Thoughts on the Market

Our Chief Cross-Asset Strategist Serena Tang and senior leaders from Investment Management Andrew Slimmon and Jitania Kandhari unpack new investment trends from supportive monetary and fiscal policy and shifting market leadership.
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Serena Tang: 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.
Andrew Slimmon: I am Andrew Slimmon, Head of Applied Equity Team within Morgan Stanley Investment Management.
Jitania Kandhari: And I'm Jitania Kandhari, Deputy CIO of the Solutions and Multi-Asset 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 am 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 CIO and Chief 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.
Andrew Slimmon: Yeah, I mean, I guess I focus a little bit more on the behavioral cycle. And I think that 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 percent. 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 [20]23 and really 2024, which were; investors, you know, 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-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 on euphoria. And so, I think it's late cycle, but it's not end of cycle. And that's my theme; is late cycle but not end of cycle.
Serena Tang: 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, rarely happens outside of recession. So how do you see those dual policy forces shaping market behavior and which parts of the market tend to benefit?
Andrew Slimmon: Well, that's exactly right. Look, the last time I checked, page one of the investment handbook says, ‘Don't fight the Fed.’ And so, you have monetary policy easing. And what we; 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 procyclical 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.
Serena Tang: Right. And we've definitely seen some bumps recently, but I think on your point around yields. So, Jitania, 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?
Jitania Kandhari: 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 10-year 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 U.S., 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.
Serena Tang: 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?
Jitania Kandhari: 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 [Mag] 7, 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 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 are seeing is two AI ecosystems evolve globally. The high cost cutting edge U.S. 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 U.S. 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 you add all this up; the message is clear that leadership is broadening and portfolio should broaden too.
Serena Tang: And I want to sort of stay on this topic of broadening. So, Andrew, I think, you've also highlighted, you know, this market broadening, especially beyond the large cap leaders, even as AI investment continues, I think, as you 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?
Andrew Slimmon: Sure. So I think, you know, 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, you know, 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 embraced the internet. And the reason the stock market doubled between 1997 and the dotcom 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 technology loser. I think it's all many different industries are going to embrace and benefit from what's going on with AI.
Serena Tang: You don't want to know where I was in 1993. And I don't recognize most of those names.
Andrew Slimmon: Sorry. I was 14!
Serena Tang: [Laughs] Ok. Investors often hear two competing messages now. 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?
Andrew Slimmon: Yeah, I think you have to employ both, and I hear that all the time; especially I hear, you know, my competitors, ‘Oh, I just focus on my stock picks, my bottom up.’ But, you know, look statistically, two-thirds of a manager's relative performance comes from macro. You know, 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 amplifications 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 [be]cause one third of term does come from actual stock selection. So, I'm a big believer in marrying a top down and a bottom up and try to capture the two thirds and the one third.
Serena Tang: Since that 2022 bear market low that you talked about earlier. I mean, 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 the narrative of the end of U.S. exceptionalism or something else?
Andrew Slimmon: 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 than 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 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 be – recognize that. So, in our global strategies, we've been heavily weighted towards, the U.S. 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-U.S. exposure. It's a longwinded way of saying, look, I think what the story of last year was the U.S. did just fine. But there were parts of the world that did better and I think that will continue in 2026.
Serena Tang: Andrew, Jitania thank you so much for taking the time to talk.
Andrew Slimmon: Great speaking with you, Serena.
Jitania Kandhari: Thanks for having us on the show.
Serena Tang: 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 discusses how the nomination of Kevin Warsh to lead the Fed could move markets.
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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: The implications of Kevin Warsh’s nomination as the next Fed Chair.
It's Monday, February 2nd at 10 am in New York.
So, let’s get after it.
Last Friday, President Trump officially nominated Kevin Warsh to be the next Chair of the Fed. The prevailing narrative around Warsh is fairly straightforward: he’s seen as more hawkish on the size of the Fed’s balance sheet, potentially more flexible on interest rates, and less comfortable with open-ended liquidity support than the current leadership. That characterization is fair, but it doesn’t answer the more important question—why pick Warsh now, and what problem is this nomination trying to solve?
In my view, the answer starts with markets, not politics. Over the past several months, we’ve witnessed parabolic moves in precious metals alongside persistent weakness in the U.S. dollar. While this administration has been very clear that a weaker dollar is not inherently a bad thing—especially as part of a broader economic rebalancing strategy—there’s an important distinction between a controlled decline and a disorderly one.
To understand why this matters so much, you need to zoom out. The administration is attempting to rebalance the U.S. economy across three dimensions simultaneously, all with the same ultimate goal—growing out of an enormous debt burden that’s been building for more than two decades. At this point, simply cutting spending isn’t realistic, economically or politically. Nominal growth is the only viable path forward.
The current strategy is more supply side driven. It focuses on rebalancing trade through tariffs and a weaker dollar, shifting the economy away from over-consumption and toward investment, and addressing inequality through immigration enforcement and deregulation. The goal is to let companies—not the government—make capital allocation decisions, while boosting income through wages rather than entitlements. If it works, the result should be higher nominal growth with a healthier mix of real growth driven by productivity.
Markets, to some extent, have already started to price this in. Since last spring, cyclical stocks have outperformed, market breadth has improved, and leadership has begun to rotate away from the mega-cap names that dominated the last cycle. Small and mid-cap stocks are working again too. That’s exactly what you’d expect in the middle stages of a ‘hotter but shorter’ expansion, my core view. At the same time, the surge in gold tells us something else is going on. Precious metals don’t move like that unless investors are questioning the endgame.
That’s where Kevin Warsh comes in. His nomination appears designed to restore credibility around the balance sheet and slow the momentum of that skepticism. Based on Friday’s price action, it worked. Gold and silver sold off sharply, the dollar strengthened modestly, and equities and rates stayed relatively stable. That combination buys time—and time is exactly what this strategy needs to work.
One of the best ways to track whether markets are buying into this story is by watching the ratio of the S&P 500 to gold. It’s a simple but powerful proxy for confidence in productive growth. The recent collapse was driven mostly by gold rising—and Friday’s sharp reversal was mainly gold prices falling, one of the largest on record.
That doesn’t mean skepticism has been eliminated. Instead, it tells me the administration is paying attention and understands they need to restore confidence. If the ratio continues to recover, it will likely come first through lower gold prices and tighter liquidity expectations, and later through stronger earnings growth driven by productivity gains. That could mean near term risk for other risk assets, including equities.
Bottom line, the current ‘run it hot’ approach has a better chance of delivering sustainable growth than prior policy mixes—but it won’t be smooth, and confidence will ebb and flow along the way. Watching how markets respond, especially through signals like gold, the dollar, and capital spending trends, will tell us whether this strategy ultimately succeeds. My view is that it’s the best approach which keeps me bullish on 2026 even if the near term is more rocky.
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!

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

Original Release Date: January 16, 2026
Our Head of Research Product in Europe Paul Walsh and Chief European Equity Strategist Marina Zavolock break down the main themes for European stocks this year.
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Paul Walsh: Welcome to Thoughts on the Market. I'm Paul Walsh, Morgan Stanley's Head of Research Product here in Europe.
Marina Zavolock: And I'm Marina Zavolock, Chief European Equity Strategist.
Paul Walsh: Today, we are here to talk about the big debates for European equities moving into 2026.
It's Friday, January the 16th at 8am in London.
Marina, it's great to have you on Thoughts on the Market. I think we've got a fascinating year ahead of us, and there are plenty of big debates to be exploring here in Europe. But let's kick it off with the, sort of, obvious comparison to the U.S.
How are you thinking about European equities versus the U.S. right now? When we cast our eyes back to last year, we had this surprising outperformance. Could that repeat?
Marina Zavolock: Yeah, the biggest debate of all Paul, that's what you start with. So, actually it's not just last year. If you look since U.S. elections, I think it would surprise most people to know that if you compare in constant currency terms; so if you look in dollar terms or if you look in Euro terms, European equities have outperformed U.S. equities since US elections. I don't think that's something that a lot of people really think about as a fact.
And something very interesting has happened at the start of this year. And let me set the scene before I tell you what that is.
In the last 10 years, European equities have been in this constantly widening discount range versus the U.S. on valuation. So next one's P/E there's been, you know, we have tactical rallies from time to time; but in the last 10 years, they've always been tactical. But we're in this downward structural range where their discount just keeps going wider and wider and wider. And what's happened on December 31st is that for the first time in 10 years, European equities have broken the top of that discount range now consistently since December 31st. I've lost count of how many trading days that is. So about two weeks, we've broken the top of that discount range. And when you look at long-term history, that's happened a number of times before. And every time that happens, you start to go into an upward range.
So, the discount is narrowing and narrowing; not in a straight line, in a range. But the discount narrows over time. The last couple of times that's happened, in the last 20 years, over time you narrow all the way to single digit discount rather than what we have right now in like-for-like terms of 23 percent.
Paul Walsh: Yeah, so there's a significant discount. Now, obviously it's great that we are seeing increased inflows into European equities. So far this year, the performance at an index level has been pretty robust. We've just talked about the relative positioning of Europe versus the U.S.; and the perhaps not widely understood local currency outperformance of Europe versus the U.S. last year. But do you think this is a phenomenon that's sustainable? Or are we looking at, sort of, purely a Q1 phenomenon?
Marina Zavolock: Yeah, it's a really good question and you make a good point on flows, which I forgot to mention. Which is that, last year in [Q1] we saw this really big diversification flow theme where investors were looking to reduce exposure in the U.S., add exposure to Europe – for a number of reasons that I won't go into.
And we're seeing deja vu with that now, mostly on the – not really reducing that much in U.S., but more so, diversifying into Europe. And the feedback I get when speaking to investors is that the U.S. is so big, so concentrated and there's this trend of broadening in the U.S. that's happening; and that broadening is impacting Europe as well.
Because if you're thinking about, ‘Okay, what do I invest in outside of seven stocks in the U.S.?’ You're also thinking about, ‘Okay, but Europe has discounts and maybe I should look at those European companies as well.’ That's exactly what's happening. So, diversification flows are sharply going up, in the last month or two in European equities coming into this year.
And it's a very good question of whether this is just a [Q1] phenomenon. [Be]cause that's exactly what it was last year. I still struggle to see European equities outperforming the U.S. over the course of the full year because we're going to come into earnings now.
We have much lower earnings growth at a headline level than the U.S. I have 4 percent earnings growth forecast. That's driven by some specific sectors. It's, you know, you have pockets of very high growth. But still at a headline level, we have 4 percent earnings growth on our base case. Consensus is too high in our view. And our U.S. equity strategists, they have 17 percent earnings growth, so we can't compete.
Paul Walsh That's a very stark difference.
Marina Zavolock: Yeah, we cannot compete with that. But what I will say is that historically when you've had these breakouts, you don't get out performance really. But what you get is a much narrower gap in performance. And I also think if you pick the right pockets within Europe, then you could; you can get out performance.
Paul Walsh: So, something you and I talked about a lot in 2025, is the bull case for Europe. There are a number of themes and secular dynamics that could play out, frankly, to the benefits of Europe, and there are a number of them. I wondered if you could highlight the ones that you think are most important in terms of the bull case for Europe.
Marina Zavolock: I think the most important one is AI adoption. We and our team, we have been able to quantify this. So, when we take our global AI mapping and we look at leading AI adopters in Europe, which is about a quarter of the index, they are showing very strong earnings and returns outperformance. Not just versus the European index, but versus their respective sectors. And versus their respective sectors, that gap of earnings outperformance is growing and becoming more meaningful every time that we update our own chart.
To the point that I think at this rate, by the second half of this year, it's going to grow to a point that it’s more difficult for investors to ignore. That group of stocks, first of all, they trade again at a big discount to U.S. equivalent – 27 percent discount. Also, if you see adoption broadening overall, and we start to go into the phase of the AI cycle where adopters are, you know, are being sought after and are seen as in the front line of beneficiaries of AI. It's important to remember Europe; the European index because we don't have a lot of enablers in our index. It is very skewed to AI adopters. And then we also have a lot of low hanging fruit given productivity demographic challenges that AI can help to address. So that's the biggest one.
Paul Walsh: Understood.
Marina Zavolock: And the one I've spent most time on. But let me quickly mention a few others. M&A, we're seeing it rising in Europe, almost as sharply as we're seeing in the U.S. Again, I think there's low hanging fruit there. We're seeing easing competition commission rules, which has been an ongoing thing, but you know, that comes after decade of not seeing that. We're seeing corporate re-leveraging off of lows. Both of these things are still very far from cycle peaks. And we're seeing structural drivers, which for example, savings and investment union, which is multifaceted. I won't get into it. But that could really present a bull case.
Paul Walsh: Yeah. And that could include pensions reform across Europe, particularly in Germany, deeper capital…
Marina Zavolock: We're starting to see it.
Paul Walsh: And in Europe as well, yeah. And so just going back to the base case, what are you advocating to clients in terms of what do we buy here in Europe, given the backdrop that you've framed?
Marina Zavolock: Within Europe, I get asked a lot whether investors should be investing in cyclicals or value. Last year value really worked, or quality – maybe they will return. I think it's not really about any of those things. I think, similar to prior years, what we're going to see is stock level dispersion continuing to rise. That's what we keep seeing every month, every quarter, every year – for the last couple of years, we're seeing dispersion rising.
Again, we're still far from where we normally get to, when we get to cycle peaks. So, Europe is really about stock picking. And the best way that we have at Morgan Stanley to capture this alpha under the surface of the European index. And the growth that we have under the surface of the index, is our analyst top picks – which are showing fairly consistent outperformance, not just versus the European index, but also versus the S&P. And since inception of top picks in 2021, European top picks have outperformed the S&P free float market cap weighted by over 90 percentage points. And they've outperformed, the S&P – this is pre-trade – by 17 percentage points in the last year. And whatever period we slice, we're seeing out performance.
As far as sectors, key sectors, Banks is at the very top of our model. It's the first sector that non-dedicated investors ask me about. I think the investment case there is very compelling. Defense, we really like structurally with the rearmament theme in Europe, but it's also helpful that we're in this seasonal phase where defense tends to really outperform between; and have outsized returns between January and April. And then we like the powering AI thematic, and we are getting a lot of incoming on the powering AI thematic in Europe. We upgraded utilities recently.
Paul, maybe if I ask you a question, one sector that I've missed out on, in our data-driven sector model, is the semis. But you've worked a lot with our semi's team who are quite constructive. Can you tell us about the investment case there?
Paul Walsh: Yeah, they're quite constructive, but I would say there's nuance within the context of the sector. I think what they really like is the semi cap space, which they think is really well underpinned by a robust, global outlook for wafer fab equipment spend, which we see growing double digits globally in both 2026 and 2027.
And I think within that, in particular, the outlook for memory. You have something of a memory supercycle going on at the moment. And the outlook for memory is especially encouraging. And it's a market where we see it as being increasingly capacity constrained with an unusually long order book visibility today, driven really by AI inference. So strong thematic overlay there as well.
And maybe I would highlight one other key area of growth longer term for the space, which is set to come from the proliferation of humanoid robots. That's a key theme for us in 2025. And of course, we'll continue to be so, in the years to come. And we are modeling a global Humanoids Semicon TAM of over $300 billion by 2045, with key pillars of opportunity for the semi names to be able to capitalize on. So, I think those are two areas where, in particular, the team have seen some great opportunities.
Now bringing it back to the other side of the equation, Marina, which sectors would you be avoiding, within the context of your model?
Marina Zavolock: There's a collection of sectors and they, for the most part, are the culprits for the low growth that we have in Europe. So simply avoiding these could be very helpful from a growth perspective, to add to that multiple expansion. These are at the bottom of our data driven, sector models. So, these are Autos, Chemicals, Luxury Transport, Food and Beverage.
Most of these are old economy cyclicals. Many of these sectors have high China/old economy exposure – as well where we're not seeing really a demand pickup. And then lastly, a number of these sectors are facing ever rising China competition.
Paul Walsh: And I think, when we weigh up the skew of your views according to your model, I think it brings it back to the original big debate around cyclicals versus defensives. And your conclusion that actually it's much more complicated than that.
Marina, thanks for taking the time to talk.
Marina Zavolock: Great to speak with you Paul.
Paul Walsh: 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 Deputy Head of Global Research Michael Zezas explains why the risk of a new U.S. government shutdown is worth investor attention, but not overreaction.
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Welcome to Thoughts on the Market. I’m Michael Zezas, Deputy Head of Global Research for Morgan Stanley.
Today, we’ll discuss the possibility of a U.S. government shutdown later this week, and what investors should – and should not – be worried about.
It’s Wednesday, January 28th at 10:30 am in New York.
In recent weeks investors have had to consider all manner of policy catalysts for the markets – including the impact to oil supply and emerging markets from military action in Venezuela, potential military action in Iran, and risks of fracturing of the U.S.-Europe relationship over Greenland. By comparison, a potential U.S. government shutdown may seem rather quaint.
But, a good investor aggressively manages all risks, so let's break this down.
Amidst funding negotiations in the Senate, Democrats are pressing for tighter rules and more oversight on how immigration enforcement is carried out given recent events. Republicans have signaled some openness to negotiations, but the calendar is really a constraint. With the House out of session until early next week any Senate changes this week could lead to a lapse in funding. So, a brief shutdown this weekend, followed by a short continuing resolution once the House returns, is a very plausible path – not because either side wants a shutdown, but because they haven’t fully coalesced around the strategy and time is short.
Of course, once a shutdown happens, there’s a risk it could drag on. But in general our base case is that the economic impact would be manageable. Historically, shutdowns create meaningful hardship for affected workers and contractors. But the aggregate macro effects tend to be modest and reversible. Most spending is eventually made up, and disruptions to growth typically unwind quickly once funding is restored. A useful rule of thumb is that a full shutdown trims roughly one‑tenth of a percentage point from the annualized quarterly GDP for each week it lasts. With several appropriations bills already passed, what we’d face now is a partial shutdown, meaning that figure would be even smaller.
For markets, that means the reaction should also be modest. Shutdowns tend not to reprice the fundamental path of earnings, inflation, or the Fed – which are still the dominant drivers of asset performance. So, the market’s inclination will likely be to look past the noise and focus on more substantive catalysts ahead.
Finally, it’s worth unpacking the politics here, because they’re relevant. But not in the way investors might think. The shutdown risk is emerging from actions that have contributed to sagging approval ratings for the President and Republicans – leading many investors to ask us what this means for midterm elections and resulting public policy choices. And taken together, one could read these dynamics as an early sign that the Republicans may face a difficult midterm environment. We think it's too early to draw any confident conclusions about this, but even if we could, we’re not sure it matters.
First, many of the most market‑relevant policies—on trade, regulation, industrial strategy, re‑shoring, and increasingly AI—are being executed through executive authority, not congressional action. That means their trajectory is unlikely to be altered by near‑term political turbulence. Second, the President would almost certainly veto any effort to roll back last year’s tax bill, which created a suite of incentives aimed at corporate capex. A key driver of the 2026 outlook.
Putting it all together, the bottom line is this: A short, calendar‑driven shutdown is a risk worth monitoring, but not one to overreact to.
Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review. And tell your friends about the podcast. We want everyone to listen.