Podcast Summary: Thoughts on the Market
Episode: Investors’ Top Questions for 2026
Date: December 3, 2025
Hosts: Michael Zezas (Global Head of Fixed Income Research and Public Policy Strategy) & Serena Tang (Chief Global Cross Asset Strategist)
Overview
This episode centers on the pressing questions and debates investors have as they look toward 2026. Drawing from Morgan Stanley’s recent Cross Asset Outlook, hosts Michael Zezas and Serena Tang discuss investor concerns around equity valuations, the impact of AI, debt issuance, market breadth, and the direction of the U.S. dollar. The conversation distills the rationale behind Morgan Stanley’s recommendations and sheds light on the factors shaping global investment strategies.
Key Discussion Points & Insights
1. Investor Debates for 2026
- Global Relevance: Investor questions on AI, equity valuations, and the U.S. dollar are universal across regions.
- Quote:
“You have investors in Europe, Asia, Australia, North America all kind of wanting to understand our views on AI, on equity valuations, on the dollar.”
— Serena Tang, [00:46]
2. Equity Valuations and the AI Effect
- AI as a Driver:
- Widespread worry that market valuations might be overinflated due to enthusiasm around AI, reminiscent of the 1990s tech bubble.
- Key differences today: higher quality, more profitable companies, and tech’s larger share of major indices.
- Net margins are significantly higher now (~14%) compared to the 1990s (~8%), justifying higher multiples.
- Supportive Policy Backdrop:
- Accommodative Fed, fiscal stimulus (i.e., the "Big Beautiful Bill Act"), and deregulation form a rare but favorable policy mix supporting stock valuations.
- This unique combination typically occurs outside of recessions.
- Morgan Stanley’s Stance:
- Overweight position in U.S. equities, even at elevated valuations, is justified given strong fundamentals and policy support.
- Quotes:
“There are some very important differences from that time period… companies… are higher quality… deliver strong profitability… net margins to about sort of 14% compared to 8% during that 1990s valuation bubble.”
— Serena Tang, [01:34]
“When margins are higher, I think like people paying premium for stocks is more justified.”
— Serena Tang, [01:57]
3. Market Breadth: Beyond the AI Giants?
- Concerns & Outlook:
- Investors want to see market growth extending beyond a handful of mega-cap tech names.
- Morgan Stanley expects earnings to broaden, particularly among small- and mid-cap stocks, signaling early-cycle recovery and a new bull market.
- The firm has upgraded small caps over large caps, foreseeing broad-based earnings growth.
- U.S. and Japan are the only regions expected to post above-consensus earnings growth for 2026; Europe and Emerging Markets are less favored.
- Quote:
“We are in a new bull market. I think we're very early cycle earnings recovery here… leaner cost structures, improving earnings revisions, AI driven efficiency gains, they all support a broad based earnings upturn.”
— Serena Tang, [04:30]
4. AI-Related Debt Issuance & Credit Outlook
- Magnitude of AI CapEx:
- Report estimates nearly $3 trillion in AI-related capital expenditure over several years, with about half to be debt-financed.
- Substantial issuance expected through private credit, asset-backed securities, and notably U.S. investment-grade corporate bonds.
- Anticipated ~$1 trillion in net investment-grade bond issuance—a 60% jump.
- Positioning:
- Despite solid credit fundamentals, the sheer volume presents a technical challenge.
- Morgan Stanley has double-downgraded U.S. investment-grade corporate credit to underweight.
- High yield bonds, facing fewer technical headwinds and with expected declining default rates, are more attractive.
- Quotes:
“This really means that we expect nearly another 3 trillion of data center related CAPEX from here to 2028… still leaves a financing gap of around one and a half trillion dollars which needs to be sourced through various credit channels.”
— Serena Tang, [06:19]
“Even though credit fundamentals should stay fine, we have double downgraded US investment grade corporate credit to underweight within our cross asset allocation.”
— Serena Tang, [07:15]
“High yield doesn't really see the same headwind from the technical side of things… default rates coming down over the next 12 months… supports high yield much better than investment grade.”
— Serena Tang, [07:40]
5. Foreign Exchange: The Dollar’s Path
- 2025 Performance & 2026 Outlook:
- Dollar’s recent weakness was a Morgan Stanley call that became consensus, driven by U.S. growth concerns and trade barriers.
- For 2026, the firm expects further downward pressure on the USD, especially in the first half.
- Factors: elevated risk premium, labor market concerns, uncertainty over Fed composition, and reduced rate differentials with the rest of the world.
- Forecasts for mid-2026: EUR/USD at 1.23, USD/JPY at 140.
- Quote:
“Downward pressure on the dollar should still persist… driven by I think near term worries about the US labor markets… compression in US versus Rest of the world rate differentials should reduce FX hedging costs…”
— Serena Tang, [08:36]
Notable Quotes & Memorable Moments
-
AI and Valuations:
“Multiples in the US right now look more reasonable after adjusting for profit margins and changes in index composition.”
— Serena Tang, [02:22] -
Policy Mix Rarity:
“That combination rarely occurs outside of a recession. And I think this creates an environment that supports valuation.”
— Serena Tang, [02:49] -
Small Cap Upgrade:
“Our US Equity strategy team has upgraded small caps and now prefer it over large caps.”
— Serena Tang, [04:34] -
Credit Market Technicals:
“Given this technical backdrop even, even though credit fundamentals should stay fine, we have double downgraded US investment grade corporate credit to underweight within our cross asset allocation.”
— Serena Tang, [07:15]
Timestamps for Important Segments
- 00:46 — Serena outlines the key investor questions for 2026
- 01:34–03:30 — Debate on AI-driven equity valuations and policy support
- 04:14–05:43 — Expectations for market breadth and small cap vs. large cap performance
- 05:43–07:28 — AI-related capex, debt issuance, and credit allocation
- 07:56–09:38 — U.S. dollar outlook, drivers, and forecast for 2026
Takeaways for Investors
- High valuations may be justified by better fundamentals, favorable policies, and elevated margins.
- Expect broader equity gains, especially among small-cap U.S. stocks, with U.S. and Japan set to outperform.
- Prepare for significant debt supply related to AI investment, tilting preference away from investment-grade bonds toward high yield.
- Dollar weakness likely to persist into mid-2026, supported by shifting rates and labor market dynamics.
The episode delivers a forward-looking framework for investors, emphasizing data-driven reasoning and constructive skepticism around headline narratives—especially on the enduring impact of AI, policy shifts, and global capital flows.