Summary of "Thoughts on the Market"

Episode: Special Encore: What’s Ahead for Markets in 2025?
Host: Morgan Stanley
Release Date: December 24, 2024

Morgan Stanley's "Thoughts on the Market" podcast presents a comprehensive roundtable discussion featuring key strategists and economists to forecast global economic and market trends for 2025. Hosted by Vishy Thiru Pattor, the session brings together Seb Carpenter (Global Chief Economist), Mike Wilson (Chief U.S. Equity Strategist and Chief Investment Officer), and Andrew Sheets (Global Head of Credit Research). Below is a detailed summary of their insights and projections.

1. Global Economic Outlook

Speaker: Seb Carpenter
Timestamp: [01:28]

Seb Carpenter opens the discussion by addressing the challenges in forecasting the global economy due to heightened uncertainty. He projects a modest global growth rate of approximately 3% for 2025, emphasizing that while overall growth may remain stable, the underlying dynamics are set to shift.

Key Points:

• United States: Anticipates a slight economic slowdown driven by unsustainable growth patterns observed in 2023 and 2024.

  • "There’s a bit of waning residual impetus from fiscal policy that's gonna come off in growth rate terms." ([01:50])
  • Monetary policy remains restrictive despite rate cuts, contributing to the slowdown.

• Fiscal Policy: The expiration of the Tax Cut and Jobs Act in 2026 poses a legislative challenge that is expected to require most of 2025 to address.

• Trade and Tariffs:

  • Anticipates an increase in tariffs, particularly targeting China, phased throughout 2025.
  • "The first thing you see is some increase in inflation, and it will build as the tariffs build." ([03:10])

• Europe: Faces sluggish growth with expectations of around 1% growth. The European Central Bank (ECB) is likely to continue cutting interest rates, potentially pushing inflation below target levels, leading to further monetary easing.

• China:

  • Continues to grapple with a debt deflation spiral, with insufficient fiscal policy adjustments to spur growth.
  • Potential for further economic slowdown in 2025 as policymakers react insufficiently to economic challenges.

• Emerging Markets:

  • Remains bullish on regions like Japan and India, citing strong growth prospects.
  • Overall, the global growth narrative is influenced by a mix of regional performances without a singular driving trend.

Conclusion:

Carpenter underscores the fragmented nature of the global economy in 2025, highlighting varied growth trajectories across regions influenced by differing fiscal policies, trade dynamics, and monetary stances.

2. Equity Market Expectations

Speaker: Mike Wilson
Timestamp: [04:41]

Mike Wilson evaluates the performance of equity markets in 2024, noting that the strong returns were primarily driven by multiple expansion rather than substantial earnings growth. He projects a more balanced scenario for 2025 with an emphasis on earnings growth and potential challenges in valuation.

Key Points:

• US Equity Markets:

  • Earnings Growth: Anticipates improved earnings growth due to a soft landing economic scenario and decreasing interest rates.
  • Valuations: Expects a 5% decrease in multiples, moving away from the multiple expansion trend of the previous year.
  • "We think they'll come down by about 5%." ([05:15])

• Japanese Equity Markets:

  • Continues to favor Japan due to strong corporate governance.
  • Projects high single-digit earnings growth with potential 10% total returns.

• European Equity Markets:

  • Faces headwinds from tariff risks and economic pressure emanating from China’s export sector.

• Valuation Challenges:

  • High-quality assets remain expensive globally, making valuation a significant concern.
  • The S&P 500 is highlighted as extremely expensive, albeit justified by higher return on equity (ROE) and growth prospects.

• Investment Risks and Opportunities:

  • Consensus Risks: The prevalent soft landing view is heavily priced in, posing risks if the consensus does not materialize.
  • Market Rotation: Opportunities lie in macro rotation and stock picking, given the high dispersion in stock performances.
  • "Clients are really being rewarded for taking single stock exposures." ([07:30])

Conclusion:

Wilson anticipates a more earnings-driven equity market in 2025, tempered by valuation concerns and the potential need for strategic stock selection amidst uncertain macroeconomic conditions.

3. Credit Market Forecast

Speaker: Andrew Sheets
Timestamp: [07:04]

Andrew Sheets discusses the favorable conditions in the credit markets as of 2024, characterized by tight spreads and stable corporate balance sheets. He explores the future trajectory of credit markets in 2025 amidst evolving macroeconomic and policy uncertainties.

Key Points:

• Current Credit Market Environment:

  • Tight Spreads: Spreads are near multi-decade lows, benefiting corporate credit amidst a stable economic backdrop.
  • Corporate Health: Corporations maintain stable balance sheets with subdued M&A activity, favoring credit market stability.
  • "Corporate balance sheets have been pretty stable." ([07:20])

• Future Outlook:

  • Increased Uncertainty: Policy changes, especially those influenced by recent US elections, introduce greater uncertainty.
  • Economic Momentum: Early 2025 is expected to retain positive momentum with anticipated rate cuts from the Fed and ECB.
  • Divergence in Second Half: Anticipates divergence in economic performance in 2025's latter half, potentially affecting credit markets.

• Regional Performance:

  • Asia: Expected to underperform due to expensive spreads and heightened economic and tariff uncertainties.
  • United States: Projected to outperform relative to other regions, facing fewer relative risks from tariffs and policy uncertainties.

• Credit Spectrum Opportunities:

  • Levered Loans: Remain attractive with spreads offering substantial risk premiums.
  • "We do think the levered loan market continues to be attractive." ([08:50])

Conclusion:

Sheets highlights a transition from a highly favorable credit environment to one marked by increased uncertainty in 2025. He advises focusing on leveraged loans and US markets as strategic areas within the credit spectrum.

4. Conclusion and Next Steps

Speaker: Vishy Thiru Pattor
Timestamp: [10:20]

Host Vishy Pattor wraps up the episode by acknowledging the comprehensive insights shared by the panelists and teases the continuation of the discussion in the upcoming episode, which will delve into forecasts for government bonds, currencies, and housing.

“We are going to take a pause here and we'll be back tomorrow with our Year Ahead Roundtable continued where we'll share our forecast for government bonds, currencies and housing.” ([10:20])

Notable Quotes

• Seth Carpenter on Global Growth Uncertainty:
  "I think right now the uncertainty is even greater than usual. It's pretty tricky." ([01:28])

• Seth Carpenter on Tariffs and Inflation:
  "The first thing you see is some increase in inflation, and it will build as the tariffs build." ([03:10])

• Mike Wilson on Valuation Challenges:
  "We think they'll come down by about 5%." ([05:15])

• Mike Wilson on Stock Picking Opportunities:
  "Clients are really being rewarded for taking single stock exposures." ([07:30])

• Andrew Sheets on Levered Loans:
  "We do think the levered loan market continues to be attractive." ([08:50])

Final Thoughts

The panelists at Morgan Stanley's "Thoughts on the Market" podcast provide a nuanced outlook for 2025, highlighting a mix of optimism and caution across global economies, equity markets, and credit markets. Key takeaways include:

• Global Economy: Stable overall growth with regional variances influenced by policy changes and trade dynamics.
• Equity Markets: Shift from multiple-driven returns to earnings growth, tempered by valuation concerns and opportunities in stock selection.
• Credit Markets: Transitioning from favorable conditions to increased uncertainty, with strategic opportunities in leveraged loans and US markets.

Listeners are encouraged to stay informed and anticipate further detailed discussions in the forthcoming episodes.