Why Markets Should Keep Running Hot

Summary

Podcast Summary: Thoughts on the Market – "Why Markets Should Keep Running Hot"
Host: Andrew Sheats, Global Head of Fixed Income Research, Morgan Stanley
Date: January 30, 2026

---

Episode Overview

In this episode, Andrew Sheats discusses why Morgan Stanley maintains a positive outlook for markets in 2026. Despite heightened geopolitical uncertainty and high valuations, he explores how coordinated fiscal, monetary, and regulatory policies around the world could sustain market momentum. The episode provides reassurance by examining specific market-based metrics of macroeconomic stability and addresses the prevailing concerns of investors.

---

Key Discussion Points & Insights

1. Drivers of Market Optimism

• Coordinated Support:
  • Sheats highlights a global alignment towards easier fiscal, monetary, and regulatory policies in 2026.
  • Quote [00:20]:
    "Easier fiscal, monetary and regulatory policy in 2026 will support more risk taking, corporate activity and animal spirits."
• Sustained High Valuations:
  • Despite current high valuations, ongoing stimulus across key regions may allow those valuations to persist.
  • "Those valuations may stay higher for longer." [00:30]

2. Policy Expectations for 2026

• Central Bank Actions:
  • Sheats expects rate cuts—or fewer-than-expected hikes—from the Federal Reserve, Bank of England, European Central Bank, and Bank of Japan.
  • Quote [00:36]:
    "We think that the Federal Reserve ... and the Bank of Japan all lower interest rates more or raise them less than markets expect."
• Fiscal Stimulus:
  • Major economies (US, Germany, China, Japan) likely to maintain or expand stimulus spending.
• Regulatory Easing:
  • Changes in regulation, usually overlooked, also favor increased risk-taking.

3. Investor Fears Amid Stimulus

• Loss of Control Concerns:

  • Too much global stimulus brings anxiety about potential instability, especially as gold surges and geopolitical risks rise.
  • Quote [01:10]: "One concern with having so much stimulative sail out, so to speak, is that you lose control of the boat."

• Key Investor Questions:

  • Are inflation expectations rising rapidly?
  • Will government debt volatility increase?
  • Is the US Dollar overvalued?
  • Are credit markets signaling early stress?

4. Market-Based Signs of Stability

• Inflation Expectations:
  • Market-implied 10-year CPI inflation remains stable at ~2.4%, similar to prior years.
  • Quote [01:50]: "The market's expectation for CPI inflation over the next Decade is about 2.4%, similar actually to what we saw in 2024, 2023."
• Interest Rate Volatility:
  • Expected US rate volatility is lower than at the start of the year.
• US Dollar Valuation:
  • Despite headlines, the US Dollar trades in line with fair value based on purchasing power.
• Credit Market Stability:
  • Credit spreads across geographies remain "historically tight", indicating stability.

5. Potential Risks and Outlook

• Acknowledged Concerns:
  • Uncertainty in US foreign policy, Japanese interest rates, and gold volatility fuel investor nerves.
  • Despite anxiety, Sheats emphasizes that stability persists—so long as key market metrics remain healthy.
• Continued Market Support:
  • Quote [02:54]: "While that's the case, we think that a positive, fundamental story—specifically our positive view on earnings growth—can continue to support markets."
  • Major shifts in these “signposts” could, however, reverse their positive stance.

---

Notable Quotes and Memorable Moments

• "Those valuations may stay higher for longer." – Andrew Sheats [00:30]
• "We think that the Federal Reserve...all lower interest rates more or raise them less than markets expect." – Andrew Sheats [00:36]
• "One concern with having so much stimulative sail out, so to speak, is that you lose control of the boat." – Andrew Sheats [01:10]
• "The market's expectation for CPI inflation over the next Decade is about 2.4%, similar actually to what we saw in 2024, 2023." – Andrew Sheats [01:50]
• "Credit markets, long seen as important leading indicators of risk...have been very well behaved, with spreads still historically tight." – Andrew Sheats [02:17]
• "While that's the case, we think that a positive, fundamental story—specifically our positive view on earnings growth—can continue to support markets." – Andrew Sheats [02:54]

---

Key Timestamps

• 00:00–00:30: Market outlook and drivers of risk appetite
• 00:30–01:10: Central bank, fiscal, and regulatory policy expectations
• 01:10–01:50: Investor fears and macro volatility
• 01:50–02:54: Market metric checkup (inflation, volatility, credit, currency) and summary
• 02:54–03:28: Final thoughts on what could shift market sentiment

---

Conclusion

Andrew Sheats maintains a constructive view for markets in 2026, grounded in globally coordinated policy easing and supporting data from inflation, credit, and currency markets. While anxiety remains high due to geopolitical and financial crosscurrents, Sheats urges vigilance over key market “signposts”—not panic—as long as those fundamentals hold.

Transcript

[A]

Welcome to Thoughts on the Market. I'm Andrew Sheats, global head of Fixed Income Research at Morgan Stanley. Today I'm going to talk about key signposts for stability in a world that from day to day feels anything but. It's Friday, January 30th at 2pm in London. A core theme for us at Morgan Stanley Research is that easier fiscal, monetary and regulatory policy in 2026 will support more risk taking, corporate activity and animal spirits. Yes, valuations are high, but with so many forces blowing in the same stimulative direction across so many geographies, those valuations may stay higher for longer. We think that the Federal Reserve, the Bank of England, the European Central bank and the bank of Japan all lower interest rates more or raise them less than markets expect. We think that fiscal policy will remain stimulative as governments in the United States, Germany, China and Japan all spend more. And as I discussed on this program recently, regulation, a sleepy but essential part of this equation is also aligning to support more risk taking. Of course, one concern with having so much stimulative sail out, so to speak, is that you lose control of the boat. As geopolitical headwinds swirl and the price of gold has risen 100% in the last year, many investors are asking whether we're seeing too much of a shift in both government and fiscal, monetary and regulatory policy. Specifically, when I speak to investors, I think I can paraphrase these concerns, as Are we seeing expectations for future inflation rise sharply? Will we see more volatility in government debt? Has the valuation of the US Dollar deviated dramatically from fair value, and are credit markets showing early signs of stress? Notably? So far, the answer to all of these questions based on market pricing is no the market's expectation for CPI inflation over the next Decade is about 2.4%, similar actually to what we saw in 2024 2023. Expected volatility for US interest rates over the next year is well lower than where it was on January 1st. The US dollar, despite a lot of recent headlines, is trading roughly in line with its fair value based on purchasing power, based on data from Bloomberg. And the credit markets, long seen as important leading indicators of risk well across a lot of different regions, they've been very well behaved, with spreads. Still historically tight uncertainty in US Foreign policy, big moves in Japanese interest rates, and even larger moves in gold have all contributed to investor concerns around the potential instability of the macro backdrop. It's understandable, but for now we think that a number of key market based measures of this stability are still holding. While that's the case, we think that a positive, fundamental story, specifically our positive view on earnings growth, can continue to support markets. Major shifts in these signposts, however, could change that. 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.

[B]

The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.