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Welcome to Thoughts on the Market. I'm Andrew Sheats, global head of fixed income research at Morgan Stanley. Today on the program, trying to square conflicting market signals. It's Friday, April 10th at 2pm in London. one level, it is all still very serious. The world remains in the midst of, and this is not an exaggeration, the worst disruption to global energy markets in history. One sixth of global oil production remains trapped behind the Strait of Hormuz and the price of so called dated Brent. The price that you pay to get oil delivered in the near term is over $130 a barrel, more than double its price at the start of the year. But markets well year to date, U.S. stocks and bonds are roughly unchanged. Both have seen large swings only to return to about where they've started. An investor who only occasionally checks the markets could be forgiven for looking at their portfolio this weekend. Assuming a pretty dull 2026 and going back to watching the Masters tournament, how do we square this? For stocks, two dynamics are important. First, despite oil prices, earnings estimates, especially in the United States, continue to move higher. Those estimates may prove wrong bank but analysts have been incrementally more optimistic, particularly as technological investment continues at pace. Stocks are also fundamentally about the future. Current prices should reflect the discounted value of earnings between now and, well, forever. And so mathematically, if the longer term outlook can hold up, a weak three month period in the near term, say due to energy disruption, simply doesn't have to matter as much mathematically. Bonds, in contrast, are currently stuck between two pretty strong opposing forces. Higher inflation driven by tariffs and oil is typically bond negative. But bonds also tend to do well if there are higher risks to growth. And so the key question is whether a prolonged energy shock finally forces central banks to prioritize these growth risks over correct currently elevated inflation. So far, 2026 has been anything but easy. Despite the lower headline changes in markets, Morgan Stanley data suggests that March was the second worst month for equity hedge funds in the last decade. And so with some humility, we'd focus on three points. First, we think US Stocks and bonds have an advantage at the moment over their global peers. US Earnings growth is stronger, the US Economy is less energy sensitive and the US Central bank, the Federal Reserve, we think, is more likely to cut rates faster if there's more weakness in growth. Second, we think the bond markets ultimately resolve their tensions at lower levels of yield. A quicker resolution would reduce inflation risks, while a more prolonged disruption is going to weigh seriously on growth. The bond unfriendly middle ground or where we are now simply seems unlikely to persist. Third, amidst the volatility, relative valuation still matters, and there are still interesting things. For example, credit spreads in Asia look extremely tight given the region's exposure to high oil prices. And by contrast, as my colleague Mike Wilson has commented on this program earlier, large cap technology stocks have derated significantly and now trade at similar valuations. The consumer staples sector, despite having roughly three times the earnings growth as well as low energy exposure, we are once again heading into an uncertain weekend. But preferring US Markets expecting lower yields and trying to stay focused on relative value are a few of the ways we're trying to navigate it. 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.
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