Podcast Summary: Thoughts on the Market

Episode: Will the Fed End the Party?
Date: September 29, 2025
Host & Speaker: Andrew Sheats, Head of Corporate Credit Research, Morgan Stanley

Episode Overview

In this episode, Andrew Sheats analyzes what could fuel a surge in corporate activity in 2026, focusing particularly on whether the Federal Reserve (Fed) is likely to “end the party” or keep the momentum going. Drawing on the interplay between government spending, corporate investment—especially around artificial intelligence (AI)—deregulation, and anticipated Fed rate cuts, Sheats explores how these forces might shape the economic and credit landscape over the next year.

Key Discussion Points and Insights

1. The “Punchbowl” Analogy and Its Relevance Today

• [00:20] Sheats opens by referencing the famous quip from former Fed chairman Bill Martin:

  “It was the Fed’s job to take away the punchbowl just when the party is getting good.”

• He notes how this metaphor is apt given current conditions, as various trends are setting up a “lively scene” for the next 12 months.

2. Government Spending Stimulus

• [00:40] The US government is providing significant fiscal stimulus with a deficit of about 6.5% of GDP.
  • Sheats points out this level of deficit spending is “only larger during the great financial crisis, Covid, and World War II.”
• Implication: The large-scale government stimulus adds “punch” to the economy and corporate sector.

3. Unprecedented AI-Driven Corporate Investment

• [01:05] Sheats highlights that ongoing and projected investment in AI could represent “one of the largest waves of investment ever recorded.”
• Morgan Stanley forecasts:
  • Investments by large tech firms will increase by 70% in the current year.
  • Between 2024 and 2027, such spending is expected to “go up by two and a half times.”
• [01:40] Infrastructure needs, especially in “power and electricity,” will further amplify economic activity.
• Quote:

  “We think that AI-related spending could amount to one of the largest waves of investment ever recorded, dwarfing the shale boom of the 2010s and the telecommunications spending of the late 1990s.” — Andrew Sheats [01:10]

4. Deregulatory Push and Bank Lending

• [01:55] Deregulation could further fuel lending and risk-taking:
  • Lower US bank capital requirements could boost banks’ balance sheet capacity by $1 trillion in risk-weighted assets.
  • A more relaxed regulatory stance on mergers could further heat up activity.
• Quote:

  “Lower capital requirements for US banks could boost their balance sheet capacity by an additional $1 trillion in risk-weighted terms.” — Andrew Sheats [02:00]

5. The Fed’s Current Stance and Labor Market Concerns

• [02:16] Despite all the “punch” added by fiscal, corporate, and regulatory forces, the Fed is not pulling back:
  • Morgan Stanley expects the Fed to cut rates five more times, down to a midpoint of 2 and 7/8%.
  • The Fed’s main concern: signs that the labor market may be slowing.
• [02:30] If the growth holds, these combined supports could drive risk-taking “possibly in a way that we haven’t seen since the 1990s.”
• Quote:

  “The Fed’s supportive efforts are based on a real fear that labor markets are already starting to slow, despite the other supportive factors mentioned previously.” — Andrew Sheats [02:20]

6. Risks and Outlook

• [02:49] Sheats warns that while a credit boom is preferable to a “sharp slowing in the economy,” it carries risks of its own, as seen in the past during periods of exuberant risk-taking.
• [03:00] He predicts that if economic data remains strong, the scenario of combined stimulus and risk-taking will become a major topic of discussion in 2026.

Memorable Moments & Notable Quotes

• On government stimulus:

  “This deficit, running at about 6.5% of the size of the whole economy, is providing stimulus. It’s only been larger during the great financial crisis, Covid and World War II.” — Andrew Sheats [00:40]

• On the scale of AI investment:

  “AI related spending could amount to one of the largest waves of investment ever recorded, dwarfing the shale boom of the 2010s and the telecommunications spending of the late 1990s.” — Andrew Sheats [01:10]

• On deregulatory momentum:

  “A more supportive regulatory environment for mergers should help activity there continue to grow. Again, more punch.” — Andrew Sheats [02:05]

• On the Fed’s risk balancing act:

  “If growth doesn’t slow, large deficits, booming capital expenditure, a looser regulatory environment, and now Fed rate cuts would all support even more corporate risk-taking, possibly in a way that we haven’t seen since the 1990s.” — Andrew Sheats [02:33]

Important Timestamps

• 00:20 — Introduction and the “punchbowl” analogy
• 00:40 – 01:05 — Government deficit as economic punch
• 01:10 – 01:50 — AI investment surge and implications
• 01:55 – 02:10 — Deregulation and banking sector impact
• 02:16 – 02:40 — Fed rate cut outlook and labor market concerns
• 02:49 – 03:00 — Risks of a credit boom
• 03:10 — Predictions for 2026 if growth remains strong

Summary

Andrew Sheats presents a lively assessment of the factors driving U.S. corporate and economic momentum as 2026 approaches. With government deficits at historic levels, surging AI-driven capital expenditure, deregulatory tailwinds, and the likelihood of further Fed rate cuts, conditions appear set for significant corporate risk-taking—“unless,” as Sheats cautions, “the punchbowl is finally taken away.” This episode is essential listening for anyone interested in the evolving intersection of fiscal policy, innovation, and monetary policy in determining the next phase of the economic cycle.