Loading summary
Transcript12 lines
- [00:01]
A
Welcome to Thoughts on the Market. I'm Stephen Berg, global head of Thematic and Sustainability Research.
- [00:06]
B
And I'm Michelle Weaver, US Thematic and Equity Strategist.
- [00:10]
A
I was recently on the show to discuss Morgan Stanley's four key themes for 2026. Today, a look at how those themes could actually play out in the real world over the course of this year. It's Tuesday, February 10th at 10am in New. So one of the biggest challenges for investors right now is separating signal from noise. Markets are reacting to headlines by the minute, but the real drivers of long term returns tend to move much more slowly and much more powerfully. That's why thematic analysis has been such an important part of how we think about markets, particularly during periods of high volatility. For 2026, our framework is built around four key themes. AI and tech diffusion, the future of energy, the multipolar world, and societal shifts. In other words, three familiar themes and one meaningful evolution from last year. So, Michelle, let's start at the top. When investors hear four key themes, what's different about the 2026 framework versus what we laid out in 2025?
- [01:10]
B
Well, like you mentioned before, three of our four key themes are the same as last year. So we're going to continue to see important market impacts from from AI and tech diffusion, the future of energy, and the multipolar world. But our fourth key theme, societal shifts, is really an expansion of our prior key theme, longevity, from last year. And while three of the four themes are the same broad categories, the way they impact the market is going to evolve. And these themes don't exist in isolation. They collide and they intersect with one another, having other important market implications. And we'll talk about many of those intersections today as they relate to multiple themes. Let's start with AI. How does the AI and tech diffusion theme specifically evolve since last year?
- [01:52]
A
Yeah, you know, you mentioned earlier the evolution of all of our themes, and that was certainly the case with AI and tech diffusion. What I think we'll see in 2026 is a few major evolutions. So one is a concept that we think of as two worlds of LLM progress and AI adoption. And let me walk through what I mean by that. On on LLM progress. We do think that the handful of American LLM developers that have 10 times the compute they had last year are going to be training and producing models of unprecedented capability. We do not think the Chinese models will be able to keep up because they simply do not have the compute required for the training. And so we will see two worlds Very different approaches. That said, the Chinese models are quite excellent in terms of providing low cost solutions to a wide range of very practical business cases. So that's one case of two worlds when we think about the world of AI and tech diffusion. Another is that essentially we could see a really big gap between what you can do with an LLM and what the average user is actually doing with LLMs. Now they're going to be outliers where really leaders will be able to fully utilize LLMs and achieve fairly substantial and breathtaking results. But on average that won't be the case and so you'll see a bit of a lag there. That said, I do think when investors see what those frontier capabilities are, I think that does eventually lead to bullishness. So that's one dynamic. Another really big dynamic in 2026 is the mismatch between compute demand and compute supply. We dove very deeply into this in our note and essentially where we come out is we believe, and our analysis supports this, that the demand for compute is going to be systematically much higher than the supply. That has all kinds of implications. Compute becomes a very precious resource, both at the company level, at the national level. So those are a couple of areas of evolution. So Michelle, let's shift over to the future of energy, which does feel very different today than it did a year ago. Can you kind of walk through what's changed?
- [03:54]
B
Well, we absolutely still think that power is one of the key bottlenecks for data center growth. And our power modeling work shows around a 47 gigawatt shortfall. Before considering innovative time to power solutions, we get down to around a 10 to 20% shortfall in power needed in the US though, even after considering those solutions. So power is still very much a bottleneck. But the power picture is becoming even more challenged for data centers. And that's largely because of a major political overhang that's emerging. Consumers across the US have seen their electricity bills rise and are increasingly pointing to data centers as the culpr behind this. I really want to emphasize though, this is a nuanced issue and data center power demand is driving consumer bills higher in some areas like the Mid Atlantic. But this isn't the case nationwide and really depends on a number of factors like data center density in the region and whether it's a regulated or unregulated utility market. But public perception has really turned against data centers and local pushback is causing planned data centers to be canceled or delayed. And you're seeing similar opinions both across political affiliations and across different regional areas. So yes, in some areas data centers have impacted consumer power bills, but in other areas that hasn't been the case. But this is good news though for companies that offer off grid power generation who are able to completely insulate consumers because they are not connecting to the grid. Steven, the multipolar theme was already strong last year. Why has it become even more Central for 2026?
- [05:29]
A
Yeah, you're right. It was strong in 2025. In fact, of our 21 categories of stocks, the top three performing were really driven by multipolar world dynamics. Let me walk through three areas of focus that we have for multipolar world in 2026. Number one is an aggressive US policy agenda. And that's going to show up in a number of ways. But examples here would be major efforts to reshore manufacturing, a real evolution in military spending towards a wide range of newer military technologies, reducing power prices and inflation more broadly, and also really focusing on trying to eliminate dependency on China for rare earths. So that's the first big area of focus. The second is around AI technology transfer and this is quite closely linked to rare earth. So here's the dynamic as we think about US and China. China has a commanding position in rare earths. The United States has a leading position in access to computational resources. Those two are going to interplay quite a bit in 2026. So for example, we have a view that in 2026 when those American models, these LLMs, achieve these step changes up in capabilities that China cannot match, we think that it's very likely that China may exert pressure and in terms of rare earths access in order to force the transfer of technology, the best AI technology to China. So that's an example of this linkage between AI and rare earths. And the last dynamic I'd say broadly would be the politics of energy, which you described quite well. I think that's going to be a big multipolar world dynamic everywhere around the world. A focus on how much of an impact our data centers having, whether it's water access, price of power, et cetera, what are the impacts to jobs. And that's going to show up in a variety of policy actions in 2026. So Michelle, the last of our four key themes is societal shifts and you walked through that briefly before. This expands on our prior longevity work. What does this broader framing capture?
- [07:34]
B
Societal shifts will include important topics from longevity still, so so things like preparing for an aging population and AI in healthcare. But the expansion really lets us look at the full age range of the demographic spectrum and we can also now start thinking about what younger consumers want. It also allows us to look at other income based demographics, like what's been going on with the K economy, which has been an important theme around the world. And a really critical element though of this new theme is AI's impact on the labor market. Last year we did a big piece called the Future of Work and in it we estimated that around 90% of jobs would be impacted by AI. I want to be clear that's not to say that 90% of jobs would be lost by AI or automated by AI, but rather some task or some component of that job could be automated or augmented using AI. And so you might have the jobs of today looking very different five years from now. Workers are adaptable and we do expect many to reskill as part of this evolving job landscape. We've talked about the evolution of our key themes, but now let's focus a little on the results. So how have these themes actually perform from an investment standpoint?
- [08:46]
A
Yeah, I was very happy with the results in 2025 when we looked across our categories of thematic stocks. We have 21 categories of thematic stocks within our four big themes. On average in 2025 our thematic stock categories outperformed MSCI World by 16% and the S&P 500 by 27% respectively. So I was very happy with that result. When you look at the breakdown it is interesting in terms of the categories it did really well. As I mentioned, the top three were driven by multipolar world, I.e. critical minerals, AI, semis and defense. But after that you can see a lot of AI and energy show up. Power and AI was a big winner. Nuclear Power did extremely well, so we did see other categories, but I did find it really interesting that Multipolar World really did top the charts in 2025. Michelle, thanks for taking the time to talk.
- [09:39]
B
Great speaking with you Steven, and thanks for listening.
- [09:42]
A
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.
- [09:51]
B
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.