the effects of higher tariff rates a year ago. Many companies will feel the downstream impacts on a lagging basis. But we believe equity indices and many subgroups already suffered enough damage to account for these concerns. In other words, the equity market isn't simply looking past the risks, it already priced them.
Take into consideration that the earnings picture is much stronger today with forward 12-month earnings growth approaching 25 percent versus just 9 percent a year ago. As well, we still hear many commentators suggesting that growth is only coming from a handful of stocks. While mathematically that is a fair point for the top-heavy S&P 500, it doesn't acknowledge that forward earnings growth for the median company and for small caps is also well into the double digits.
This cadence is very different from the prior three to four years when the economy was experiencing a rolling recession. It also supports our rolling recovery and broadening thesis we laid out a year ago. So far, the first quarter earnings season has delivered a 10 percent beat rate in aggregate. This is two times the long-term average. More importantly, second quarter and forward 12-month company guidance have increased by an additional 2 to 3 percent.
Besides earnings beat rates and guidance, we are also watching capex guidance and signs of pricing power. We entered 2026 with a view that the capex cycle was gaining momentum, thanks to three tailwinds: First, strong earnings and cash flow, which tend to correlate with capex. Second, tax incentives from the BBB; and third, strong demand for the AI buildout and reshoring of manufacturing.
Early indications on this front are supportive with median stock capex growth running almost 10 percent, and our factor work continuing to show that the market is rewarding high capex. It's important to see these trends continue as the quarter progresses, especially this week when the hyperscalers are scheduled to report.
Another point; given potential downstream cost headwinds from the Iran war, we want to see pricing power and top line durability persist. Early indications here are also supportive with sales surprises for the S&P 500 running well above average and close to 2 percent.
Finally, as noted in prior podcasts, one of the last hurdles for the market to overcome was the Fed's recent hawkish pivot on higher oil prices and the transition of its leadership from Jay Powell to Fed Chair nominee Kevin Warsh.
This past week, Kevin Warsh appeared in front of the Senate. He signaled some caution on near-term rate cuts, noting that inflation risks are not resolved. He also reiterated his well-established criticism of the Fed’s historic willingness to intervene in markets and the economy too aggressively with its balance sheet.
Every Fed Chair transition typically requires a learning period for the markets where they test the new chair's resolve and figure out how to interpret his or her communication style. This time should be no different and could lead to some corrective price action in the near-term caused by short spikes in bond volatility or stress in funding markets.
In my view, the Treasury and Fed will be able to manage these risks in the end leaving the bull market intact.
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!

Kevin Warsh, President Trump’s nominee for the next Fed Chair, testified in front of the Senate earlier this week. Our Global Head of Fixed Income Research Andrew Sheets presents key takeaways from the two-and-half-hour testimony.
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 on the program, a first look at potentially the next Fed chair.
It's Friday, April 24th at 9am in New York.
Financial markets can often struggle to keep track of more than one story at a time – and at present, we're really pushing the limit. At one end, the Iran conflict continues to create a historic disruption in global energy markets. At the other, signs of corporate animal spirits and activity hint at the potential for an even larger boom if this disruption ends.
Merger activity, capital spending, loan growth and earnings growth are all strong and accelerating. And so, into this mix enters a third story, the Federal Reserve. Indeed, both Iran and the investment boom introduce real questions as to how a central bank should react to these factors.
For example, if oil prices spike further, should the central bank raise interest rates to counter the inflation that would follow? Or should it lower them because that increase in oil prices could potentially hit growth? And what about corporate aggression? As that aggression increases, should the Fed look to raise interest rates and take away the punch bowl, so to speak, to avoid an even larger overheating in the economy? Or maybe all of this investment will create abundance – actually lower prices and warrant interest rate cuts.
These questions will weigh on the Fed and, in particular, Kevin Warsh, who has been nominated by President Trump to be the next chair of the Federal Reserve. This week saw Warsh testify in front of the Senate as part of that process, giving us the most detailed insight into his current thinking that we've had so far.
Two things really stood out. First, Warsh believes that this historic boom in AI and technology investment really is likely to boost productivity. A productivity boost, all else equal, should mean a greater supply of goods and services into the economy from the same number of workers; and thanks to that greater supply, relatively lower prices and less inflation. This belief in investment driven productivity underpins why he thinks interest rates can be lower even if current inflation is elevated.
Second, Warsh was critical of the Fed, stating that it had “lost its way,” from expanding its balance sheet too much to being too slow to reign in inflation following COVID. He outlined a sweeping agenda for change, including how the Fed could forecast inflation, manage its assets, and communicate its policy.
But another challenge that's going to be facing the next Fed chair will be personal as much as it's economic. Fed decisions are made by a majority vote. And while Warsh may feel strongly that the historic investment cycle that we're seeing in technology will bring down inflation, can he convince others of this as well – especially at a time when current inflation readings are somewhat elevated? And will his criticism of how the Fed has conducted action over the last several years make it harder to gain the support of colleagues, some of whom were there for those measures? Or will it be welcomed as a breath of fresh air and a chance for the Fed to have a new start?
The uncertain timing of the handover and the fact that policy is still up to committee means that we think markets will likely stay focused on other factors in the near term and expect relatively modest shifts in Fed policy for now. But it's still worth watching.
Since 1979, only five individuals have occupied this important seat leading the U.S. Central Bank. We may be about to get the sixth.
Thank you as always for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Our Global Chief Economist and Head of Macro Research Seth Carpenter asks Mayank Phadke, a member of his team, to give up an update on tariffs and their real cost to the U.S. economy.
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. And I'm joined by Mayank Phadke, a member of my global economics team. And today we're going to talk about tariffs. I bet that was a surprise.
It is Thursday, April 23rd at 10am in New York.
I have to say, for the past couple of months, the focus on energy markets, energy supply, energy prices – that has dominated everything that we've been talking to clients about around the world. And so, everyone would be forgiven if they had forgotten that we were talking about tariffs much the same way, nonstop last year.
Now, tariffs kind of seem like an afterthought. But part of the stated motivation for tariffs when they were imposed was to boost reshoring. That is to have more production of goods in the United States that had been imported. So, tariffs still matter. They matter for CapEx, in that regard, they matter for domestic production. And because of all of that, presumably they matter for markets and for the Federal Reserve.
But for the narrow question of reshoring, the data so far, I would argue, suggests that there's been very little net effect. There will be more tariff news arriving in coming months. So Mayank, I am going to pull you into this conversation because you have been one of the key people on the team, doing of analysis on the data work on tariffs, trade and reshoring. So, could you tell us a little bit about what’s been happening to the effective tariff rate for the United States recently? And where we think that’s likely to go?
Mayank Phadke: Tariff levels have declined steadily in recent months, falling to 8.5 percent as of February, with the decline having accelerated after the Supreme Court ruling. The decision on IEEPA forced a shift in underlying tariff authorities with country level IEEPA tariffs temporarily reconstituted under Section 122.
We have long argued, even before the 2025 tariffs that the legal basis for durable tariffs would need to be anchored in section 232 and section 301 based authorities rather than in IEEPA. The current Section 122 tariffs are due to expire on the 24th of July. And after that, we expect more durable authorities to kick in. The shifts that we will see as IEEPA tariffs are replaced by new section 301 and 232 tariffs means that there will be some differences. But from a macro perspective, we expect the level to be roughly similar to where it stood at the end of 2025. An aggregate effective rate of around 10 percent.
Two sets of Section 301 investigations were announced by the administration in March, covering virtually all major trading partners. These investigations are likely to run on a faster timeline than prior efforts. Those took around nine months.
The comments were requested by the 15th of April, with hearings scheduled for early May. We're inclined to expect completed section 301 investigations over the summer while section 232 tariffs will likely arrive in waves as sector-based investigations proceed.
Seth Carpenter: Got it. Okay. So, I'm going to summarize that to say tariffs are not going away. Tariffs are here. In the aggregate for macro economists like us, probably about the same level it's been. But that escapes the question about the individual industries, and it brings us right back to this question of reshoring. Is that what's going to happen?
And so, when I think about it, we do have all these negotiations. But the reshoring question forces you to wonder about manufacturing, manufacturing growth and with it CapEx. And like I said at the top, it's non-AI CapEx that's really on the soft side of things.
So, you've spent a lot of time looking at the data. I would say one industry that tends to stand out in all these conversations is steel. So, if we look at what's happened with the steel industry, with tariffs, with changes in imports and that sort of things, what's happened? Do we see clear evidence that there's this big reshoring push?
Mayank Phadke: The case of steel is certainly very interesting. It helps frame why tariff uncertainty matters. And the supply chain for steel is relatively compact, which makes it easier to observe how the sector responds to tariffs.
Domestic production has risen as imports have fallen consistent with the idea of reshoring. But when we look at the total supply of steel to the domestic economy, it hasn't risen. More importantly, U.S. steel prices have materially diverged from global peers. And the risk of more aggressive sector tariffs across the economy, in our view is higher prices. An outcome which is consistent with our expectations from a year ago – and with economic theory.
Seth Carpenter: As an economist, I'm always happy when the reality matches what I was expecting in theory. So, that's super helpful. Now, that is one specific industry, and I know that you have spent a bunch of time looking at the data across industries.
The point that you made though, about the higher prices, the higher domestic prices for steel means, to me as an economist, that we have to try to maybe separate out the effects of the nominal versus the real. Which is to say, if we're measuring how much output there is, how much that increase is coming from just prices going up versus how much is coming from, total quantity.
So, if I asked you, when you look across industries, when you look at the data, what evidence do you see in terms of lots of reshoring. That is to say a diversion of trade, a reduction of imports, and with it an increase in domestic production. Is that there broadly in the data?
Mayank Phadke: When we look at production and imports across industries and goods and identify the industries both with and without reduced imports, we see that the increase in domestic production has come largely in nominal terms. Which means that the price has risen, but very little of that increase is actually higher output. The evidence for meaningful reassuring here is quite limited.
Seth Carpenter: Alright. So that's super helpful to me because when I think about the implications of tariffs, the economist in me says it reduces the overall productive capacity of the economy. It raises cost for the economy. The counter argument has been we're going to make more in the United States and that's going to boost the U.S. economy.
As far as I can tell, when we look at the data themselves, there's not a lot of evidence for the upside. But there is clear evidence that we're raising costs for the U.S. economy.
Alright, well Mayank, thank you so much for joining me. And thank you to the listeners. If you enjoy this show, please leave us a review; and share Thoughts on the Market with a friend or a colleague today.