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Thoughts on the Market: Daily Summaries Delivered
by Morgan Stanley
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- Yesterday10 min
Fed in July: A Weaker Case for Hiking
Our Global Head of Macro Strategy Matthew Hornbach and Chief U.S. Economist Michael Gapen unpack what is likely to influence this week’s interest rate decision by the Fed.Read more insights from Morgan Stanley.----- Transcript -----Matthew Hornbach: Welcome to Thoughts on the Market. I'm Matthew Hornbach, Global Head of Macro Strategy. Michael Gapen: And I'm Michael Gapen, Morgan Stanley's Chief U.S. Economist. Matthew Hornbach: Today, will the Fed hold or hike? It's the question in the market right now. It's Tuesday, July 28th at 9:30am in New York. Will the Fed display patience, or has it run out of patience? That's the question hanging over the July FOMC meeting currently underway. We believe the former. We expect the Fed to keep the target range for the federal funds rate unchanged at 3.5 to 3.75 percent. The statement will probably also remain unchanged, reiterating the ample reserve policy, economic activity expanding at a solid pace despite elevated uncertainty. So, Mike, what's your assessment of the situation beyond that? Michael Gapen: Our assessment of the July FOMC meeting is actually the case for hikes is not as persuasive now as it was in June. And I think when we say that and when we come to the decision the Fed will stay on hold this week, we're basing it mainly on the data that has come in since the June FOMC meeting. And two important pieces on that front are employment growth moderated. So, in the June meeting, the three-month average payroll gain was running at about 188,000 per month. And I think it gave the sense that the labor market was really accelerating and there was downside risk to the unemployment rate. The subsequent employment data changed that view. Now it looks like there is much less of an acceleration in hiring and momentum has slowed. So, the labor market doesn't look quite as robust. Second, there was a lot of information, we think, a lot of signal about disinflation. So yes, recent volatility in the Middle East did push oil prices temporarily higher. We'll see where that goes. But underneath the hood, there was significant softness in goods inflation and services inflation, particularly related to housing. So, we do think that there was a lot of evidence that disinflation is here. So, with those two things in mind, we think there's less of a case to hike in July than there was in June. So, we think the right thing... Or what we think the Fed will do is to skip July, try and buy a little more time, get a little more information. If disinflation is indeed here, the Fed stays on hold. If not, and inflation stays firm, well, they can move to rate hikes later this year. But we think the case to hike in July is less compelling than it was in June. Matthew Hornbach: Well, they certainly will get a lot more information between the July meeting and the September meeting. If memory serves, at least two more rounds of all of the major economic data points… Michael Gapen: That’s right. Matthew Hornbach: Payroll, CPI, and so on. Michael Gapen: That's right. The gap between the July FOMC meeting and the September FOMC meeting is the longest on the Fed's calendar. Of course, in part, that makes room for Jackson Hole in August, which if the Fed were moving to a tightening cycle, could be a venue to lay out the case for that. But you're right, they will see multiple employment and inflation reports before they meet again in September. Matthew Hornbach: If they really wanted to get ahead of that data and move at this meeting, what is the case for hiking rates in July? How would you think about that perspective? Michael Gapen: I think you could make a couple of cases to hike now. One is recent volatility and conflict in the Middle East has pushed oil prices higher. Maybe it convinces you – you're in a prolonged oil risk premium scenario, and inflation will not dissipate. Second, I think you could argue, well, it's a balance of risks argument. And we think risks have just shifted in the direction of inflation, where last year they were in the direction of a weaker labor market. We eased last year. Let's just reverse those risk management rate cuts this year. So, it's not about inflation in hand, it's about your view of risks around inflation. Another, I think, and to me, this is the most important one, is maybe Warsh wants a regime change in the reaction function. In other words, he emphasizes price stability and achieving the 2 p
- 2 days ago5 min
A More Selective Stock Market
Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why he thinks the bull market has entered a new phase, with more focus on quality.Read more insights from Morgan Stanley.----- Transcript -----Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast I’ll be discussing the transition from early- to mid-cycle and what that means for your portfolioIt's Monday, July 27th at 11:30 am in New York. So, let’s get after it.Our broadening call for the market has been about moving beyond the narrow leadership of the mega-cap winners and into more economically sensitive areas. That made sense in the context of our rolling recovery thesis, a period when revenue growth returns to lean cost structures, and operating leverage emerges across many sectors of the economy.But now, I think that early-cycle phase of the rolling recovery is ending, and the market is starting to rotate toward quality. That’s not bearish, but it is different and can affect portfolios at the stock level. As the cycle matures, investors stop rewarding low quality beta and start focusing more on free cash flow, balance sheet strength, margins, and earnings stability. The market is not abandoning the recovery. It is becoming more selective about the best way to own it. This setup reminds me of early-to-mid 2021. After the initial post-COVID rebound, leadership shifted away from lower-quality and more speculative areas and toward higher-quality companies. The S&P 500 kept rising, but the leadership changed. I think we’re seeing something similar today. The S&P itself is already a quality-heavy benchmark, with high-quality cohorts representing roughly 42 percent of the index versus about 28 percent for low quality. That should help keep the index resilient, even as the market continues to digest this transition. Could we still see near-term volatility? Absolutely. If the war escalates further or the Fed surprises us with a rate hike this week, the market can continue to correct. I continue to think 7000 on the S&P 500 is important support if investors remain uneasy about the Fed transition or the geopolitical backdrop. However, the bigger message is that leadership is changing, not that the bull market is ending.One of the most important drivers of this shift is AI adoption. Earlier in the cycle, margin expansion was about classic operating leverage: sales recovering faster than costs. From here, margin expansion will depend more on companies using AI effectively, running leaner, and turning productivity into revenue growth as well. This is why quality matters. Companies with strong pricing power, strong balance sheets, or the ability to translate AI adoption into real growth are likely to be rewarded disproportionately.Companies where AI is material to the investment thesis and pricing power is neutral to strong are seeing forward net margin expectations improve nearly 400 basis points above the median stock. Our transcript work also shows that roughly 25 percent of S&P 500 companies cited measurable benefits from AI adoption in the second quarter, up from 14 percent a year ago. That’s operating leverage with a new engine. This also feeds into the AI leadership rotation. I still think semis are likely to underperform hyperscalers from here, even if both can be under pressure during the next leg of consolidation. Semis are a classic early-cycle group, and they’ve already seen a peak rate of change in earnings revisions. The hyperscalers, by contrast, have high quality core businesses, exposure to the agentic application layer, and an underappreciated ability to take costs out through AI-driven efficiencies. In terms of the overall S&P 500, the two variables I’m watching most closely are interest rates and oil. The bond market is pricing a meaningful probability of a Fed hike, but my base case remains that the Fed stays on hold. A hike would be a hawkish surprise and a risky maneuver, but I think even that would delay rather than derail a positive finish to 2026 with earnings growth remaining strong. Oil is the other wildcard. A sustained rise in oil is not priced into equities, and just another reason to move one’s portfolio up the quality ladder.Bottom line, the broadening is not over, but it is changing shape and leadership. We’re moving from early-cycle beta toward mid-cycle quality as the market seeks not only growth, but companies that can convert that growth into durable free cash flow and margin expansion. The recent elevation of qual
- 5 days ago4 min
An Odyssey Through Market History
Looking at clues from the past, our Global Head of Fixed Income Research Andrew Sheets examines how the recurring themes – from deregulation to volatility – are shaping markets and why every cycle still takes its own path.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Today, what can Odysseus teach us about investing? It's Friday, July 24th at 2pm in London.Like many of you, this week I saw The Odyssey. The enduring appeal of this story more than 2,700 years after it was composed is a reminder that some themes are universal. Pride, resourcefulness, determination, self-control, or the lack thereof, mattered to both an ancient Greek dinner party and resonate with anybody investing today.But drawing lessons from the past is also tricky. We do not have that much financial history, and markets contain too many variables for the same combination to align twice. Some judgment, art, and dare we say storytelling is always involved in deciding which historical periods best describe the present. Those disclaimers aside, we've argued in our year ahead outlook that 1997 to 1998 and 2005 to 2006 are some of the most useful templates for the current backdrop.That remains our view. They suggest a cycle that has further to run, equities outperforming credit, and a preference to own volatility. Both of these periods were defined by a sharp rise in corporate activity. That is certainly what we're seeing today.We forecast U.S. capital expenditure to rise 23 percent in 2026, and 26 percent in 2027. AI is the biggest driver of this spending but build-outs in energy infrastructure are also playing a role. And increased corporate CapEx is certainly a global story, especially in Asia.Then there's M&A, which also rose significantly in these two past historical periods. As recently as early 2024, global M&A volumes were unusually depressed, some of the lowest levels in over 30 years, adjusted for economic size. But that's no longer the case. And more recently, M&A is currently running up 64 percent relative to a year ago.Important current macroeconomic data also looks somewhat similar to these past two periods. The current levels of U.S. core PCE inflation, the unemployment rate, and the 10-year yield are pretty close to the averages seen in 1997, 1998, 2005, and 2006.And the U.S. 2s10s yield curve, well, it broadly flattened then, and it has broadly been flattening today. A third similarity, maybe less obvious but no less important, is deregulation. Both 1997 and 1998 and 2005 to 2006 saw significant financial deregulation. And we're seeing that again now. From the Basel Endgame to NAIC risk weights to Solvency II changes to savings reforms in Europe, Korea, and elsewhere, the current trend appears to be on a firmly deregulatory path.Even more simply, 1997 and 1998 and 2005 to 2006 provide interesting narrative bookends to two ways that I often hear the current environment being described. The late '90s? Well, that was defined by rising excitement around a transformational new technology – then the internet – and the prospect of a more productive future. Sound familiar? And the mid-2000s? Well, that was defined by a very unequal economy and rising consumer stress – but growth that was still supported by a seemingly inexhaustible investment demand from a rising market force. Then that force was emerging markets. Today, it's AI. Again, somewhat familiar. If these periods serve as a guide, the cycle probably has further to run, and corporate aggression should favor equities over credit.But if we learn anything from the trials of Odysseus, the journey can throw up plenty of surprises along the way. Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.
- 6 days ago5 min
Data Centers’ Political Battle
Despite growing political resistance, investment in data centers isn't slowing. Ariana Salvatore explains why supply constraints may actually accelerate AI capital spending.Read more insights from Morgan Stanley.----- Transcript -----Ariana Salvatore: Welcome to Thoughts on the Market. I'm Ariana Salvatore, Head of Public Policy Research at Morgan Stanley. Today, I'll be talking about why we still expect robust AI capital spending in spite of some rising political pushback. It's Thursday, July 23rd at 10am in New York. It should be no surprise to our listeners that data center pushback, a topic that we've been following for some time, has been growing louder. But in 2026, it's accelerated meaningfully. Data we track suggests that an estimated $156 billion of projects were canceled or delayed in 2025. This year alone, in just the first quarter, we've seen almost that same exact number. The opposition is coming from several directions.Communities are raising concerns about rising electricity bills, environmental pressures related to water use, and the local quality of life effects of large-scale construction. But it's also coming from lawmakers across the aisle. State legislatures with both Democratic and Republican lawmakers have been advancing this type of policy.At the same time, we're forecasting a little less than a trillion dollars of AI CapEx this year alone, and we think it's an increasingly important component of the macroeconomic growth outlook.So how do we square that circle? First, and most importantly, we think this is primarily a supply-side risk rather than a demand-side one. We don't expect the backlash to materially reduce projections for compute demand. Instead, it could widen the gap between that demand and the industry's ability to bring new capacity online through things like permitting delays, grid interconnection constraints, and local opposition.Despite that more difficult political and infrastructure environment, our internet team, led by Brian Nowak, remain constructive on AI capital spending. Our broader thematic estimate for total AI CapEX, including the neo cloud providers, stands at approximately $870 billion in 2026, and we actually see risks skewed even higher from here.So why is spending still increasing as the environment for building data centers becomes more challenging? There are a few reasons.First, the AI ecosystem remains compute constrained. The urgency to invest has not diminished. In fact, growing social opposition and political uncertainty ahead of the 2028 presidential election may actually be encouraging hyperscalers to begin projects earlier, which our credit strategists outline as a potential scenario here. A pull forward of demand before the political and execution risk grows even louder.Second, the timelines associated with data center construction have become longer. From groundbreaking to operational launch, projects can now take as long as three years or even more. That gives companies a strong incentive to begin developing future capacity well in advance, even if the political pushback is strong.And third, the underlying demand signal is not slowing. Global weekly token usage, which our analysts view as an important proxy for compute demand, has increased since early January. It's rising and continues to do so throughout the course of this year. So, in short, the pushback is real, but it appears to be reshaping the build-out rather than stopping it. That's why our base case is for a conditional build-out. We think projects are likely to face greater scrutiny, we think projects are likely to face greater scrutiny, longer delays, and more requirements related to environmental impact and community benefits.But ultimately, we still think they cross the finish line. That could mean higher costs, it could mean longer development timelines, and greater geographic dispersion of projects away from the largest existing data center markets. It could also accelerate the shift toward on-site and behind-the-meter power generation. Fuel cells, turbines, and energy storage are becoming increasingly important as operators look for ways to reduce their reliance on these lengthy grid interconnection processes, and that can benefit companies that are able to bring those solutions to the forefront. Meanwhile, our U.S. equity strategy team maintains a relative preference for hyperscalers over semiconductors over the next several months. As you heard our CIO and Chief Equity Strategist Mike Wilson explain yesterday, that's because the team sees the hyperscalers as early in discounting the market's renewed focus on CapEx discipline. Putting it all together, we see
- 1 weeks ago4 min
More Stocks Join the Bull Market
Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why market leadership is rotating beyond semiconductors and where investors may find opportunities despite near-term volatility.Read more insights from Morgan Stanley.----- Transcript ----- Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. Today on the podcast, I will explain why the recent volatility in markets makes sense. It's Wednesday, July 22nd at 2 p.m. in New York. So, let’s get after it. The broadening trade is back and it’s gaining steam. We established this thesis last week. Importantly, there’s a key reason this broadening trade is likely to continue. One of the more crowded areas of the market—semiconductors—has lost its momentum. As I’ve also noted before, this is not a call that the AI cycle is over. However, stocks do trade on the rate of change in growth, and expectations often reach a place where they can no longer surprise on the upside. Earnings revisions tend to get too stretched, and capital starts looking for the next place where fundamentals are improving but positioning is still light. This is no different than what happened to other leadership groups earlier this year in areas like precious metals and energy stocks. Remember, I first made the call for market broadening in our November outlook. My view is that the economy had moved into a new expansion after the rolling recession ended in April 2025. Markets were starting to catch on before the Iran conflict interrupted that trend. Investors piled back into the AI trade—especially semis—as oil prices jumped and Fed expectations shifted more hawkish. Back in June, I noted that those earnings revisions were likely nearing their peak. Hyperscale stocks starting to lag was the first indication. Since semis ultimately depend on hyperscaler spending, that divergence usually doesn’t last. It doesn’t mean the buildout is ending. However, the spenders may be moving from blind enthusiasm to a more disciplined phase as a means of addressing the market’s concerns about falling cash flows. We’ve seen this pattern before. Since ChatGPT launched, this ebbing and flowing between the hyperscaler and semiconductor stocks has happened three times. This is the fourth such adjustment, during which the hyperscaler stocks are likely to outperform the semis. Since a few weeks back, hyperscalers have outperformed semiconductors by almost 30 percent. Another consequence is that the major averages may trade lower in the near term. When a crowded, large-cap leadership group is unwinding, the index can look choppy even as the market underneath is improving. That’s the key distinction. The index may struggle, but the broadening can still work. Over the next month, don’t be surprised if the S&P 500 trades as low as 7000 before it makes a move to 8000 by year-end. Use this weakness to add to equity positions. I continue to like Consumer Discretionary Goods, Transports, and Biotech. Discretionary Goods remains one of the cleaner expressions of the broadening thesis. Wallet share is shifting from services back toward goods, goods pricing is improving, and earnings revisions are strengthening. Transports continue to show improving revisions as volumes stabilize and pricing gets better. Biotech is one of the more attractive lower-rate beneficiaries, especially if policy expectations are too hawkish, as I think they are. On that last point, the Fed backdrop matters. The June FOMC meeting told us forward guidance is going to be limited, and the inflation path is going to drive policy. The softer-than-expected inflation data last week should allow the Fed to stay on hold rather than hiking. It may take the bond market a few more data points to fully re-price this view. Bottom line, the broadening is in gear, but it may not feel comfortable because it’s happening while the crowded momentum trade unwinds, a process that is likely unfinished. That’s usually how rotations in market leadership work. Like spring, it’s often: in like a lion and out like a lamb. Thanks for tuning in. I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!
- 1 weeks ago12 min
The Global Rate Debate
In the second part of our economic roundtable, Michael Gapen, Jens Eisenschmidt and Chetan Ahya join Seth Carpenter to discuss how central banks are balancing sticky inflation, resilient growth and regional policy trade-offs.Read more insights from Morgan Stanley.----- Transcript -----Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research. And once again today, I am joined by Morgan Stanley's chief regional economists: Michael Gapen, the Chief U.S. Economist, Jens Eisenschmidt, our Chief Europe Economist, and on the other side of the world, Chetna Ahya, our Chief Asia Economist. Yesterday, we talked about what's supporting growth around the world, especially AI spending in the U.S. and some government spending in Europe, and Asia's role in making all of this happen. Today, we're going to try to dig deeper and go into policy. It's Tuesday, July 21st at 10 am in New York Jens Eisenschmidt: And 4pm in Frankfurt. Chetan Ahya: And 10pm in Hong Kong. Seth Carpenter: Since the last time we did this in mid-April, I will say the debate around central banks has probably become more complicated. Global growth has held up, probably better than many people expected. And inflation, which picked up a lot, started to recede. But it has not gone away. And some of the forces helping to shape the economy, the AI spending, government spending, that possible upswing in manufacturing, that could keep demand strong, and it might keep pushing inflation higher. So, the question today is, if growth remains resilient, how much room really do central banks have to navigate? Mike, let me start with you because your call for the Fed here in the U.S. is out of consensus, or at least at odds with where the market is pricing things. We talked about the demand going from AI. You pointed out that imports are actually limiting how much domestic demand there is. So, what is the underlying story for inflation in the U.S.? And what does it mean for the Fed? Michael Gapen: So, our view is that inflation will come down in the U.S. So, we think disinflation will be driven by some payback in energy prices. Some payback from tariffs, which have pushed up goods prices over the last year. And some further diminishment in housing-related inflation, namely shelter. So, we think on a broad-based perspective, inflation has already peaked and will start moving lower. And we think we've seen evidence of this in recent inflation prints. A risk to that, though, is from the demand side of the economy and AI-related inflation in two parts. One, higher software prices, chipflation. So, the pass-through of some of the AI pricing components. Fortunately, here, they're about less than 1 percent of the consumer basket. So, we don't think that there's a great risk, a strong risk, a high risk of AI-related inflation in the consumer bundle. I think the real risk is that maybe we underestimate broad-based demand, animal spirits. And so, you might just see a broad-based increase in inflation from stronger demand. That'll be a little bit harder to see in real times. But our expectation is that inflation moves lower to about 3 percent, by the end of this year and closer to 2.5 percent next year. Seth Carpenter: All right. Thanks, Mike. And in fact, the most recent inflation report that we just got confirms your perspective that inflation should be coming down. And so, I guess the question then remains: What would it take for the Fed to hike this year if inflation has come down like we've seen? Michael Gapen: Well, I think that the answer there is that inflation wouldn't come down in line with our expectations. So, if the view is that energy prices, tariffs, and shelter inflation should provide plenty of offset and bring inflation down, I think the answer is you don't get payback. Explicitly, core goods prices stay elevated. Maybe we get ongoing disruptions in the Middle East that push energy prices higher and create second-round effects. So, I think inflation just lingering at elevated levels could mean the Fed gets brought in to raise rates in September or later this year. We think if they're patient enough, they'll see enough disinflation to keep them on the sidelines. But the risk is disinflation forecast is too optimistic, inflation stays firm, the Fed needs to raise rates. Seth Carpenter: All right, Jens, what about for you and the ECB? They've already raised interest rates
- 1 weeks ago12 min
AI Spending: A New Engine for the Global Economy
AI investment is reshaping the global outlook. In part one of this economic roundtable, our panel explores where the momentum is strongest — and where investment still needs to catch up.Read more insights from Morgan Stanley.----- Transcript -----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: And I'm Michael Gapen, Chief U.S. Economist. Chetan Ahya: And I'm Chetan Ahya, Chief Asia Economist. Jens Eisenschmidt: And I'm Jens Eisenschmidt, Chief Europe Economist. Seth Carpenter: And today is going to be our third quarter economic roundtable taking a wide-angle view on the global economy and all the key forces shaping our outlook and the economy. Seth Carpenter: It's Monday, July 20th at 10am in New York Jens Eisenschmidt: And 4pm in Frankfurt. Chetan Ahya: And 10pm in Hong Kong. Seth Carpenter: Since our last roundtable in April, the global economy has continued to face all sorts of shocks, a mix of resilience and friction. Inflation pressures have not disappeared. Energy and geopolitical risks have come up, they've receded, they've come back, they've receded all over the place But there is one underlying source of momentum that we have to talk about. And that is the AI-driven CapEx cycle. Michael, let me turn to you because the U.S. is a real focal point of all of this. Tell me a little bit about where Morgan Stanley Research is thinking about hyperscaler CapEx. How big it is? And then for you, when you think about the U.S. economy, just how big of a driver is it for what we're looking for in the U.S.? Michael Gapen: Yeah, we continue to revise higher our estimates for hyperscaler and AI-related CapEx in the U.S. economy. We were thinking a little over a trillion for 2027. Now we're more like 1.2 - 1.3 trillion, maybe as high as 1.4 trillion in 2028. So, the level of hyperscaler spending continues to keep rising. The growth rate and its effect on the economy is likely to slow. But as you noted, it's still a major driver of momentum in the U.S. You would look at that headline number and think, "Wow, that's, you know, 3.5 percent or so of GDP. Must be a massive source of momentum for GDP growth." But roughly about 60 percent of that hyperscaler CapEx spending goes to items like computers and peripherals, equipment spending categories that have a very, very high import content. We still get a significant number that AI CapEx is probably contributing around 40 basis points to growth this year. Be a similar-sized amount perhaps next year.So, for an economy that's growing somewhere a little bit above 2 percent right now, maybe closer to 2.5 percent next year, that's a non-trivial amount. We just have to remember it's fueling growth around the world, just not here in the U.S. Seth Carpenter: Yeah, that's a really great point because I have seen some estimates where people say, "Well, if it wasn't for AI CapEx, the U.S. economy wouldn't have grown at all." And that's clearly wrong, as you point out. But U.S. imports are necessarily exports from somewhere else. And, Chetan, if I can pull you into the story then, U.S. firms are buying a lot of AI-related equipment from Asia. What does that mean in your part of the world? And in particular, I'm thinking about Korea, Taiwan, and maybe some other economies in Asia. What's the critical story there? Chetan Ahya: So, for Asia, this has definitely been a big boon. If you look at Asia's exports, they have been booming, and particularly for the ones which are exporting semiconductors to the U.S. They are seeing semiconductor exports growing by 90 percent. And when we go back in time and compare Asia's semiconductor exports, it's very tightly linked to the U.S. IT CapEx. And it's not surprising when Mike Gapen mentions about the imports going up. It's on the other side, helping Asia's exports quite meaningfully. So, so far, we've seen this benefiting Korea, number one, Taiwan, and also Japan. All these three are big beneficiaries of U.S. AI CapEx. And of course, also not just U.S., but the other countries which are doing any little amount of CapEx on AI front, that's also helping these three economies in the region. Seth Carpenter: You've been doing a lot of work, Chetan, recently about how much the story can actually broaden out, that the AI CapEx
- 1 weeks ago12 min
Why Your Medical Bill Is So High
Our analysts Andrew Sheets and Mark Schmidt unpack why U.S. healthcare feels so expensive and the potential impacts of rising hospital costs.Read more insights from Morgan Stanley.----- Transcript -----Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Mark Schmidt: And I'm Mark Schmidt, Head of Municipal Strategy at Morgan Stanley. Andrew Sheets: And today on the program, a discussion into one of the biggest mysteries in one of the biggest sectors of the economy. We're talking about healthcare costs. It's Friday, July 17th at 2pm in London. Mark Schmidt: At 9am in New York. Andrew Sheets: So, we're talking today about healthcare, which represents roughly a fifth of the U.S. economy, the bulk of job creation over the last several years, and in my view, honestly, one of the biggest inflation paradoxes that we see in the market. On the one hand, the high cost of healthcare is taken as a given, and it's something that many Americans still struggle with financially. But if you look at the official inflation data in the U.S., healthcare costs have been lower than normal, and that's been true now for a number of years. So, what's going on? How do we tie this together? And Mark, you just wrote a report that tries to do exactly that. So, what did you hope to accomplish with this report? Mark Schmidt: You're absolutely right. It's hard to underline enough just how large healthcare is to the U.S. economy overall. Americans spend nearly $6 trillion on healthcare. That's more than the GDP of the entire country of Germany. And if we think about prices, Americans pay more. A knee replacement, for example, costs $25,000 in the United States. That same procedure costs just $6,000 in France. Common heart treatments that would cost $3,000 in Germany or $10,000 in Australia cost $34,000 in the U.S. It also matters for everyone's local community. Healthcare jobs have been growing twice as fast as the rate of job growth in the economy overall. And those are good jobs. They pay above average wages. For many Americans these days, the most secure path to the middle class is a career in healthcare. Now, this may seem a little bit arcane, but it probably hits close to your portfolio as well. Earlier in the year, when we took a look at how equity separately managed accounts invest, they typically have a core overweight to healthcare. And even though American prices may seem like an American issue, many of the largest and most profitable healthcare companies in the world are actually headquartered in Europe. So, whether you're sitting in New York or sitting in London, the price of American healthcare probably matters to you. But as you noted, Andrew, it does feel like a paradox because although Americans cite healthcare costs as one of their top concerns, and although healthcare spending is growing at 6 percent a year or more, the official inflation data says that healthcare prices are in check. And at one point earlier in the year, healthcare inflation, according to official data, even dipped below 3 percent. It just didn't make a lot of sense, and that's why we got together with our colleagues across equities, fixed income research, public policy, and economics to dig into what was actually going on. Andrew Sheets: So, Mark, let's dig right into that. I mean, it seems like a perfect encapsulation of the so-called Main Street versus Wall Street perception of the economy. So, what's going on? How does one kind of square those two numbers? Mark Schmidt: The easiest way to understand it is that you can't walk through a grocery store and figure out the price of a knee replacement. And that's true both for you and me. It's also true for the government. They have to survey hospitals and health insurance companies. The trouble is that the prices that health insurance companies pay hospitals, well, those are trade secrets. So, at any given point in time, even for the best government economists, it's not entirely clear what the price trends are. And that's why when you look at the official data, healthcare inflation typically has relatively lumpy jumps in the series. You could see several months of 0.1 or 0.2 percent official growth in healthcare inflation. Or as earlier this week, you could see certain categories jump to 0.4 or even 0.8. Andrew Sheets: Another element, Mark, that you talked about in the report is th
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Barry Ritholtz explores the people and ideas influencing markets, investing, and business.
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It's a free AI-powered email that summarizes new episodes of Thoughts on the Market as soon as they're published. You get the key takeaways, notable quotes, and links & mentions — all in a quick read.
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When a new episode drops, our AI transcribes and analyzes it, then generates a personalized summary tailored to your interests and profession. It's delivered to your inbox every morning.
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Thoughts on the Market publishes daily. Our AI generates a summary within hours of each new episode.
What topics does Thoughts on the Market cover?
Thoughts on the Market covers topics including Business, Investing. Our AI identifies the specific themes in each episode and highlights what matters most to you.
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