Welcome to Thoughts on the Market.
I'm Serena Tang, Morgan Stanley's Chief Cross-Asset Strategist.
Today we're revisiting the 2026 Global Equity Outlook with two senior leaders from Morgan Stanley Investment Management.
I'm Andrew Solomon, Head of Applied Equity Team within Morgan Stanley Investment Management.
And I'm Jitanya Kandhari, Deputy CIO of the Solutions and Multi-Acid Group, Portfolio Manager for Passport Strategies and Head of Macro and Thematic Research for Emerging Market Equities within Morgan Stanley Investment Management.
It's Tuesday, February 3rd at 10 a.m. in New York.
So as investors are entering in 2026 after several years of very strong equity returns, with policy support reaccelerating.
As regular listeners have probably heard Mike Wilson who, of course, is a CIO and chief US equity strategist for Morgan Stanley, his view is that we ended a three-year rolling earnings recession in last April and entered a rolling recovery and a new bull market.
Now Andrew, in the spirit of debate.
I know you have a different take on valuations and where we are at in the cycle.
I'd love to hear how you're framing this for investment management clients.
Yeah, I mean, I guess I focused a little bit more on the behavioral cycle.
And I think from a behavioral cycle, we're following a very consistent pattern, which is we had a bad bear market in 2022.
That bottomed down 25.
And that provided a wonderful opportunity to invest.
But early in a behavioral cycle, Investors are very pessimistic.
And that was really the story of 23 and really 2024, which were investors were negative on equities.
The ratios were all very negative.
And investors sold out of equities.
And that's consistent with a early cycle.
And then, as you move into the third and fourth year, investors tend to get more optimistic about returns.
Doesn't necessarily mean the market goes down, but what it does mean is the market tends to get more volatile and returns start to compress.
And ultimately, bull markets die in euphoria.
And so I think it's late cycle returns.
But it's not end of cycle.
And that's my theme is late cycle, but not end of cycle.
And I think, on that point, one very unusual feature of this environment is that you have both monetary and fiscal policy being supportive at the same time which, of course, like rarely happens outside of a recession.
So how do you see those dual policy forces sort of shaping market behavior, and which parts of the market tend to benefit?
Well, that's exactly right.
Look, the last time I checked, the page one of the investment handbook says don't fight the Fed.
And so you have monetary policy easing.
And remember what happened in 2021?
The Fed raised rates and monetary policy was tightening. equities do well when the Fed is easing.
And that's one of the reasons why I think it's not end of cycle.
And then you layer in fiscal policy with tax relief coming.
It is a reason to be relatively optimistic on equities in 2026.
But it doesn't mean there can't be bumps along the way.
And I think a higher level of optimism, as we're seeing today, is a result of that.
But I think you stick with those more pro-cyclical areas finance industrials, technology and then you move down the cap curve a little bit.
I think those are the winning trades.
They really started to come to the fore in the second half of last year and I think that will continue into 2026.
Right.
And we've definitely seen some bumps recently.
But I think on your point around sort of yield.
So Jetania, I think that policy backdrop really ties directly to your idea of the age of capped real rates.
In very simple terms, can you explain what that means and what's behind that view?
Sure.
When I say age of real rates being capped, I mean, like the structural template within which I'm operating.
And real rates here are defined by the tenure on the treasury yield adjusted for CPI.
Firstly, I'd say there was too much linear thinking in markets post-Liberation Day that Tariffs equals inflation equals higher rates.
Now, tariff impacts, as we have seen, can be offset in several ways and economic relationships are rarely linear.
So inflation may not go up to the extent market is expecting.
So that supports the case for capped rates.
And the real constraint is the debt arithmetic, right?
So, if you look at the history of public debt in the US, whenever there was a surge in public debt during the Civil War, two world wars, global financial crisis, even during COVID in all these periods when debt spiked, real rates have remained negative
So there can be short-term swings in rates, but I believe that markets not necessarily central banks will even enforce that cap.
You've described this moment as the great broadening of 2026.
What's driving this and what do you think is happening now after years of very narrow concentration?
Yes, I think like if last decade was about concentration, now it's going to be about breadth.
And if you look at where the concentration was, it was in the mega seven, in the AI trade.
We are beginning to see some cracks in the consensus where adoption is happening, but monetization is lagging.
But clearly the next phase of value creation will could happen from just the model building to the application layer, as you guys have also talked about, from enablers to adopters.
The other thing we're seeing is two AI ecosystems evolve globally the high-cost, cutting-edge US innovation engine and the lower-cost, efficiency-driven Chinese model.
Each of them have their own supply chain beneficiaries.
And as AI is moving into physical world, you're going to see more opportunities.
And then secondly, I think there are limitations on this tariff policies globally.
And tariff fears, to me, remain more of an illusion than a reality, because US needs to import a lot of intermediate goods.
And then lastly, I see domestic cycles inflecting upwards in many other pockets of the world.
And if you add all this up, the message is clear that leadership is broadening and portfolios should broaden too.
And I still want to sort of stay on this topic of broadening.
So Andrew, I think you've also highlighted this market broadening, especially beyond the large cap leaders, even as AI investment continues, I think it's touched on earlier.
So why does that matter for equity leadership in 2026?
And can you talk about the impact of this broadening on valuations in general?
Sure.
So I think I've been around a long time.
And I remember when the internet first rolled out, the Mosaic browser was introduced in 1993.
And the first thing the stock market tried to do is appoint winners of who was going to win the internet search race.
And it was Ask Jeeves.
And it was Yahoo.
And it was Netscape.
Well, none of those were the winners.
We just don't know who's ultimately going to be the tech winner.
I think it's much safer to know that, just like the internet, AI is a technology productivity enhancing tool.
And companies are going to embrace AI just like they embrace the internet.
And the reason the stock market doubled between 1997 and the dot-com peak was that productivity margins went up for a lot of companies in a lot of industries as they embraced the internet.
So to me, a broadening out and looking at lower valuations, it is in many ways safer than saying this is the technology winner and this is the technology loser.
I think it's all.
Many different industries are going to embrace and benefit from what's going on with AI.
You don't want to know where I was in 1993, and I don't recognize most of those names.
Sorry.
I was 14.
Okay.
Investors often hear two competing messages ignore the macro and buy great companies, or let the big picture drive everything.
How do you balance top-down signals with bottom-up fundamentals in your investment process?
Yeah, I think you have to employ both.
And I hear that all the time.
Especially I hear my competitors.
Oh, I just focus on my stock picks, my bottom-up.
But look, statistically...
Two thirds of a manager's relative performance comes from macro.
How did growth do?
How did value do?
All those types of things that have nothing to do with what stock picks.
And likewise much of a return of an individual stock has to do with things beyond just what's happening fundamentally, but some of it comes from what's happening at the company level.
So I think to be a great investor, you have to be aware of the macro.
The Fed cutting rates this year is a very powerful tool.
And if you don't understand the implications of that as per what types of stocks work because you're so focused on the micro.
I think that's a mistake.
Likewise, you have to know what's going on in your company, because one third of the return does come from actual stock selection.
So I'm a big believer in marrying a top down and a bombs up and try to capture the two thirds and the one thirds.
Since that 2022 bear market low that you talked about earlier, your framework really favored growth and value over defensives.
But I think more recently, you've increased your non-U.S. exposure.
What changed in your top-down signals and bottom-up data to make global opportunities more compelling now?
Is it like the narrative of the end of U.S. exceptionalism or something else?
No, I really think it's actually something else, which is we have picked up signals from other parts of the world Europe and Japan that are different signals.
Then we saw really for the last decade, which is namely that pro-cyclical stocks started to work.
Value stocks started to work in the first half of 2025.
And you look at the history of of when that happens.
Usually value doesn't work for a year and peter out.
So that's been a huge change where, I would say, a safer orientation has shown the relative leadership.
And we have to recognize that.
So in our global strategies we've been heavily weighted towards the US orientation because we didn't see really a cyclical bias outside.
And Now that's changing, and that has caused us to increase the allocation to non-US exposure.
It's a long-winded way of saying look, I think, what the story of last year was.
The US did just fine, but there were parts of the world that did better.
And I think that will continue in 2026.
So Chaitanya, I think with that in mind, where do you see the biggest investment opportunities in 2026?
Outside the US?
Yeah, so I'll break it down between the US and the AQUI-X-US, which is the All-Country World Index-X-US, the market configuration right.
If tech and tech-related names are like 40 of the US in the Acquiax US universe, it's industrials and financials which are 40 of that index, right.
So similar to what Andrew said, there is a cyclical trend. stage in different countries.
Europe, different pockets look very interesting, both in core, in periphery, and also in the emerging Europe.
Overall, emerging markets, they've clearly restored fiscal and monetary credibility in this cycle.
So there is like a structural positive story within that complex.
Again, it's a heterogeneous asset class.
So you have The new China, with the manufacturing and technology pivot and the AI ecosystem that I talked about.
The North Asian markets, which are in the supply chain of both U.S. and China.
Some of the sectors in Korea like defense, biotech, shipbuilding are interesting opportunities because they are vendors to U.S., India is a structural market we've talked about all the time.
And Latin America with.
You know Trump's relatively positive stance on the region.
Good fiscal monetary management by central banks.
So lots of opportunities scattered all over the world at this stage of the economic cycle and their market cycle.
Andrew, Jitania, thank you so much for taking the time to talk.
Great speaking with you, Serena.
Thanks for having us on the show.
And thanks for listening.
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