Thoughts on the Market

In the first of a two-part discussion, our roundtable explores how AI investment, trade and consumer spending are sustaining global growth, and what could put that resilience at risk.
Read more insights from Morgan Stanley.

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Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research.
Michael Gapen: I'm Michael Gapen, Chief U.S. Economist.
Jens Eisenschmidt: I'm Jens Eisenschmidt, Chief Europe Economist.
Chetan Ahya: And I'm Chetan Ahya, Chief Asia Economist.
Seth Carpenter: And today, our fourth quarterly economic roundtable discussion is going to try to take a wide-angle view on the global economy – and it has held up despite higher interest rates, higher energy prices, geopolitical uncertainty, you name it.
It's Thursday, October 22nd at 10am in New York.
Jens Eisenschmidt: And 4pm in Frankfurt.
Chetan Ahya: And 10 pm in Hong Kong.
Seth Carpenter: All right then. Let me start with that big question Why has global growth held up better than maybe would have been expected given everything that we've seen ?
Mike, maybe I'll start from the U.S. perspective with you. What do you think has mattered most? What is driving – if I dare use an overused word – the resilience of the economy?
Michael Gapen: Most of us believe AI-related spending is interest rate insensitive and geopolitically insensitive. And certainly, I think the data has borne that out. And in the direct translation of AI hypercaler Capex spending to growth, we find that AI is accounting for 4/10 to 6/10 contribution to growth in any given quarter. You could nudge that a little higher if you think it’s creating productivity, which we do.
And that spending is underpinning asset market appreciation – or certainly has for the past several years. And that is underpinning resilient spending by upper income households.
So, I think in the U.S. the clear answer is AI-related spending, but also its linkage to asset markets and upper-income households.
Seth Carpenter: Jens, let me come to you for the European view. I mean the AI story has been a little bit different in Europe. I think consumer behavior sometimes can differ in Europe than in the United States.
What would you say is the story behind the resilience of economic growth there in Europe?
Jens Eisenschmidt: It’s similar in the sense that there is a clear element of also of AI-related external demand. That even in Europe now the phones are ringing, given that we are more typically seen as on the more higher cost end of the spectrum.
So, I think there was clearly in the second quarter data, export-led growth elements related to AI or delivery into that. There was also an element of geopolitical tensions helping some of those producers – say, chemical industry in Germany comes to mind – that would deliver products that would previously be delivered out of the Strait [of Hormuz].
So, that is another element. And then, yeah, the consumer held up better than had expected. Or that you could have expected given the rise in energy prices. So all in all, that got us a relatively solid second quarter print. And we expect this to be more or less repeated also in the third.
Seth Carpenter: Chetan, the export story is pretty important. You've been writing about a big CapEx cycle and big industrial cycle in Asia. So, when you think about the Asia story and why the economic growth held up in spite of the global shocks, how would you characterize that?
Chetan Ahya: Yeah. So, Asia is benefiting from a strong pickup in CapEx, which initially was led by the tech sector, but is now broadening out to energy, defense, and broader industrial investments. Exports are strong, and showing some signs of broadening out from tech to non-tech goods too.
This has meant that the region has faced positive terms of trade situation despite higher oil prices. Higher export prices have boosted corporate profits and in turn government tax revenues, offsetting the fiscal pressures from higher fuel subsidies.
And when you're thinking about higher interest rates that you are seeing globally and also in Asia, what is different in this cycle is that the macro stability indicators are in a good place. Current account surpluses in the region have widened quite significantly. In fact, it is $1.6 trillion or 4.2 percent of GDP.
Also what we have is the private sector balance sheets outside of China are quite healthy.
So, all in all, both higher oil prices and interest rates have not disturbed the CapEx and growth cycle in the region.
Seth Carpenter: Is there a lot of dispersion across sectors, across countries for this cycle that you’re talking about? Can you go a little deeper there?
Chetan Ahya: Yeah. So let me start first with the story on investment versus consumption So initially, the growth story in the region started with a pickup in exports and CapEx. But what we have seen is that this has now broadened out into a dynamic where we see an improvement in the labor market and therefore consumption growth.
So, we have this recovery broadening out from exports to CapEx to consumption.
And within the region, when you're thinking about different economies. Initially, we saw very strong growth in Korea and Taiwan. But now we have seen growth being strong in all parts of the region, especially in economies like India, Japan, and also some of the Southeast Asian economies like Malaysia and Singapore.
Seth Carpenter: I want to stay on this broadening theme, Michael.
Is all of the CapEx spending, all the investment spending, by business in the United States, is it just an AI story? Are we seeing any broadening of the investment story in the U.S. beyond AI? Or should we just resign ourselves that the rest of the economy is going to stagnant?
Michael Gapen: No, I do think we are seeing evidence of some broadening out. It is most clear in manufacturing.
So, I do think it points to some broadening out in the AI story beyond the narrow AI story into something that is broader that both Chetan and Jens have referenced about in a multipolar world needing to build out redundancies in supply chain.
Maybe there's some incentive to do some reshoring. So, whether it's a spillover effect from AI or a spillover effect from geopolitics writ large, I do think there's some evidence that we're seeing the broadening out.
I would just caution and say, just remember, manufacturing in the U.S. is relatively small. It's only about 10 percent of output and maybe 10 percent of employment. But nonetheless, it's there. So, it's not just an AI story. I think you can characterize it as a bit broader.
Seth Carpenter: Let me come to you, Jens, on this. We've seen an investment story play out for a while in Europe. There was a lot of discussion about defense especially in Germany –infrastructure especially in Germany.
Is that still an important part of spending in Europe, the investment side of things? And how important is investment relative to household?
Jens Eisenschmidt: Yeah. No, I mean, I think in, in terms of the shares; and GDP shares in spending, you're talking about 50 percent versus 20 percent. So, consumption is the more important one…
If you talk about relative expectations, so I think there your question really points at a key component of the forecast. If anything, you could expect maybe some more dampening from here, given that energy prices have increased further, and at some point the consumer will just capitulate. Or at least, need to show some signs of retracement. While investment has so far, in the aggregate at least, not shown any signs of a big revival.
And if anything, this is what we would expect more investment from here – be it related to, you know, a progressive AI build out.
Or be it because we anyway expect some more positive investment dynamics given where we are in the cycle and given that the ECB has decreased rates last year. And at some point, this typically shows up in investment demand.
So, long story short, the relative importance as a growth driver should increase of investments, vis-a-vis consumption. I think that is that is relatively clear. The question is just the magnitude here.
Seth Carpenter: How much do you worry then that not only is investment going to become bigger share of growth? That consumption could weaken even more because energy prices chip away at purchasing power of households? Is that a relevant factor for Europe?
Jens Eisenschmidt: I think that has to be the number one growth worry going forward So essentially, you come down in terms of wage increases from very high level that were reflective of past inflation.
So, the European wage setting process always lags inflation, and so basically today's wage agreements are reflective of yesterday's inflation.
But now we are going above 4 percent, very likely on our forecast. Not an awful lot above 4 percent, but still above.
Then it becomes a question of how long this is going to persist. If you just believe the future curves in energy markets – not long. But then if you look at more details in terms of, for instance, where diesel prices are likely heading, you can become more pessimistic, and ultimately, this is what matters for the consumer. So long story short, big risks here, of course.
Seth Carpenter: All right. So, a consumer that's not exactly pulling its weight leads me back to China. Key economy in the world, one of the biggest economies going. But when it comes to demand, aggregate demand, China has been in this deflationary cycle for a while. The household sector has been pretty soft in terms of its demand.
What are we looking at there in terms of the consumer in China, the demand side of things in China? is that likely to change anytime soon? And can the global economy look to China as a source of extra demand to keep this expansion going?
Chetan Ahya: Unfortunately, I think the short answer to your question is no. We are still very cautious on China's consumption outlook. And what we have been characterizing the China growth story as it's going through a K-shaped recovery.
On one side, you have the strength in exports and AI CapEx. And on the other hand, we have a very weak consumer.
Now, why is the consumption growth weak in China? So firstly, the property sector has still not completed the adjustment cycle.
So, from consumer standpoint, they have still a weak labor market and wage income growth. On top of that, they have seen this massive decline in asset prices. And, so they are actually, de-leveraging at a very rapid pace. The outstanding debt for consumers is contracting at the rate of 1.5 percent. 1.5 percent is not a big number, but just to see that contraction is quite surprising.
And so therefore, all in all, China's consumption growth continues to remain weak. We do think that there is a possibility that the policymakers respond to this weak growth and provide some support. But we're not expecting that support to be big fiscal expansion in a way that you get a major surprise on the consumption outlook for China.
Seth Carpenter: But as we started off saying, things are holding up, and so that fact brings up a question in my mind. Where are the risks? Where are the downside risks? And so, Mike, maybe I'll start with you.
What do you think would lead to a downturn in the U.S.? Where's the biggest vulnerability? What do we have to look out for?
Michael Gapen: Well, I think in the, the near term, I do think higher rates pose a vulnerability. So, I would say if the central bank has to shift to a much more dramatic tightening cycle and interest rates go a lot higher, that would be a near-term vulnerability. But I think if we look further out, if the resiliency of the economy is driven by the AI investment cycle, then I think a potential over-investment cycle is the greater risk.
Seth Carpenter: Alright. Jens, what about in, in Europe?
Jens Eisenschmidt: Clearly we have a discussion among European, in particular monetary policymakers, as evidenced by the latest accounts of the ECB about the degree to which long rates have increased. Maybe, too much and, you know, present a significant tightening of financial conditions.
And juggling that in a good way will certainly be a risk and reason to be cautious.
So, I would say, here the three risks. Again, consumption because of energy prices, interest rates, or a too tight monetary policy stance. And of course, the investment cycle overall.
Seth Carpenter: Chetan, you get the last word in Asia
Chetan Ahya: So, I would say, Seth, two risks. One is higher oil prices and the second one is, if you see a contraction in AI investments in the U.S. and therefore in Asia as well.
So, on oil prices, I would say a threshold of $130 to $150 of oil would be a problem for the region. It would make the governments finally do resort to higher oil prices for the consumers.
And if you get a combination of higher oil prices and lower AI investments, that would be quite a big shock to the region's growth outlook.
Seth Carpenter: Super helpful. And I think that's probably a good place for us to stop for today.
We talked about global growth. It's been holding up really well. Sources of that resilience probably differ a bit across regions, but investment is important and becoming probably more important over time. And that investment boom is spreading through trade. Domestic demand in parts for Asia. Europe has got its own story going on. And obviously, the consumer around the world matters a lot.
That current outlook though, of a reasonably strong economy with this shock from energy that's driving up inflation, means that the policy side of things, especially monetary policy, is now becoming kind of complicated.
So, what should a central bank do? When we come back tomorrow, we're going to ask questions about the Fed, the ECB, the Bank of England, the Bank of Japan. How they're thinking about what's going on, the tightening that needs to be done, whether or not this is going to be a fully synchronized hiking cycle.
And I guess most of all, what's going to tell us when the policy hiking has gone far?
Mike, Jens, Chetan, thanks so much for joining today. And to the listener, thank you for listening, and be sure to tune in tomorrow for part two of our conversation.
And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or a colleague today.

Can markets absorb this much new debt? Our panel examines strong demand for investment-grade bonds, stress in high-yield debt and the macro risks that could shape the next six to twelve months in credit markets.
Read more insights from Morgan Stanley.

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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.
Anish Shah: I'm Anish Shah, Global Head of Debt Capital Markets.
Rehan Latif: I am Rehan Latif, Global Head of Credit Trading.
Samer Oweida: And I'm Samer Oweida, Global Head of Foreign Exchange and Emerging Markets.
Andrew Sheets: Today, a discussion of historical levels of bond issuance and how it could affect the broader markets.
It's Wednesday, October 21st at 9am in New York.
Gentlemen, it's great to talk with you. I think what we're talking about is an issue that really cuts across all parts of Morgan Stanley's businesses, from issuance to credit trading to macro markets and beyond.
And I'd like to get into it, but just quickly to kind of frame where we are. Anish, we are in the midst of a historic investment cycle in AI CapEx. We're in the midst of a very large pickup in M&A activity that I also want to make sure we get into.
But you sit at the intersection of our capital markets businesses. Talk a little bit about what we're seeing in the bond issuance space.
Anish Shah: Sure, Andrew. I look after all of our new issue capital markets business in credit, and that's across the credit spectrum and across geographies. And I'm constantly looking to Rehan for the latest in investor sentiment and how we can deliver the right product for our issuing clients. And to Samer on macro views that impact our clients every day.
We are in the midst of a significant decommoditization of new issue credit markets and a decompression in credit. It's really driven by four important factors.
One is, as you note, unprecedented levels of issuance. Investment grade debt volumes are up almost 25 percent on the year. That's driven by the AI CapEx theme and a resurgence in M&A.
Number two is the rate backdrop has been, to date, pretty constructive for credit. We've seen $100 billion of new cash come into investment grade credit. We've seen new pools of investors drive tremendous new capacity into credit markets, whether it be insurance, capital fueled by annuity investments or other private credit.
We're also seeing an increase in complexity, and that's driven by the AI CapEx cycle and the interconnectedness between hyperscalers, the chip makers, the neo clouds, the data centers, and that's requiring an unprecedented level of innovation in structuring new solutions for issuers.
And the last is the market is grappling with supply-demand dynamics and winners and losers in the AI thematic.
Andrew Sheets: Rehan, that's actually a great place to turn to you because you're on the other side of this. You're focused on can markets absorb all of this supply? And I often kind of hear two narratives.
You know, one is everything is great. You've got record issuance and record supply into the credit markets. And the other is cracks are forming. You're seeing widening of CCC spreads. You're seeing some headlines around some issuers running into more trouble. From your perch, how do you see things?
Rehan Latif: So, Andrew, instead of two, I'll give you three narratives within public credit trading.
One, I agree with Anish. I think first of all, I've got to thank Anish because it's never been busier on the public credit side because of the amount of issuance coming through. But there are, really, three different themes coming through.
One, investment grade has been incredibly strong. The higher quality part of the credit market is benefiting from all this new investor money coming through at these higher rate levels. For the longest period of my 20-year career, 20-plus year career, we were in a zero-rate environment. At current yield levels, investment grade has never looked like a more attractive proposition.
You add in growth in the U.S. and across the rest of the world, the reality is that investment grade looks like a very interesting investment thesis. And I think spreads continue to be appropriately priced for the risk.
On the CCC side of the market, that's where we're seeing real dispersion.
Where we're seeing investors from the distressed community, from the high yield community, really have to figure out how to refinance some of these names. And that's been where the real challenge has been from a credit perspective.
And then obviously, you've got the hyperscalers that have come through in significant wave across many different parts of the capital market.
So, one thing Anish mentioned was the number of different financings that are available to the hyperscalers. So, I do think that given the cash flows that these hyperscalers actually have, you've managed to be able to attract a new investor base to our market as well.
Andrew Sheets: Samar, we just heard that, you know, Anish has never been busier. Rehan has never been busier. There's clearly a very credit-specific story here. But, you know, this is something that I imagine is also top of mind in the macro markets.
You've got all of this supply. You've got AI that's kind of driving the market, but you've also got all these other broader issues around energy and deficits. How do you see the historic wave of credit supply fitting into the macro piece?
Samer Oweida: Well, maybe I'll start by also thanking Anish because our corporate derivative business, where we hedge exposure, whether it's on a deal basis or on a normal course basis for these issuers, has never been busier. And part of that is because of the historic issuance that's been discussed.
But part of that, Andrew, is also about the uncertainty that you mentioned in these markets. And so, this epic wave that we're seeing around hyperscalers and AI is happening at a time where energy prices are high, inflation is sticky, fiscal concerns abound, and there's a lot of uncertainty in the forward.
And so, what we've seen from a behavioral standpoint is clients having much more appetite to engage on these discussions because of the uncertainty and hedge that exposure.
What we've also seen is a lot of re-racking of traditional macro models and how do we think about what is the rate level that the economy can handle? What does that rate level mean for winners and losers by jurisdiction or by sector, as Rehan mentioned earlier?
And we've seen that manifest itself in a lot of the invested decisions that our clients have made over the course of the year, where we've seen capital and engagement go up with names both corporate and sovereign. Where there's a positive commodity story and there's a positive AI hyperscaler story.
And we've seen less investment around the jurisdictions and the names where that story is not the case. And so we're seeing some amount of divergence, but I think also given that the economic background globally, and particularly in the U.S., continues to be strong. We've just seen very high levels of activity coming out of our corporate and sponsors-based businesses.
Andrew Sheets: So, Anish, that brings me to a question I wanted to ask you about – which is, you know, Samer, you mentioned this, really important macro question is: at what point do higher rates slow down activity?
And yet, so far, activity's still been very solid, and it's not just AI. We've also seen a lot of strategic activity, a lot of M&A activity. I would love for you to take us inside the conversations that you're having with these companies – and how they're thinking about the environment. How much these current levels of interest rates are impacting their decision-making?
Anish Shah: Andrew, you could probably break that question down into two pieces.
One is in the AI ecosystem, where, you know, certainly there's a lot of optimism on the return on these investments. And so, sitting in the shoes of a hyperscaler or a data center developer or a chip maker, there's a lot of optimism that – notwithstanding the current higher rate environment, that the long-term return on these investments is going to be very, very attractive.
And so, we're seeing a relative level of insensitivity on rates from the issuer's perspective in accessing capital. The first wave of all of the AI CapEx has predominantly been in the investment-grade bond market. That's the deepest, most liquid, fastest way to raise capital and speed.
Now you're seeing some of these companies diversify into different currencies and different products, and that's been a really healthy technical for the markets. From an M&A context, I think a lot of the resurgence in activity is driven by the fact that there's a meeting of the minds in terms of valuation.
So, for the first time in many years, we're seeing large-scaled sponsor private equity-owned assets come to market and be acquired by an investment-grade corporate strategic. Yes, they are borrowing at higher rates than they would have a few years ago. But the view is that they're able to acquire these assets at an appropriate valuation, and it makes long-term strategic sense, and we're seeing just a big pickup in that activity.
I think that also has another implication for credit markets, which is some of these assets that have been long held by private equity sponsors had multi-billion dollar debt complexes that are going to be repaid as part of these transactions.
That's a recycling of credit. That's going to free up some capacity in the leverage finance markets as well.
Andrew Sheets: And yeah, Rehan, how do you think about that? Because, you know, again, we have these big macro forces of AI CapEx, and then these very micro company-specific stories around M&A. How do you see that impacting your backdrop?
Rehan Latif: Within credit, the biggest driver is always growth. You pay the rate that you pay simply because there's an expectation towards growth. When Anish talks about some of these developments that are happening within the market, these are all, you know, big paradigm shift in growth.
And, AI investment the reality is that we are at the forefront of creating the capital for that. And the reality is that the yield that is being paid; or the coupon that is being paid is essentially the price for that investment.
Investors are seeing that across all these different markets. I think we have to be very deliberate about the difference between investment-grade, investments in newer sectors, and what is actually happening within the more distressed part of the credit market.
Simply because that market has been challenged for a long time. That market was held together to a certain degree by a zero-rate environment. And that has changed quite dramatically as rates went higher and as the global economy has evolved as well.
So, from my perspective, this is all very healthy.
Rehan Latif: Samar, I'll let you have the last word here. You know, Anish and Rehan have talked about these historic waves of credit issuance. Part of that's coming from AI, but part of it's coming from M&A and strategic transactions. You know, we're sitting here on the eve of our Morgan Stanley Credit Symposium in New York. It's tomorrow. We have over 1,000 investors attending. I think that indicates just the amount of interest and focus on this space.
And yet, as you hear Anish talk about kind of the almost insensitivity of rates for some of these key borrowers, how does this impact how you're thinking about macro markets and how they could trade over the next six to twelve months?
Samer Oweida: I think it speaks to what both Anish and Rehan said in that between the growth and the higher level of rates, there are going to be winners and losers.
And what we can't predict is what energy markets or political developments or fiscal developments might have in store. But generally speaking, macro markets are responsive to underlying growth, inflation, and policy discipline. And I think as we go into the depths of what is one of the most consequential CapEx cycles in post-Industrial Revolution history, the governments, the jurisdictions, and the corporates that have discipline and capacity around this growth will be the winners.
We think so. We see that as on the go forward. And those that don't have a clear policy will suffer the consequences. I think that is still a very early innings discussion to be had. Lots of data still has to come through.
I think what we know is what is on the docket for the next year or two in terms of how much capital needs to be raised and debt issued. But what we don't know is how does that affect underlying economic activity.
And I think as that data manifests in conjunction with policy initiatives globally, there's a lot to be excited about. And there's a lot to be quite concerned about. And looking at how policy mistakes one way or the other might affect a lot of the behavioral patterns in credit markets and from an issuer standpoint.
Andrew Sheets: Gentlemen, thank you for taking the time to talk, and see you tomorrow at the conference. And thank you for listening. If you enjoy Thoughts the Market, please take a moment to rate and review us wherever you listen and tell a friend or colleague about us today.

Anish Shah is a member of Morgan Stanley’s Global Capital Markets Division. Rehan Latif and Samer Oweida are members of Morgan Stanley’s Fixed Income Division. They are not members of Morgan Stanley’s Research Department. Unless otherwise indicated, their views are their own and may differ from the views of the Morgan Stanley Research Department and from the views of others within Morgan Stanley.

With AI startups scaling at record speed, our analysts Sabrina Hao, Adam Wood and Brian Nowak share takeaways from Morgan Stanley's Spark Conference on AI returns, competitive moats and implications for public markets.
Read more insights from Morgan Stanley.

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Sabrina Hao: Welcome to Thoughts on the Market. I'm Sabrina Hao, Morgan Stanley's AI and Tech Thematic Equity Strategist.
Adam Wood: And I'm Adam Wood, Head of U.S. Software Research at Morgan Stanley.
Brian Nowak: And I'm Brian Nowak, Head of U.S. Internet Research.
Sabrina Hao: Today, what private companies are telling us about the AI opportunity and what it means for public markets.
It's Tuesday, October 20th, at 10am in New York.
Last week, we were at our Spark Private Company conference in California, bringing together more than a hundred startups across software, robotics, AI infrastructure, and beyond. There was even a company helping to manufacture pharmaceuticals in space.
It was a really interesting week to be at the conference given everything that was happening in the market. But really, we came away feeling even more positive about the AI cycle.
While public market investors are waiting for returns to justify trillions of dollars in AI spending, we're already seeing that pay off in private markets. AI demand is real, companies are delivering tangible returns for customers, and startups are scaling faster than ever.
Adam, let's start with growth. We heard from startups scaling at extraordinary speeds. One was approaching [$] 4 billion in annual recurring revenue in two years, another reaching a billion in under a year.
What really stood out to you about the pace of AI adoption, and why aren't we necessarily seeing that same growth at established software companies?
Adam Wood: So yeah, absolutely, the pace was remarkable. And clearly one of the standouts from the conference when we used to discuss how quickly a company could get to a $1 billion so-called unicorn valuation. And now we're discussing how quickly they can get to a unicorn revenue run rate of a billion dollars, which for me is quite incredible.
But I think I wouldn't make the debate simply about private versus public companies. I'd make the distinction between two different types of software.
I think we have to make a distinction between largely coding and inference tools. There were a number of coding and inference software companies at the conference, and application software. And I think there's a big difference in terms of time and complexity to bring these products to market.
I think the coding and inference, which tends to be the building blocks, as I would call them, underneath the application layer, they can be constructed much more quickly. And I think because we can adopt when we're still building bespoke, which I think is a lot of the phase we're in today, we're still building bespoke software rather than buying off the shelf. They can be adopted earlier as well.
So, we've got faster time to build and faster time to adopt by companies. So, I think it's natural you can see very fast growth in those types of businesses very quickly.
I think in the application landscape, it's a little bit different because those applications have to deliver complete business solutions for customers. In finance and customer service, that means integrating data, understanding workflows, and putting controls in place.
There's much more to build and much more to implement, and generally, the adoption of those tools takes place a little bit later. After we've gone from the bespoke phase where companies are building themselves, we go to a phase where companies see that there are off-the-shelf packages that are available, that companies have built out.
So, I think it's both a complexity of build debate and also, a time in terms of where we are in the software adoption cycle.
The second thing I'd say is, you know, in public software companies that have a big incumbent existing business, sometimes there can be that big incumbent business that's not growing very quickly. And a very fast-growing AI business in there as well. And that very fast AI growth business can be hidden a little bit by that large public software company that exists.
So, I don't think it's as straightforward as just saying, you know, private's growing very quickly, public not. I think there's a couple of layers of complexity in there in terms of what type of software you're dealing with. And then how big the existing kind of business is in a software company and what is kind of existing software growing a little bit less quickly. And then the AI bit that could potentially be growing very fast.
Sabrina Hao: Absolutely. It makes a ton of sense. Maybe on this theme of full stack solutions, you know, Brian, we heard about the shift from AI assistants to agents that can actually execute work. You've done a lot of work on this, both across consumer and enterprise.
What did you learn about how quickly agents are advancing? And how does it shape the outlook for the internet names that you cover?
Brian Nowak: This is a very exciting time for agentic adoption on both the consumer side and the enterprise side. You know, we've sized potential addressable markets of $30 to $40 trillion of spend on both the consumer side and the enterprise side that we think can be addressed by agentic tools. On the consumer side, people are shopping, they are planning their travel, they're planning their holiday shopping. On the enterprise side, we're seeing both vertical specific agents start to emerge. So, agents within the legal area or agents within the healthcare area. And then we're also seeing broad-based agents from some of the larger private companies also start to bud through.
So, there is a smattering of agents that are popping through. On the consumer side, Muse is your early leader, and we do expect more to come in 2027. And then I think on the enterprise side, they're both vertical specific as well as broader based agents expected to grow.
Sabrina Hao: Agents really raise an important question around disruption. Maybe for Adam, you've written about the moat and the journey in software. It's not just about if a company has a competitive advantage, but how it navigates that transition to an AI-driven world.
Did Spark change your thinking about which software incumbents are best positioned to defend their businesses or capture new growth?
Adam Wood: So, I think Spark really confirmed a lot of our views on that moat and journey framework that we've put forward. The moat protecting the existing business that you have and the journey turning AI into new growth opportunities. And in some ways, the deeper the moat for businesses, the longer that journey can be.
An incumbent embedded in complex mission-critical workflows is hard to replace because of the data integrations and customer trust it has by definition. But those same requirements can make introducing AI into its platform more demanding. You can't compromise the reliability of that work.
So that's why we've separated the durability of the business from the speed of its AI transition.
For some of the coding inference businesses we heard from – again, these incredibly fast run rate, fast growth businesses, the monetization has obviously moved very, very quickly. And I think there the investor debate's going to be a little bit the opposite way around. How durable and how big a competitive advantage have these companies built on that very fast-growing revenue base?
And that's not to say these businesses can't have moats. They can. You know, performance, model customization, and integration can create real differentiation. But I think there is a big difference to be made between rapid growth and defensibility.
And, you know, to give a couple of examples here in terms of the moat that some of these AI native vertical and business software companies are leveraging. You know, there's a legal AI company that's hiring former lawyers to become forward deployed lawyers.
We had forward deployed engineers, now we've got forward deployed lawyers. But the reason there is they bring that understanding of legal workflows to the product and its implementation.
So, the value isn't just access to the model. It's making the model and the technology work in the customer's business and understanding in depth those business workflows.
Sabrina Hao: And we've talked about this theme of AI adopters, and really what we need to get this trade to work are those quantifiable benefits from AI. So open weights are a key part of that.
Maybe to pull on another thread, and you, kind of, alluded to this, the models themselves are increasingly becoming table stakes rather than moats. And the value is shifting to everything around the model – whether that's your data, your workflows, the tools that make AI useful.
So where did you see this most clearly at Spark? And does it change your view on where durable value will accrue in software?
Adam Wood: So again, I mean, I think I'd come back to the growing importance of open weight models. I mean, it was a recurring theme at the conference. Almost every company spoke to us and spoke to, you know, the implementation. And again, it reinforces that view of a multi-model world.
You’ve got the inference companies talking about bringing down the costs of using the models. Again, that diffusion concept we talk about. At the application layer, a legal software company said it benchmarks 18 models across 200 criteria to decide which model should run the task. So, you know, you're getting incredible gains in efficiency.
I think there are two implications for public software vendors. I think, you know, first of all, there's an opportunity here for software companies to help their customers with orchestration. So, there's going to be a layer around how do we get the right task to the right model at the right price. And I think a lot of the public software companies, you know, at the hyperscaler level, they can help at a broader enterprise adoption level.
And then down at the application layer, whether we're talking about CRM, ERP, HR, there's an opportunity for software companies to help with orchestration at that layer as well.
I think the second thing, which is probably a little bit less talked about, is maybe there is a gross margin opportunity here. I think in software, all we've discussed so far is the pressure that's going to come on gross margins from having to include the cost of running tokens in a software business model and offer that to customers as part of the package.
If we can bring down inference costs dramatically, and you can hold on to some of the pricing as a software company – maybe there could be a little talked about bull case in the medium term. That maybe software margins are not going to be as pressured as people think. And we can maybe see gross margins hold in a lot better than people think.
Sabrina Hao: Brian, I want to end with something that may seem counterintuitive. In a world where software's becoming easier to build, some of the strongest competitive advantages may actually be in the physical world.
The conference had many companies, whether that was logistics, manufacturing, real-world operations. You know, why is that intersection of the digital and physical world so defensible? And how does it influence your view of who ultimately wins in an agentic world?
Brian Nowak: I think it's important for people to remember that AI is not just software. AI is going to get physical through new types of robots that impact the entire globe. We're seeing it in multiple industries already. We're seeing it on the defense side with drones and other types of mechanisms that are going to change the way that we build out our overall defense tools. We're seeing it on the industrial side, in warehouses, on delivery. We're seeing it on the agriculture side, the way that we're going to the future of farming.
And so over the long term, while I think we will have humanoids and we will have robots in our homes, I think it's important for people to keep in mind there are going to be a lot of physical and robotic implementations of AI over the next two, three, five years that are going to really change the way we do a lot of business.
Sabrina Hao: Absolutely. Lots of exciting things happening. Adam, Brian, thanks for joining me. And thank you 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.

Higher rates can take time to filter through the economy, making their full impact difficult to judge. Arunima Sinha from our U.S. and Global Economics teams considers where the pressure may emerge next and how policymakers could navigate the competing risks.
Read more insights from Morgan Stanley.

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Welcome to Thoughts on the Market. I'm Arunima Sinha, from the Morgan Stanley’s U.S. and Global Economics teams.
Today, I'll talk about what rising rates mean for economic activity, inflation, and the policy path.
It’s Monday, October 19th, at 10am in New York.
The FOMC raised rates in September. But expectations for future hikes remain volatile. Within hours of the latest CPI print, markets round-tripped, pushing the probability to even for an October hike before retreating.
Now, consistent with our baseline forecast, the market assigns December the highest likelihood for the next hike. But moves further along the U.S. curve matter even more; notably the 10-year yield shifted.
One question that arises, taking a step back is – how much we should worry that broad-based inflation upside means tighter policy is required to push down inflation and, therefore, growth? Or have financial conditions tightened enough on their own that the central bank has less, not more work to do?
The calibration of monetary policy has always been difficult, and now it is becoming urgent.
Economists try to put the level of interest rates into the context of where they stand relative to the economy's natural rate. Stronger productivity growth and investment demand should mean a higher natural rate, so a given level of rates is less restrictive.
The rise in long-term treasury yields alongside still firm growth and earnings expectations is an indication that the neutral rate may indeed be higher. When yields rise because growth prospects are improving, expected returns rise and the demand for capital strengthens. In that setting, higher rates are not necessarily contractionary.
But there is a less benign alternative.
Yields have also risen because inflation has been hot, fiscal concerns are intensifying, and investors are demanding more compensation for holding duration. The question that Chair Warsh has posed – are financial conditions restrictive – is starting to get a different answer.
Calibration will be key to how the economy evolves. For the U.S. so far, even the most recent upside inflation surprise pointed to resilient demand rather than energy-driven stagflation. The simple explanation is that many firms still see returns well above their cost of capital. Recent work from our U.S. economics team supports such a view.
Where there may be a contrast is at the sector level, and that seems to be becoming more apparent. If activity is concentrated in sectors driven by innovation, productivity, and strategic investment, the economy may be less rate sensitive than in past cycles.
Calibrating policy amid these opposing forces is no easy task. The fact that we're seeing the biggest spread widening in the lowest quality part of the credit spectrum and the fact that housing activity is at recessionary levels are some tells in the U.S. that policy and financial conditions are restrictive.
The signs of tighter financial conditions are somewhat more visible in Europe, in part because the AI CapEx spend is less of a factor. Growth has been resilient, but not sufficiently so to offset rising fiscal concerns from higher rates.
The French OAT sell-off shows how quickly the balance of risks shifts. Globally, financial conditions are introducing tougher questions to the macro landscape.
Until recently, the economy's message had been clear.
Higher rates were restraining some sectors, but without meaningfully altering the expansion's trajectory. As long as expected returns rise alongside borrowing costs, then yields can remain high – without becoming decisively restrictive. But as our rate strategy colleagues have noted, inflationary pressures have pushed up real rates, not break evens.
So, the market is telling us that policy is getting tighter to restrain growth and eventually pull-down inflation. The latest inflation print in the U.S. reinforces this debate. Are financial conditions restrictive?
With several catalysts ahead, Q3 earnings, hyperscaler CapEx credit spread widening, and U.S. elections, the Fed meeting coming up, markets will need to shift to assessing growth risks as central banks try to recalibrate.
Thanks for listening. If you enjoy the show, please leave us a review and share Thoughts on the Market with a friend or colleague today.

Our ABS Strategist Carolyn Campbell explains how rising borrowing costs are slowing the AI data center boom and what could drive a rebound in financing.
Read more insights from Morgan Stanley.

----- Transcript -----

Carolyn Campbell: Welcome to Thoughts on the Market. I'm Carolyn Campbell, Morgan Stanley's Asset-Backed Securities Strategist.
Today, why the AI boom is running into an unexpected obstacle: the cost of borrowing money.
It's Friday, October 16th, at 10am in New York.
Demand for data center facilities is booming. Yet even as companies race to build more capacity, the financing for them is becoming increasingly expensive. And that tension is creating an interesting story in credit markets.
Since January, five-year Treasury rates have climbed more than one percentage point, and spreads for data center assets have also gone wider. At the beginning of 2026, the highest-rated data center bonds offered yields below 5 percent. Today, similar bonds are yielding closer to 7 percent, and that increase matters enormously for companies trying to finance multi-billion-dollar facilities.
Many operators turn to the securitized credit markets to raise money. Essentially, they issue bonds backed by the income generated by their data centers. By the time these bonds are issued, construction on the data center is complete, the power is secured, and the rent is already being paid.
So, on the one hand, cash flows are stabilized – but there is a catch. These facilities often sign long-term leases well before they seek financing in the securitized credit market.
By the time they're ready to issue these bonds, rental income is already locked in. And so, when interest rates rise quickly, as we've seen this year, and these borrowing costs increase, revenues aren't necessarily keeping pace.
Our analysis suggests that when borrowing costs approach 8 percent, issuing these bonds becomes significantly more challenging under these current financing terms. And we're already seeing the effects in the market.
So far in 2026, data center operators have issued around [$] 15 billion in ABS and another [$] 7 billion in the CMBS markets. That's roughly in line with last year's pace, but it's below what we'd expect given the extraordinary growth in data center demand this year. Still, we believe the slowdown in supply is temporary.
Our forecast suggests that U.S. data center power capacity could grow from roughly 60 gigawatts today to 150 gigawatts by 2028; although there are some constraints on power availability that could leave capacity 30 percent to 40 percent below these projections.
Regardless, much of the lease capacity that comes online will require debt financing, and these operators have ambitious growth plans. So, they have some options to navigate these higher rate environments.
They might borrow less against their properties. They might accept lower investment returns in the near term. Or they can turn to different credit channels that offer more flexible financing structures.
So, where does this leave the market? To take into account the higher rate environment, we've lowered our forecast slightly for 2026 and 2027 for securitized credit data center issuance. But the amount of lease capacity that's set to come online in 2028 is so high that we've actually held those numbers steady.
All told, we now expect around a [$] 120 to a [$] 150 billion of supply over the next couple of years. That's substantial financing activity, even with the higher interest rates creating near-term challenges.
The higher cost of borrowing may slow the pace of data center financing for now, but the scale of the build-out ahead suggests that this market still has plenty of room to grow. And there are pockets within the market that we do like.
We've talked a lot about the hyperscaler data centers, which are big campuses leased to one or two hyperscaler tenants, often with 10- or 15-year leases.
But the other part of the market, the colocation data center market, is where we see a lot of value today. These campuses have many different types of tenants, many different industries represented, and they often have shorter leases.
Given the sharp increase in data center rental rates and vacancy rates around 1 percent, these data center operators are more quickly able to monetize the changes that we're seeing in the industry.
That flexibility could prove particularly valuable when borrowing costs remain elevated.
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.