Thoughts on the Market
Morgan Stanley | December 16, 2025
Episode: Where Investors Agree—or Don’t—With Our 2026 Outlook
Host: Vishy Tirupattur, Chief Fixed Income Strategist

Main Theme

In this episode, Vishy Tirupattur discusses the most debated themes from Morgan Stanley's published 2026 market outlook, focusing on areas where clients strongly agreed—or disagreed—with the firm's forecasts. He breaks down key sources of pushback, especially regarding AI-driven capital expenditure (CapEx), credit markets, bond supply projections, interest rate paths, and divergent macroeconomic expectations across regions.

Key Discussion Points & Insights

1. Client Engagement with the 2026 Outlook

• The outlook sparked "wide ranging conversations, much dialogue and debate" across global clients.
• The Morgan Stanley team welcomes pushback for its ability to refine their outlook through critical feedback.
  • Quote: “We welcome this dialogue, especially the pushback as it forces us to re examine our assumptions and refine our thinking.” [00:45]

2. AI CapEx and Financing Channels

Morgan Stanley’s View:

• Bullish on AI and data center-related CapEx: They believe demand for compute will “far outstrip supply over the next few years.”
• Credit markets—across unsecured, structured, and securitized instruments, both public and private—will be “central to the financing of the next wave of AI-driven investments.”
• AI-related CapEx is expected to be “relatively insensitive to macro conditions,” like interest rates or economic growth.

Pushback:

• Some clients argue Morgan Stanley's AI CapEx forecast is too conservative, suggesting more growth could be possible.
• The team counters: they see AI investment growth as a “multi year process” with long-term, gradual impact.

3. Investment Grade (IG) Bond Supply Projections

Morgan Stanley’s Forecast:

• 2026 issuance: $2.25 trillion in gross IG bond supply (up 25% YoY), or $1 trillion in net issuance (up 60% YoY).
  • Quote: “Our US credit strategist forecast for IG bond supply $2.25 trillion in gross issuance that’s up 25% year over year or $1 trillion in net issuance that’s up 60% year over year garnered significant attention.” [01:52]
• This surge is not just about AI—pick up in M&A activity also drives acquisition-driven IG supply.

Pushback:

• Some clients questioned whether the forecasted volume was too aggressive.
• Response: Growing CapEx (especially from AI) will outpace revenue and put pressure on free cash flow, making credit a key “financing bridge.”

4. Credit Spreads Outlook

Morgan Stanley’s Call:

• Expecting “modest widening” in credit spreads—about 15 basis points in IG—which would still be “near the low end of historical ranges,” despite the supply surge.

Pushback:

• Some clients argue for broader widening.
• Morgan Stanley’s counterpoints:
  • Bulk of AI-related issuance will be from high quality, AAA-rated issuers (currently underrepresented in credit markets).
  • Continued policy easing (i.e., two more rate cuts), modest economic re-acceleration, and persistent demand from yield-focused buyers will help anchor spreads.

5. Macro Strategy: Global Interest Rates

Morgan Stanley’s Outlook:

• 2026 described as a “transition year” in global rates:
  • Shift from “synchronized tightening” to “asynchronous normalization” as central banks seek equilibrium.
  • Expectation for government bond yields to “remain range bound.”

Pushback:

• Debate emerged over the expectation that markets will price in a “dovish tilt” to Federal Reserve policy.
• General agreement exists for “yield curve steepening,” but contention on whether the steepening will be bull or bear driven.

6. Europe: ECB Policy Calls

Morgan Stanley’s Forecast:

• Predicts “two more rate cuts in 2026” from ECB.
• Stance that the disinflationary process “has not ended,” counter to ECB President Lagarde’s public comments.
• Output gap expected to lead to inflation undershooting the 2% target, even with moderate euro area growth and fiscal expansion in Germany.

Pushback:

• The call on further cuts met significant skepticism, especially around differing assessments of the end of disinflation.

7. China: Market vs. Economy

• The discussion compared micro (market sentiment/returns) versus macro (economic data/outlook) in China.
• Sentiment on China investments has improved—strategists are “on board,” but economic deflation remains a concern.
  • Beijing’s fiscal policy is seen as “a bit too modest to spark near term disinflation.”
  • Quote: “The key debate here comes down to a micro versus macro story. Put differently, the market is not the economy and the economy is not the market.” [03:47]

Notable Quotes & Memorable Moments

• “We remain confident that credit markets across unsecured, structured and securitized instruments…will be central to the financing of the next wave of AI driven investments.” [01:09]
• “The crucial point here is that we think the spending will be relatively insensitive to the macro conditions, that is Level of interest rates and economic growth.” [01:21]
• On China: “The market is not the economy and the economy is not the market.” [03:47]
• “Our economists disagreed with President Lagarde that the disinflationary process has ended…we still see an output gap that will eventually lead to inflation to undershoot ECB’s 2% target.” [03:22]

Timestamps for Key Segments

• 00:45 – Welcome and the value of client pushback
• 01:09 – AI CapEx, data center demand, and credit market role
• 01:52 – IG bond supply projections and reasons for the surge
• 02:30 – Credit spreads outlook and quality of expected issuance
• 02:55 – Macro outlook: global rate transition and yield curve debate
• 03:22 – ECB forecasts and European inflation/disinflation
• 03:47 – China: Market versus economy, ongoing deflation, and modest fiscal policy

Summary

This episode offers an in-depth look at Morgan Stanley’s 2026 outlook through the lens of client feedback and challenges. Key areas of debate center on the sustainability and drivers of AI-centered CapEx, the scale of corporate bond issuance and its impact on credit markets, the direction of interest rates, central bank policy, and the difference between market sentiment and macroeconomic fundamentals in China and Europe. Morgan Stanley remains confident in its core forecasts while recognizing the value of investor skepticism in stress-testing their views.