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- [00:01]
A
Welcome to Thoughts on the Market. I'm Michelle Weaver, Morgan Stanley's US Thematic Strategist.
- [00:05]
B
I'm Chris Snyder, Morgan Stanley's US Multi Industry Analyst.
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C
And I'm Adam Jonas, Morgan Stanley's Embodied AI Strategist.
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A
We recently concluded Morgan Stanley's annual Industrials conference in Laguna Beach, California and wanted to share some of the biggest takeaways. It's Tuesday, September 16th at 10am in New York. I want to set the stage for our conversation. The overall tone at the conference was fairly similar to last year with many companies waiting for a broader pickup and I'd flag three different themes that really emerged from the conference. So first, AI. AI is incredibly important. It appeared in the vast majority of fireside conversations and companies were talking about AI from both the adopter and the enabler angle. Second theme on the macro. Overall companies remain in search of a reacceleration. They pointed to consistently expansionary PMIs or a PMI above 50, a more favorable interest rate environment and greater clarity on tariffs as the key macro conditions for renewed momentum. And then the last thing that came up repeatedly was how are companies going to react to tariffs? I would say companies overall were fairly constructive on their ability to mitigate the margin impact of tariffs, with many talking about both leveraging pricing power and supply chain shifts to offset those impacts. So Chris, considering all this, the wait for an inflection came up across a number of companies. What were some of your key takeaways on multis?
- [01:36]
B
On the macro front the commentary was stable to modestly improving and that was really consistent across all of these companies. There are specific verticals where things are getting better. I would call out data center as one, non res construction as row one in plant manufacturing as one. And there were certain categories where we are seeing deterioration residential H Vac, energy markets and agriculture. But we came away more constructive on the cycle because things are stable if not modestly improving into a rate cut cycle. The concern going in was that we would hear about deteriorating trends and a rate cut where would be needed just to stabilize the market. So we do think that this backdrop is supportive for better industrial growth into 2026. We have been positive on the project or capex side of the house. It feels like strength there is improving. We've been more cautious on the short cycle production side of the house, but we are starting to see signs of rate of change. So when we look into 26 and 27 we think US industrials are poised for decade high growth.
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A
You've had a thesis for a while now that US Reshoring is going to be incredibly important and that it's a $10 trillion opportunity. Can you unpack that number? What are some recent data points supporting that and what did you learn at the conference?
- [03:01]
B
Some of the recent data points that support this view is US manufacturing construction starts are up 3x post Liberation Day. So we're seeing companies invest. This is also coming through in commercial and industrial lending data. We're which continues to push higher almost every week and is currently at now record high levels. So there's a lot of reasons for companies not to invest. Right now there's a lot of uncertainty around policy, but seeing that willingness to invest through all of the uncertainty is a big positive because as that uncertainty lifts, we think more projects will be come off the sidelines and be unlocked. So we see positive rate of change on that. What I think is often lost in the reshoring conversation is that this has been happening for the last five years. The US lost share of global capex from 2000 when China entered the World Trade Organization, almost every year till 2019 when Trump implemented his first wave of tariffs. Since then, the US has taken about 300 basis points of global capex share over the last five years. And that's a lot on a $30 trillion capex base. So I think the debate here should be can this continue? And when I look at Trump policy, both the tariffs making imports more expensive, but also the incentives lowering the cost of domestic production, we do think these trends are stable. And I always want to stress that this is a game of increments. It's not that the US is going to get every factory, but we simply believe the US is better positioned to get the incremental factory over the next 20 years relative to the prior 20. And the best point is that the baseline growth here is effectively zero.
- [04:45]
A
And how does power play into the reshoring story? AI and data centers are generating huge demand for power that well outstrips supply. Is there a risk that companies that want to reshore are not able to do so because of the power constraints?
- [04:58]
B
It's a great question. I think it's part of the reason that this is moving more slowly. The companies that sell this power equipment tend to prioritize the data center customers given their scale and magnitude of buying. But ultimately we think this is coming and it's a big opportunity for U.S. power to extend the upcycle. Manufacturing accounts for 26% of the electricity in the country. Data center accounts for about 5%. So if the industrial economy returns to growth, there will be a huge pull on the grid and I view it as a competitive advantage. If you think about the future of US manufacturing, we're simply taking labor out and replacing it with electricity. That is a phenomenal trade off for the US and a not as positive trade off for a lot of low cost regions who essentially export labor to the world. I'm sure Adam will have more to say about that.
- [05:56]
A
And Adam, I want to bring robotics and humanoids specifically into this conversation as the US technological edge is a big part of the reshoring story. So how do humanoids fit into reshoring? How much would they cost to use? And how could they make American manufacturing more attractive?
- [06:12]
C
Humanoid robots, we're talking agentic robots that make decisions for themselves autonomously due to the dual purpose and the military dual purpose aspect of it makes it absolutely necessary to onshore those technologies. At the same time, humanoid robots actually make it possible to onshore those technologies. Meaning you need, we're not going to be able to replicate manufacturing and onshore manufacturing the way it's currently done in China with their environmental practices and their labor availability of affordable, cheap human labor. Autonomous robots are both the cause of onshoring and the effect of onshoring at the same time. And it's going to transform every industry. The question isn't so much as which industry will autonomous robots, including humanoids, impact, it's what will it not impact? And we have not yet been able to find anything that it would. When you think about cost to use, we think by 2040 we get to a point where, to Chris's point, the marginal cost of work will be some factor of electricity, energy and some depreciation of that physical plant or the physical robot itself. And we come up with a range of scenarios where it centered on around $5 per. If that can replace two human workers at $25 an hour, that can NPV to around $200,000 of NPV per humanoid. That's discounting back 15 years from 2040. Michelle, there's 160 million people in the U.S. labor market. So if you just substituted 1% of that or 1.6 million people out of the U.S. labor pool, 1.6 million times $200,000 NPV, that's $320 billion of value, which is worth, well, quite a lot, quite a lot of money to a lot of companies that are working on this. So when we get asked what are we watching in terms of the bleeding edge of the robot revolution? We're watching the Sino US competition and I prefer to call IT competition. And we're also watching the Terra cap companies, the mag 7 type companies that are quite suddenly and recently and very, very significantly going after physical AI and robotics talent and increasingly even manufacturing talent. So again, to circle back to Chris's point, if you want evidence of, of reshoring and manufacturing and advanced manufacturing in this country, look at some of these TMT and tech and AI companies in California and look at, go on their hiring website and watch all the manufacturing and robotics people that they're trying to hire and pay a lot of money to do so. And that might be an interesting indicator of where we're going.
- [08:51]
A
I want to dig in a little bit more there. We're seeing a lot of the cutting edge tech coming out of China. Is the US going to be able to catch up?
- [08:59]
C
I don't know. I don't know. But I would say what's our alternative? We either catch up enough to compete or we're up for grabs. Okay. I would say from our reading and working closely with our team in China that in many aspects of supply chain manufacturing, physical AI China is ahead. And with the passage of time they are increasingly ahead. We estimate, and we can't be precise here, that China's lead on the US would not only last three to five years, but might even widen three to five years from now, may even widen at an accelerating rate three to five years from now. And so it brings into play as what kind of environment and what kind of regulatory and policy decision will be made to help kind of level the playing field and encourage the right kind of manufacturing. We don't want to encourage trailing edge Victorian era manufacturing in the US we want to encourage, you know, skate to where the puck is going, technology that can help improve our world and create a sustainable abundance rather than an unsustainable one. And so we're watching China very, very closely. It makes us a little bit, makes me a little bit kind of nervous when we, if we see the government put the thumb on the scale too much. But it's invariably going to happen. You're going to have increased involvement of whichever administration it is in order to kind of set policies that can encourage innovation, education of our young people, repurposing of labor. You know, all these people making machines in this country now, they might get, there may be a displacement over a number of years, if not a generation, but we need those human bodies to do other things in this economy as well. So I don't want to give the impression at all in our scenarios that we don't need people anymore. We need lots of what are the.
- [10:47]
A
Opportunities and the risks that you see for investors as robotics converges with this broader US Manufacturing story?
- [10:54]
C
Well, Michelle, we see both opportunities and risks. There are opportunities that you can measure in terms of what portion of global GDP of 115 trillion could you look at? I mean, labor alone is $40 trillion. And if you really make humanoid that can do the work of two workers, guess what? You're not going to stop at 40 trillion. You're going to go beyond that. You might go multiple beyond that. Talking about the world before AI, robotics and humanoids is like talking about the world before electricity or talking about business before the Internet. We don't think we're exaggerating, but the proof will be in the capital formation. And that's where we hope we can be of assistance to our clients, working together on a variety of investment ideas. But the risks will come and it is our professional responsibility, if not our moral responsibility, to work with our partners across research to talk about those risks. Michelle, if we have labor displacement go too quickly, there's serious problems. And if you don't believe me, go look at the French Revolution or the Industrial Revolution or Age of Enlightenments. Ages of scientific enlightenment frequently cohabitate times of great social and political turmoil as well. And so we think that these risks must be seen in parallel if we want to bring forth technologies that can make us more human rather than less human. Sorry if I'm coming across as a little preachy, but if you studied robots and labor all day long, it does have that effect on you. So Michelle, how do you see innovation priorities changing for industrials and investors in this environment?
- [12:34]
A
I think it's huge. As we're seeing AI and technology broadly diffuse across different segments of the market, it's only becoming more important. About 2/3 of companies at the conference mentioned AI in some way, shape or form. We know that from transcripts and we're seeing them continue to integrate AI into their businesses. They're trying to go beyond what we've just seen at the initial edge. So, for example, if I think about what was going on within AI adoption a couple years ago, it was largely adding a chatbot to your website that's then able to handle a lot of customer service inquiries. Maybe you could reduce the labor there a little bit. Now we're starting to see a lot more business specific use cases. So for example, within airlines, an airline company is using AI to most optimally gate different planes as they're landing to try and reduce connection times. They know which staff needs to go to another flight to connect which passengers need to move to another flight. They're able to do that much more efficiently. You're seeing a lot on AI being adopted within manufacturing to make manufacturing processes a lot more seamless. So I think innovation is only going to continue to become more important to not only industrials, but broadly the entire market as well. Clearly the industry is being shaped by adaptability, collaboration and a focus on innovation. So Chris, Adam, thank you both for taking the time to talk.
- [13:58]
C
Always a pleasure, Michelle.
- [13:59]
B
Thank you for having us on.
- [14:01]
A
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