Investing Through an Uneasy Boom

0:00Welcome to Thoughts on the Market. I'm Serena Tang, Morgan Stanley's Chief Cross Asset Strategist. Today, our mid-year market outlook across regions and asset classes. It's Friday, May 15th at 10am in New York. If you've winced at the gas pump, hesitated before booking a flight, or checked your 401k a little more often than usual, you already understand the forces driving markets now. Energy prices and geopolitics are creating real uncertainty. But underneath that uncertainty, companies are still investing, earnings are still holding up, and AI is becoming one of the biggest spending cycles in the global economy.

0:48That's why our message for the rest of 2026 is be constructive, not complacent. Let's start with the constructive part. Across markets, macro and micro fundamentals support risk assets. In the U.S., growth should hold up. For investors, this suggests favoring stocks over core fixed income and developed market equities, especially the U.S. in particular. Our U.S. equity strategist S &P 500 target for mid-2027 stands at$8 ,300, supported by expected earnings growth of 23 % in 2026 and 12 % in 2027. The momentum in returns is coming from improving earnings. Now, a striking data point. The median S &P 500 company delivered a 6 % earnings surprise in the first quarter, the strongest in four years.

1:49Earnings revision breadth also improved sharply. AI explains a major part of that strength. It has become a capital spending story and increasingly a credit market story. A year ago, we projected combined CapEx for the biggest hyperscalers at around$450 billion in both 2026 and 2027. Now, that estimate has moved to roughly$800 billion in 2026 and$1.16 trillion in 2027. AI infrastructure, data centers, power, chips, networks, should shape equities, credit, rates, and even commodities for years to come. But here's where the not-complacent part matters. There's another side to the AI boom. Building all those data centers, chips, power systems, and networks require significant investment.

2:50And companies won't fund all of it with cash. Many will borrow. That means more corporate bonds coming to market, especially from high-quality U.S. companies. Even if those companies look financially healthy, investors may demand better terms when they have so many new bonds to choose from. So, AI can support earnings, but it can also put some pressure on credit markets. Energy prices also pose major risk. Our base case assumes de-escalation and a gradual reopening of the Strait of Hormuz. But the range of possible outcomes looks unusually wide. Oil prices and the duration of the Middle East supply shock are the single largest variable in our outlook.

3:41Higher oil effectively acts like a tax on consumers and businesses alike. That's why we recommend a balanced allocation with a risk on tilt. Overweight equities, underweight core fixed income, and hold other fixed income, commodities, and cash at benchmark weight. Within equities, we favor the U.S. because earnings look strong and the risk-reward looks better than in other regions. Europe and Japan also offer upside, but Europe has more exposure to energy disruptions and emerging markets lack a broad macro and micro narrative, despite pockets of strength. This is all to say, the cycle has not run out of road.

4:25But the road looks bumpier, narrower, and more energy sensitive than it looked a few months ago. 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.

4:45Serena Tang:The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.