Thoughts on the Market: Midyear Global Outlook, Pt 2 – Why the U.S. Still Leads Global Markets

Podcast Information:

• Title: Thoughts on the Market
• Host/Author: Morgan Stanley
• Episode: Midyear Global Outlook, Pt 2: Why the U.S. Still Leads Global Markets
• Release Date: May 22, 2025

In the second part of Morgan Stanley’s “Midyear Global Outlook” podcast, Global Chief Economist Seth Carpenter and Chief Global Cross Asset Strategist Serena Tang delve deeper into the current state of global markets, emphasizing the sustained leadership of the United States amidst global economic uncertainties.

1. Portfolio Positioning Recommendations

Seth Carpenter (00:00) opens the discussion by setting the stage for analyzing recent market dynamics and their implications for investor strategies. Serena Tang (00:43) responds by outlining Morgan Stanley’s strategic recommendations:

• Overweight US Equities: Serena emphasizes the strength of the US stock market, recommending investors allocate more towards US equities given their resilience and growth potential.

• Overweight Core Fixed Income: She advises an overweight position in core fixed income assets, particularly US Treasuries and investment-grade corporate credit. “We have a very strong preference for US over rest of the world assets except the dollar,” (00:43) Serena states, highlighting the attractiveness of US fixed income in the current environment.

• Quality Focus: Tang cautions that current valuations have nearly priced out the possibility of growth slowdown, suggesting potential downside risks. “We recommend quality across the board,” (01:35) she advises, stressing the importance of high-quality assets in uncertain times.

2. US Dollar and Exceptionalism

A significant portion of the discussion centers on the US dollar's role and the concept of US exceptionalism:

• US Exceptionalism: Serena challenges the declining consensus on US exceptionalism, asserting the enduring dominance of US dollar assets. “There are very few alternatives to US dollar assets right now,” (02:45) she asserts, citing the disproportionate size of the US stock market compared to Europe and the substantial portion of liquid, high-grade fixed income denominated in US dollars.

• Hedging and Currency Strategy: Despite maintaining a constructive stance on US dollar assets, Serena acknowledges concerns about the dollar's future strength. “If there's one US asset that we dislike, it's the US dollar,” (04:19) she admits, noting expectations of a weakening dollar due to fading growth and yield differentials. She recommends that non-US dollar investors consider buying US stocks and fixed income on an FX-hedged basis to mitigate potential currency depreciation.

3. Short-term vs. Long-term Asset Preferences

When addressing near-term versus medium-term investment horizons, Serena differentiates Morgan Stanley's strategic preferences:

• Short-term (Next 3-6 Months): The focus shifts towards US investment-grade corporate credit, which is poised to perform well in the latter half of the year and the first half of next year. “We feel pretty highly convicted on US Investment grade corporate credit,” (05:22) Serena notes, highlighting its potential for stable returns amidst current market conditions.

• Long-term (Next 12 Months): Over the longer term, the recommendation returns to overweight positions in US equities and government bonds, anticipating benefits from a weakening dollar and expected Federal Reserve rate cuts in 2026. Serena forecasts significant returns from US Treasuries, projecting yields to drop to 3.45% for the 10-year and 2.6% for the 2-year notes by mid-2026, translating to attractive total returns exceeding 10%.

4. Out-of-Consensus Views

Seth and Serena highlight several viewpoints where Morgan Stanley diverges from broader market consensus:

• Preference for US and US Dollar Assets: Contrary to some strategists questioning US exceptionalism, Morgan Stanley remains bullish on US assets. “We are pretty constructive on US dollar assets,” (02:45) Serena emphasizes, reinforcing their belief in the sustained dominance of US financial markets.

• Bullish on US Treasuries: The firm is notably more optimistic about US Treasuries than the market consensus. Serena explains, “We're much more bullish on U.S. treasuries than what's being priced into markets,” (06:24) attributing this stance to their conviction in substantial Federal Reserve rate cuts anticipated in 2026.

• Bearish on the US Dollar: Morgan Stanley projects a more significant depreciation of the US dollar compared to general expectations. “The kind of appreciation we're forecasting for at around 10% is higher than I think what most investors are expecting,” (06:24) Serena states, anticipating increased FX hedging and potential pressure on the dollar.

5. Indicators for Assessing Global Growth Fragility

Seth Carpenter outlines the key indicators Morgan Stanley monitors to gauge the resilience or fragility of global growth:

• Shipping and Trade Data (07:31): Analyzing trade flows, especially imports into the United States, which may reflect responses to tariffs and trade policies.

• Labor Market Dynamics (07:31): Observing signs of reduced labor demand in the US, coupled with the impact of immigration restrictions on labor supply.

• Consumer Spending (07:31): Tracking consumer spending patterns, a critical driver for developed market economies, to assess overall economic health and growth prospects.

Carpenter emphasizes the complexity of real-time monitoring amidst economic shocks, underscoring the importance of these indicators in shaping their economic outlook.

Conclusion

Throughout the podcast, Morgan Stanley’s analysts present a compelling case for the enduring leadership of the US market amidst global economic uncertainties. Their strategic recommendations favor US equities and fixed income, coupled with cautious positioning regarding the US dollar. By maintaining a focus on quality assets and closely monitoring key economic indicators, Morgan Stanley aims to navigate the complexities of the current market landscape effectively.

Notable Quotes:

• Serena Tang (00:43): “We have a very strong preference for US over rest of the world assets except the dollar.”

• Serena Tang (02:45): “There are very few alternatives to US dollar assets right now.”

• Serena Tang (04:19): “If there's one US asset that we dislike, it's the US dollar.”

• Serena Tang (06:24): “We're much more bullish on U.S. treasuries than what's being priced into markets.”

• Serena Tang (06:24): “The kind of appreciation we're forecasting for at around 10% is higher than I think what most investors are expecting.”

This comprehensive summary encapsulates the critical discussions, insights, and strategic recommendations from Morgan Stanley’s latest market outlook podcast, providing valuable guidance for investors navigating the evolving global financial landscape.