Thoughts on the Market

Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen unpack what is likely to influence this week’s interest rate decision by the Fed.
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Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy.
Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist.
Matthew Hornbach: Today, will the Fed hold or hike? It's the question in the market right now.
It's Tuesday, July 28th at 9:30am in New York.
Will the Fed display patience, or has it run out of patience? That's the question hanging over the July FOMC meeting currently underway.
We believe the former. We expect the Fed to keep the target range for the federal funds rate unchanged at 3.5 to 3.75 percent. The statement will probably also remain unchanged, reiterating the ample reserve policy, economic activity expanding at a solid pace despite elevated uncertainty.
So, Mike, what's your assessment of the situation beyond that?
Michael Gapen: Our assessment of the July FOMC meeting is actually the case for hikes is not as persuasive now as it was in June. And I think when we say that and when we come to the decision the Fed will stay on hold this week, we're basing it mainly on the data that has come in since the June FOMC meeting. And two important pieces on that front are employment growth moderated.
So, in the June meeting, the three-month average payroll gain was running at about 188,000 per month. And I think it gave the sense that the labor market was really accelerating and there was downside risk to the unemployment rate. The subsequent employment data changed that view. Now it looks like there is much less of an acceleration in hiring and momentum has slowed. So, the labor market doesn't look quite as robust.
Second, there was a lot of information, we think, a lot of signal about disinflation. So yes, recent volatility in the Middle East did push oil prices temporarily higher. We'll see where that goes. But underneath the hood, there was significant softness in goods inflation and services inflation, particularly related to housing.
So, we do think that there was a lot of evidence that disinflation is here. So, with those two things in mind, we think there's less of a case to hike in July than there was in June. So, we think the right thing... Or what we think the Fed will do is to skip July, try and buy a little more time, get a little more information. If disinflation is indeed here, the Fed stays on hold. If not, and inflation stays firm, well, they can move to rate hikes later this year.
But we think the case to hike in July is less compelling than it was in June.
Matthew Hornbach: Well, they certainly will get a lot more information between the July meeting and the September meeting. If memory serves, at least two more rounds of all of the major economic data points…
Michael Gapen: That’s right.
Matthew Hornbach: Payroll, CPI, and so on.
Michael Gapen: That's right. The gap between the July FOMC meeting and the September FOMC meeting is the longest on the Fed's calendar. Of course, in part, that makes room for Jackson Hole in August, which if the Fed were moving to a tightening cycle, could be a venue to lay out the case for that. But you're right, they will see multiple employment and inflation reports before they meet again in September.
Matthew Hornbach: If they really wanted to get ahead of that data and move at this meeting, what is the case for hiking rates in July? How would you think about that perspective?
Michael Gapen: I think you could make a couple of cases to hike now. One is recent volatility and conflict in the Middle East has pushed oil prices higher. Maybe it convinces you – you're in a prolonged oil risk premium scenario, and inflation will not dissipate.
Second, I think you could argue, well, it's a balance of risks argument. And we think risks have just shifted in the direction of inflation, where last year they were in the direction of a weaker labor market. We eased last year. Let's just reverse those risk management rate cuts this year. So, it's not about inflation in hand, it's about your view of risks around inflation.
Another, I think, and to me, this is the most important one, is maybe Warsh wants a regime change in the reaction function. In other words, he emphasizes price stability and achieving the 2 percent target. Well, at some point, words are words and actions are actions. And maybe what he desires is a more hawkish reaction function and kind of a higher interest rate all else equal to guide inflation down to 2 percent more quickly.
So, I think, Matt, if we're wrong this week, I think the main reason we're wrong is I'm thinking under an older reaction function, and Warsh is bringing a new one. And right now, we don't exactly know what his reaction function is. And he could reveal it this week as being in a direction where he really wants to concentrate on the inflation side of the mandate to the exclusion of nearly everything else.
Matthew Hornbach: Well, I don't think that's lost on markets at all. And in fact, I think that the rise in yields we've seen in the bond market concentrated in the real yield component of the 10-year Treasury bond tells you a lot about how investors are thinking the Fed will react to higher energy prices. As energy prices have gone up, so have bond yields.
The relationship between those two asset prices are very strong. And usually what that suggests is if the real yield is going up more than the break-even inflation rate is going up as energy prices rise, it's telling you that investors think the Fed will not look through the rise in energy prices.
If you have the opposite happen, where your break-even inflation rate is going higher, more so than the real interest rate is going higher, that would suggest investors think the Fed will look through the energy price increase. That just hasn't been the case, and so I think investors are very much attuned to what they think is the right reaction function for the Fed.
But I guess we'll see. Only time will tell. And I think in order to help us tell what the right reaction function is – we'll need some communication from the Fed. And maybe that's where I want to go next with you – is on communication.
It does seem like there have been fewer FOMC participants speaking to the public since Chairman Warsh began his tenure as chairman. Is that your impression? How do you think about communication? And since we are in the midst of this FOMC meeting, the press conference… What do you think about press conferences going forward?
Michael Gapen: I do think you're right. I haven't counted up the literal official FOMC communications. I do think there have likely been fewer speeches and/or interviews given recently. And whether or not that's a function of Kevin Warsh as the chairman or it's summer and things move a little slower, I don't know.
I will say, though, that when participants have spoken, I think we're getting the same, say, normal communication that they brought in the past. So far, I don't read participants as unwilling to provide their view about the outlook for the economy and for monetary policy.
On the press conference, boy, would that be a change. I've been of the view that you probably will not get what I'll call a major change to the SEPs or the press conferences in terms of their frequency until the task force on communications has run its course, where I think the deadline is ultimately later this year.
So, I don't think the schedule of press conferences will change until 2027, if it changes at all. But if we don't have them… The way that I would look at that, Matt, is to say, if the Fed's speaking less, there will be a vacuum out there to some degree. So, if the Fed's giving its view on the outlook and monetary policy less frequently, something else will fill that narrative, whether it's markets or the private sector or whatever it is.
Vacuums are going to get filled. The Fed's speaking less, somebody else will speak more. Maybe that drives volatility more. I guess it would depend on the situation, but I think pulling press conferences would be a major surprise. I don't think it's in market expectations, and my belief is it would probably lead to some increase in volatility over time.
How would you read it?
Matthew Hornbach: Absolutely. I think the void has already begun to be filled by investors and how they think about the Fed's reaction function, rightly or wrongly. Which is why I think we've seen real yields move in a very positively correlated way with energy prices. Investors are intuiting a certain reaction function to higher energy prices.
Whether or not that is the correct view, only time will tell.
If we do have a press conference at this upcoming meeting, which looks very likely, investors are going to pay attention to every nuance and every shift in the chairman's tone. How he chooses to address certain questions versus others—or whether he chooses to address them at all—will be important for market participants and how they invest in the bond and currency markets.
With that, Mike, thanks again for taking the time to talk. I look forward to catching up with you again in late August around the Jackson Hole symposium.
Michael Gapen: Great speaking with you, Matt. Thanks for having me on.
Matthew Hornbach: And thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen. And share the podcast with a friend or colleague today.

Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why he thinks the bull market has entered a new phase, with more focus on quality.
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Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast I’ll be discussing the transition from early- to mid-cycle and what that means for your portfolio.
It's Monday, July 27th at 11:30 am in New York.
So, let’s get after it.
Our broadening call for the market has been about moving beyond the narrow leadership of the mega-cap winners and into more economically sensitive areas. That made sense in the context of our rolling recovery thesis, a period when revenue growth returns to lean cost structures, and operating leverage emerges across many sectors of the economy.
But now, I think that early-cycle phase of the rolling recovery is ending, and the market is starting to rotate toward quality. That’s not bearish, but it is different and can affect portfolios at the stock level.
As the cycle matures, investors stop rewarding low quality beta and start focusing more on free cash flow, balance sheet strength, margins, and earnings stability. The market is not abandoning the recovery. It is becoming more selective about the best way to own it.
This setup reminds me of early-to-mid 2021. After the initial post-COVID rebound, leadership shifted away from lower-quality and more speculative areas and toward higher-quality companies. The S&P 500 kept rising, but the leadership changed.
I think we’re seeing something similar today. The S&P itself is already a quality-heavy benchmark, with high-quality cohorts representing roughly 42 percent of the index versus about 28 percent for low quality. That should help keep the index resilient, even as the market continues to digest this transition.
Could we still see near-term volatility? Absolutely.
If the war escalates further or the Fed surprises us with a rate hike this week, the market can continue to correct. I continue to think 7000 on the S&P 500 is important support if investors remain uneasy about the Fed transition or the geopolitical backdrop. However, the bigger message is that leadership is changing, not that the bull market is ending.
One of the most important drivers of this shift is AI adoption. Earlier in the cycle, margin expansion was about classic operating leverage: sales recovering faster than costs. From here, margin expansion will depend more on companies using AI effectively, running leaner, and turning productivity into revenue growth as well.
This is why quality matters. Companies with strong pricing power, strong balance sheets, or the ability to translate AI adoption into real growth are likely to be rewarded disproportionately.
Companies where AI is material to the investment thesis and pricing power is neutral to strong are seeing forward net margin expectations improve nearly 400 basis points above the median stock. Our transcript work also shows that roughly 25 percent of S&P 500 companies cited measurable benefits from AI adoption in the second quarter, up from 14 percent a year ago. That’s operating leverage with a new engine.
This also feeds into the AI leadership rotation. I still think semis are likely to underperform hyperscalers from here, even if both can be under pressure during the next leg of consolidation. Semis are a classic early-cycle group, and they’ve already seen a peak rate of change in earnings revisions. The hyperscalers, by contrast, have high quality core businesses, exposure to the agentic application layer, and an underappreciated ability to take costs out through AI-driven efficiencies.
In terms of the overall S&P 500, the two variables I’m watching most closely are interest rates and oil. The bond market is pricing a meaningful probability of a Fed hike, but my base case remains that the Fed stays on hold. A hike would be a hawkish surprise and a risky maneuver, but I think even that would delay rather than derail a positive finish to 2026 with earnings growth remaining strong.
Oil is the other wildcard. A sustained rise in oil is not priced into equities, and just another reason to move one’s portfolio up the quality ladder.
Bottom line, the broadening is not over, but it is changing shape and leadership. We’re moving from early-cycle beta toward mid-cycle quality as the market seeks not only growth, but companies that can convert that growth into durable free cash flow and margin expansion.
The recent elevation of quality factors has been evolving for the past month and now it’s time to fully embrace it.
Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

Looking at clues from the past, our Global Head of Fixed Income Research Andrew Sheets examines how the recurring themes – from deregulation to volatility – are shaping markets and why every cycle still takes its own path.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, what can Odysseus teach us about investing?
It's Friday, July 24th at 2pm in London.
Like many of you, this week I saw The Odyssey. The enduring appeal of this story more than 2,700 years after it was composed is a reminder that some themes are universal. Pride, resourcefulness, determination, self-control, or the lack thereof, mattered to both an ancient Greek dinner party and resonate with anybody investing today.
But drawing lessons from the past is also tricky.
We do not have that much financial history, and markets contain too many variables for the same combination to align twice. Some judgment, art, and dare we say storytelling is always involved in deciding which historical periods best describe the present.
Those disclaimers aside, we've argued in our year ahead outlook that 1997 to 1998 and 2005 to 2006 are some of the most useful templates for the current backdrop.
That remains our view.
They suggest a cycle that has further to run, equities outperforming credit, and a preference to own volatility. Both of these periods were defined by a sharp rise in corporate activity. That is certainly what we're seeing today.
We forecast U.S. capital expenditure to rise 23 percent in 2026, and 26 percent in 2027. AI is the biggest driver of this spending but build-outs in energy infrastructure are also playing a role. And increased corporate CapEx is certainly a global story, especially in Asia.
Then there's M&A, which also rose significantly in these two past historical periods. As recently as early 2024, global M&A volumes were unusually depressed, some of the lowest levels in over 30 years, adjusted for economic size. But that's no longer the case. And more recently, M&A is currently running up 64 percent relative to a year ago.
Important current macroeconomic data also looks somewhat similar to these past two periods. The current levels of U.S. core PCE inflation, the unemployment rate, and the 10-year yield are pretty close to the averages seen in 1997, 1998, 2005, and 2006.
And the U.S. 2s10s yield curve, well, it broadly flattened then, and it has broadly been flattening today.
A third similarity, maybe less obvious but no less important, is deregulation. Both 1997 and 1998 and 2005 to 2006 saw significant financial deregulation. And we're seeing that again now. From the Basel Endgame to NAIC risk weights to Solvency II changes to savings reforms in Europe, Korea, and elsewhere, the current trend appears to be on a firmly deregulatory path.
Even more simply, 1997 and 1998 and 2005 to 2006 provide interesting narrative bookends to two ways that I often hear the current environment being described.
The late '90s? Well, that was defined by rising excitement around a transformational new technology – then the internet – and the prospect of a more productive future. Sound familiar?
And the mid-2000s? Well, that was defined by a very unequal economy and rising consumer stress – but growth that was still supported by a seemingly inexhaustible investment demand from a rising market force. Then that force was emerging markets. Today, it's AI. Again, somewhat familiar.
If these periods serve as a guide, the cycle probably has further to run, and corporate aggression should favor equities over credit.
But if we learn anything from the trials of Odysseus, the journey can throw up plenty of surprises along the way.
Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Despite growing political resistance, investment in data centers isn't slowing. Ariana Salvatore explains why supply constraints may actually accelerate AI capital spending.
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Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley.
Today, I'll be talking about why we still expect robust AI capital spending in spite of some rising political pushback.
It's Thursday, July 23rd at 10am in New York.
It should be no surprise to our listeners that data center pushback, a topic that we've been following for some time, has been growing louder. But in 2026, it's accelerated meaningfully. Data we track suggests that an estimated $156 billion of projects were canceled or delayed in 2025. This year alone, in just the first quarter, we've seen almost that same exact number.
The opposition is coming from several directions.
Communities are raising concerns about rising electricity bills, environmental pressures related to water use, and the local quality of life effects of large-scale construction. But it's also coming from lawmakers across the aisle. State legislatures with both Democratic and Republican lawmakers have been advancing this type of policy.
At the same time, we're forecasting a little less than a trillion dollars of AI CapEx this year alone, and we think it's an increasingly important component of the macroeconomic growth outlook.
So how do we square that circle?
First, and most importantly, we think this is primarily a supply-side risk rather than a demand-side one. We don't expect the backlash to materially reduce projections for compute demand. Instead, it could widen the gap between that demand and the industry's ability to bring new capacity online through things like permitting delays, grid interconnection constraints, and local opposition.
Despite that more difficult political and infrastructure environment, our internet team, led by Brian Nowak, remain constructive on AI capital spending. Our broader thematic estimate for total AI CapEX, including the neo cloud providers, stands at approximately $870 billion in 2026, and we actually see risks skewed even higher from here.
So why is spending still increasing as the environment for building data centers becomes more challenging? There are a few reasons.
First, the AI ecosystem remains compute constrained. The urgency to invest has not diminished. In fact, growing social opposition and political uncertainty ahead of the 2028 presidential election may actually be encouraging hyperscalers to begin projects earlier, which our credit strategists outline as a potential scenario here. A pull forward of demand before the political and execution risk grows even louder.
Second, the timelines associated with data center construction have become longer. From groundbreaking to operational launch, projects can now take as long as three years or even more. That gives companies a strong incentive to begin developing future capacity well in advance, even if the political pushback is strong.
And third, the underlying demand signal is not slowing. Global weekly token usage, which our analysts view as an important proxy for compute demand, has increased since early January. It's rising and continues to do so throughout the course of this year.
So, in short, the pushback is real, but it appears to be reshaping the build-out rather than stopping it.
That's why our base case is for a conditional build-out. We think projects are likely to face greater scrutiny, we think projects are likely to face greater scrutiny, longer delays, and more requirements related to environmental impact and community benefits.
But ultimately, we still think they cross the finish line. That could mean higher costs, it could mean longer development timelines, and greater geographic dispersion of projects away from the largest existing data center markets.
It could also accelerate the shift toward on-site and behind-the-meter power generation. Fuel cells, turbines, and energy storage are becoming increasingly important as operators look for ways to reduce their reliance on these lengthy grid interconnection processes, and that can benefit companies that are able to bring those solutions to the forefront.
Meanwhile, our U.S. equity strategy team maintains a relative preference for hyperscalers over semiconductors over the next several months. As you heard our CIO and Chief Equity Strategist Mike Wilson explain yesterday, that's because the team sees the hyperscalers as early in discounting the market's renewed focus on CapEx discipline.
Putting it all together, we see the growing pushback against data centers as representing a genuine risk to the pace, cost, and geography of the AI infrastructure build-out.
But again, this isn't just a demand story, it's a supply story. And somewhat paradoxically, the scarcity and the uncertainty created by these constraints could actually end up pulling capital spend forward rather than reducing it.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share thoughts on the market with a friend or colleague today.

Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why market leadership is rotating beyond semiconductors and where investors may find opportunities despite near-term volatility.
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Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast, I will explain why the recent volatility in markets makes sense.
It's Wednesday, July 22nd at 2 p.m. in New York.
So, let’s get after it.
The broadening trade is back and it’s gaining steam. We established this thesis last week. Importantly, there’s a key reason this broadening trade is likely to continue. One of the more crowded areas of the market—semiconductors—has lost its momentum.
As I’ve also noted before, this is not a call that the AI cycle is over. However, stocks do trade on the rate of change in growth, and expectations often reach a place where they can no longer surprise on the upside.
Earnings revisions tend to get too stretched, and capital starts looking for the next place where fundamentals are improving but positioning is still light. This is no different than what happened to other leadership groups earlier this year in areas like precious metals and energy stocks.
Remember, I first made the call for market broadening in our November outlook. My view is that the economy had moved into a new expansion after the rolling recession ended in April 2025. Markets were starting to catch on before the Iran conflict interrupted that trend. Investors piled back into the AI trade—especially semis—as oil prices jumped and Fed expectations shifted more hawkish.
Back in June, I noted that those earnings revisions were likely nearing their peak. Hyperscale stocks starting to lag was the first indication. Since semis ultimately depend on hyperscaler spending, that divergence usually doesn’t last. It doesn’t mean the buildout is ending. However, the spenders may be moving from blind enthusiasm to a more disciplined phase as a means of addressing the market’s concerns about falling cash flows.
We’ve seen this pattern before. Since ChatGPT launched, this ebbing and flowing between the hyperscaler and semiconductor stocks has happened three times. This is the fourth such adjustment, during which the hyperscaler stocks are likely to outperform the semis. Since a few weeks back, hyperscalers have outperformed semiconductors by almost 30 percent.
Another consequence is that the major averages may trade lower in the near term. When a crowded, large-cap leadership group is unwinding, the index can look choppy even as the market underneath is improving.
That’s the key distinction. The index may struggle, but the broadening can still work. Over the next month, don’t be surprised if the S&P 500 trades as low as 7000 before it makes a move to 8000 by year-end. Use this weakness to add to equity positions.
I continue to like Consumer Discretionary Goods, Transports, and Biotech.
Discretionary Goods remains one of the cleaner expressions of the broadening thesis. Wallet share is shifting from services back toward goods, goods pricing is improving, and earnings revisions are strengthening. Transports continue to show improving revisions as volumes stabilize and pricing gets better. Biotech is one of the more attractive lower-rate beneficiaries, especially if policy expectations are too hawkish, as I think they are.
On that last point, the Fed backdrop matters. The June FOMC meeting told us forward guidance is going to be limited, and the inflation path is going to drive policy. The softer-than-expected inflation data last week should allow the Fed to stay on hold rather than hiking. It may take the bond market a few more data points to fully re-price this view.
Bottom line, the broadening is in gear, but it may not feel comfortable because it’s happening while the crowded momentum trade unwinds, a process that is likely unfinished. That’s usually how rotations in market leadership work.
Like spring, it’s often: in like a lion and out like a lamb.
Thanks for tuning in. I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!