Thoughts on the Market

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

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

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

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.

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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.
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 once this year. I think you've got a forecast for them raising interest rates again in September. What could make you wrong about that forecast? What's going to make you convinced that you're right about that forecast? And is there a similar tension that the ECB is wrestling with that Mike talked about for the Fed?
Jens Eisenschmidt: Yeah. I mean, starting with the last part of your question, I think no doubt, very similar tension. Just that, of course, it's less obvious. It's essentially a nuanced European version instead of the loud American version that we always stereotypically think the world looks like.
So, essentially, we have here clearly not an AI boom. That, I mean, there's no question. And we have discussed that yesterday. Still, there is certainly the notion that the world demand is not really weak, and some of this will also arrive in Europe. And so, you have that tension between maybe there's more resilience than we had thought, and so inflation will not come down through to slack as much. And so, we might actually add something here in terms of monetary restrictiveness.
Now, the other thing that is often forgotten, even though it's blatantly obvious, the starting point is just different. The ECB is running neutral monetary policy by all accounts. I mean, you could say 2 percent is neutral, and now they are 2.25. But, you know, there are ranges of uncertainty around any estimate. And the latest that they published runs – goes from 1.75 to 2;2.5.
So basically, even if they were to increase rates to 2.5 in September, you could go with the microphone around the governing council, and you would probably find a lot of people saying, "Well, this is still a neutral policy." That's probably not the case for the U.S. So, I guess this matters here for that debate too.
Seth Carpenter: All right. Yesterday we talked about lots of different things, but for Europe, we brought up fiscal policy. How do you think about fiscal policy and how it affects monetary policy? And so, I'm thinking about two channels.
One, how much does the ECB care that if they keep pushing up interest rates, they're going to increase the debt service burden for countries that are already facing high debt costs?
And second, is fiscal policy going to be the extra impetus for inflation that forces even more rate hikes from the ECB?
Jens Eisenschmidt: I guess it depends on who you ask. Certainly, more concerned members in the governing council that would point to exactly that fiscal stimulus as a reason why interest rates have to be increased further from here.
The other answer I would give is – probably for now at least, the view on fiscal policy is really model-based. You look at what type of increase in interest rate gets you essentially more fiscal restraint because there's an increase in interest rate bill and so less spending somewhere else. And that gets you basically less stimulus or less growth, I mean, very roughly speaking.
I don't think it's a major concern for now. We haven't reached yet interest rates where this would start to play a role. I guess, again, Europe being fragmented as it is, with all the political risk that's around the corner. Think about the elections in France and Italy and Spain next year. That will very likely find itself expressed in spreads. And so, the higher the interest rates are, the larger the spreads could become.
Seth Carpenter: So, for each of you, there's clearly a role for inflation. One of the risks we'll talk about maybe is inflation expectations and how maybe there's a big shift in what's going on with inflation.
But Chetan, that brings me to you and Asia, because one economy where there unquestionably has been a fundamental shift in inflation and inflation expectation over the past several years is Japan.
The Bank of Japan is on this normalization path where they're raising interest rates. Interest rates had been negative and then zero, and now they're gradually raising things up. Inflation has come back to Japan. Markets are looking at what the Bank of Japan is likely to do. Can you tell us a little bit about what our view is for the Bank of Japan this year and next? And what might make them hike interest rates faster than we think?
And is there any risk that in fact they hike interest rates slower than we think?
Chetan Ahya: Yeah, Seth. So, we are expecting BoJ to hike twice from here. The first rate hike is coming up in December of this year, and then another one coming up in June of next year. And then we think that, you know, the underlying inflation trend in Japan is not really that strong.
So, while market pricing is for about three more rate hikes instead of two that we are building in our base case. And some of the macro investors are even talking about four more rate hikes. We think the underlying inflation trend warrants a caution and BoJ to go slowly than what the market is pricing in and what the macro investors are saying in.
And the key part of our framework on thinking about Japan's inflation is that bulk of the explanation to inflation rise in Japan lies in currency moves. And secondarily, you can look at also the other drivers are more from supply side, which is higher energy prices or food prices. Whereas it's not driven so much by demand.
To elaborate further on why it is not driven by demand, when you look at Japan's consumption trend, and if you index it to hundred at pre-COVID levels in September [20]19 then it's currently about 101; i.e., that it's just about 1 percent up over the last seven years.
So that's a very tepid trend of consumption demand. And therefore, we don't think that BoJ needs to rush into hike in a more aggressive pace going forward.
Seth Carpenter: So, there is this fundamental shift, but boy, it's not on a tear, and so the BoJ can take its time. You know, Chetan, it's hard to wrap up a conversation about the global economy without talking about China.
I get the sense that there's not a lot going on with monetary policy, but we did just see a soft Q2 GDP print. So, against that backdrop, what should we be expecting in terms of policy? Is there any monetary policy coming? Or is there going to be some fiscal expansion? Or is China just sort of stuck in this lower gear?
Chetan Ahya: Yeah, Seth. So, we were also surprised by the soft GDP print. But when you look into the data, actually, it was interestingly doing well on exports.
And I mentioned earlier about how the global CapEx trend is helping Asia. It's definitely helping China too. But at the same time, China's domestic demand turned out to be quite weak. And particularly in the areas where we think that the policy response can be providing some help, i.e., infrastructure spend, was also very weak.
And therefore, we are expecting that in the back half of the year, you will see the government taking up some fiscal expansion. Not new stimulus announcement, but whatever they had budgeted. They have enough room within that to utilize that budget and actually increase that fiscal spending towards infrastructure.
We have about 2 trillion RMB worth of funds available for the government to go ahead and spend in the second half. And then lift that growth trend, which has dipped to 4.3 percent in second quarter to back to 4.6 percent in the back half of the year.
Seth Carpenter: You know what? Maybe that's a great place for us to leave it. We've gone around the world again today, but this time focusing much more on policy.
In the U.S., the Fed is facing this interesting situation. We think inflation is coming down. The last CPI print went in our favor. And so as a result, our forecast is that the Fed doesn't change policy at all this year. But it's going to come down to the data, and in particular, whether or not Mike and his team are right in terms of where inflation is going.
In Europe, the ECB has already raised interest rates once this year. Jens and team are looking for another interest rate hike. The ECB really does seem more sensitive to inflation coming from the energy shock, but there are lots of other crosscurrents that they're paying attention to as well.
And then the other major developed market central bank, the Bank of Japan, is on this normalization path. They are in the process of raising interest rates, but Chetan pointed out to us that the growth rate is such that they don't have to be in any sort of hurry, and they can take their time.
So, with that, Mike, Jens, Chetan, thank you so much for helping us connect all of these dots. And to the listeners, thank you 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 a colleague today.

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.

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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: 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 cycle has really contributed to Asian growth, but it doesn't tell the whole story that there's a broader industrial cycle.
Can you give us a little bit of a flavor of that story?
Chetan Ahya: That's right, Seth. So, we are actually highlighting that there is a CapEx and industrial super cycle that is underway in Asia, and there are four components to this story. AI and semiconductors CapEx, which we just briefly discussed.
Number two is energy. Number three is defense. And number four is industrial supply chain onshoring related CapEx. I know that everybody still thinks that AI is the most important part of this story, but when I give you the numbers and the breakup of that... So, for Asia, AI and semiconductor companies CapEx is about $380 billion in 2026, but energy CapEx is going to be $900 billion.
So, this is a far broader story than just AI for Asia.
Seth Carpenter: Mike, let me come back to you and to the U.S. then. So, isn't the growth story also broader than that as well domestically?
So, what's going on in terms of consumer spending in the U.S., and is there a broader CapEx story in the U.S. as well?
Michael Gapen: I would say, is it broader than that? I think maybe you could argue also it's narrower than that. Here's what I mean by that. As I noted AI CapEx contributing about 40 basis points to growth, it's certainly underpinning equity valuations in the U.S. and underpinning strong wealth creation.
So about [$]180 trillion in household net worth in the U.S. About [$]55 trillion of that has been created in just the last five years alone, underpinned in part by AI-related spending and optimism about future profitability. That's really supported spending by upper income households. So, I think it's both investment-led and consumer-led, but they're inextricably linked.
So, the positive for the U.S. is that it's providing a lot of resilience. The negative component of that is it feels like momentum in the U.S. is narrowly driven.
Jens Eisenschmidt: Let me maybe jump in here from Europe to provide some perspective from the other side. So, I think it's a fair summary to say that AI investment is not yet, or maybe will never get there, dominating the business cycle.
What we do have instead is an unusually consumption-driven expansion. That has to do not so much with an extraordinary strength of consumption, but more of an absence of other factors. Now, prospectively looking forward, we think the fiscal expansion might help lifting us a little bit. And then it is really the debate how much AI investment can arrive in Europe.
For now, I would say it's probably a factor of 20 that separates European investment plans from the plans we know that exist for the U.S.
Seth Carpenter: Let me stick with you then in Europe because you brought up fiscal as one of the factors going on here and where it's going… You and your team recently wrote a blue paper talking about what the outlook is for fiscal policy in Europe, and in particular, we had this era of cheap debt. Interest rates in Europe were low, at times negative. It was super easy to borrow. Not as much happened then.
There's been a shift towards more fiscal expansion at the same time that interest rates have gone up, causing the cost of debt to go up. Feels like there's a lot of push and pull going on. Can you unpack for us a little bit what was in that paper you wrote, what's going on with fiscal policy in Europe, especially in Germany? And what it might mean over time for Euro-area countries?
Jens Eisenschmidt: Yeah, so I think fiscal policy in Europe really is looking at a regime shift. So, there is this very famous, probably in the U.S. even more so than here, notion that the Europeans have built a very comfortable welfare state. And that's true if you just look at the accounting from a GDP perspective. It's close to 50 percent that, you know, budgets are actually extended on welfare spending.
And now you have three structural headwinds for any type of fiscal spend. So, one is aging related costs, you mentioned it already. Defense spending has to increase significantly, and the interest rate costs will also rise significantly. All of that means there will be very hard choices to be made.
The one thing that actually could help here is growth. Growth is the one thing that's, for now at least, missing, at least in comparison to the U.S. It's probably half what we expect, what the U.S. colleagues think is in stake for the U.S., and a quarter or even less than that of what is there in Asia.
So, growth is really the key, the solution, the answer to everything in Europe. More growth than just 1 percent, which is potential, would help solving that fiscal challenge. For now, it looks really, really like an uphill battle. Returning to Germany, it's the one country that has a very good fiscal starting position.
They are pushing a lot but they're to some extent pushing a string. So, even with the German huge fiscal package, given that private sector investments so far are absent, doesn't get us a ton of growth.
Seth Carpenter: Chetan, maybe I'll come back to you before we close part one of this roundtable. The AI CapEx cycle started with AI, broadened out further. How long do you expect this cycle to last? How durable can it be? And how might it compare to previous CapEx cycles?
Chetan Ahya: Yeah, Seth. So, we think this will be a multi-year CapEx cycle. And when we are thinking about the duration of the cycle, there are two things that I would keep in mind.
Number one is that most of the drivers that we just discussed – the CapEx on AI, energy, defense, and industrial supply chain onshoring related investments – these are all structural drivers. So, we think these are going to continue for some more time. At this point of time, we have the visibility for this cycle to be lasting for three-four more years.
And then the second point of framework that I would keep in mind is that the corporate balance sheets are in a pretty good shape. So, when you are thinking about the leverage in the private sector, you can look at both households and the corporate sector balance sheet. But since the cycle is CapEx driven, we are looking at the corporate balance sheets, and they are in a pretty good shape.
Across the region, corporate debt to GDP is below where it was in 2019.
Seth Carpenter: Mike, let me, let me wrap up quickly with you. We talked about AI, AI CapEx. For now, that's a very strong demand story.
When are we going to see a supply side of things coming from AI? Are you already seeing a big contribution to GDP and growth from productivity coming from AI?
Michael Gapen: We are, but not outside of the high-tech sectors, and we're seeing limited, what I'll call labor market restructuring of tasks and occupations beyond high AI-exposed occupations.
So right now, everything is still very isolated I think maybe as we get into 2029 and beyond, so as Chetan says, we probably have a three to four-year super cycle here around a build-out phase. Then we might see some of that broader-based diffusion to other non-tech sectors in the economy.
Seth Carpenter: All right, Jens, for you, let's wrap up here. So, what is the state of play for the build-out in the CapEx cycle for AI in Europe?
Jens Eisenschmidt: Yeah, it's very early stages. As I said before, we really; we connected to all the industry experts or analysts covering the sector and the total plans are a factor of 20 below what we see in the U.S. by just the seven hyperscalers. So, I would say very fragmented, very small, in general. Not only AI.
I think the one thing I would be looking at for any type of sign of revival, sign of growth is investment. The second would be investment. And you can guess what the third would be… Investments in the core countries. That's really what we need to see, and we haven't seen much in Germany or France on this front.
Seth Carpenter:
That's a great place for us to stop today. We talked about the real side of the economy, AI, CapEx, trade. Tomorrow we're going to come back, and we'll talk about how that growth outlook affects inflation. And once you start talking about growth and inflation, you got to talk about policy, and that's where we'll be tomorrow.
Mike, Jens, and Chetan, thank you for joining today. And for the listeners, thank you for listening. Be sure to tune in tomorrow for Part 2 of our conversation. And I have to say, 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.