Thoughts on the Market

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Crypto Goes Mainstream
Our Research and Investment Management analysts Michael Cyprys and Denny Galindo discuss how and why cryptocurrencies are transitioning from niche speculation to portfolio staples. Read more insights from Morgan Stanley.----- Transcript -----Michael Cyprys: Welcome to Thoughts on the Market. I'm Mike Cyprys, Head of U.S. Brokers, Asset Managers and Exchanges for Morgan Stanley Research.Denny Galindo: And I'm Denny Galindo, Investment Strategist for Morgan Stanley Wealth Management.Michael Cyprys: Today we break down the forces making crypto more accessible and what this shift means for investors everywhere.It's Tuesday, November 11th at 10am in New York.We've seen cryptocurrencies move from the fringes of finance to being considered a legitimate part of mainstream asset allocation. Financial platforms, especially those serving institutional clients, are starting to integrate crypto more than ever.Denny, you've written extensively about the crypto market for some time now among your many jobs here at Morgan Stanley. So, from your perspective in wealth management, what are you hearing from retail clients about their growing interest in crypto?Denny Galindo: Yeah, we actually started writing about crypto back in 2017. We had our first explainer deck, and we started writing extensive educational reports in 2021. So, we've covered it for a while.Advisors who dabble in crypto typically had this one client. He asked a lot of questions about when they could do more. We also had some clients who were curious, maybe their neighbor made a lot of money, bought a new boat and they were like wondering, you know, what is this Bitcoin thing?Now, this year we've seen a sea change. I think it was the election really started it; the Genius Act, and some of the legislation also kind of added to it. Almost all this interest is really on Bitcoin only, although we also have gotten a decent amount of interest about stablecoins and how those might impact things. But it's really just the beginning and I think it's an area that's; it's not going to go away.Mike, on the institutional side, what trends are you seeing among asset managers and brokers in terms of crypto adoption integration?Michael Cyprys: So, we've seen a big move into the ETF space as large money managers make crypto easier to access for both retail and institutional investors. Now this comes on the back of the SEC approving the first spot Bitcoin and Ethereum ETFs back in 2024. And since then, we've seen firms from BlackRock to Fidelity, Franklin, Invesco, and many others, including crypto native firms having launched spot Bitcoin ETFs and spot Ethereum ETFs. And these steps in the minds of many investors have legitimized crypto as an investible asset class.Most recently, we've seen the SEC adopt generic ETF listing standards for crypto ETFs that can make it easier to accelerate ETF launches in reduced regulatory frictions. And today the crypto ETF space is about $200 billion of assets under management and saw inflows of over [$]40 billion last year, over [$]45 billion so far this year – despite some of the near-term volatility. And most of the asset class today is in Bitcoin, single token ETFs, with BlackRock and Fidelity managing the largest ETFs in the space.Speaking of products, what types of crypto are retail investors most curious about? And why do those particular ones make sense for their portfolios?Denny Galindo: Yeah, I think you hit the nail on the head. The most popular products are really the Bitcoin products. We as a firm allowed solicitation in Bitcoin ETPs more than a year ago in brokerage accounts. We just expanded them to allow them in Advisory in October. So, we're still early days here. There really hasn't been that much interest in the other crypto products.Now when people think about this, there's three buckets here. There are some people that think of it like digital gold. And they're worried about inflation. They're worried about government deficits. And that's kind of the angle that they're approaching crypto from. A second group think of it like a venture capital, like a disruptive innovation in tech that's going after this big addressable market. And, you know, hopefully the penetration will rise in the future. And then the third bucket is really thinking [of it] out it as a diversifier. So, they're saying, ‘Hey, this thing is volatile. It doesn't match stocks, bonds, other assets. And so, I kind of want to use it for diversification.’Now, Mike, when you have these discussions with institutional clients, how do they view the risk and potential of these different cryptocurrencies?Michael Cyprys: What's interesting with the crypto space is adoption started on the retail side with institutions now slowly beginning to explore allocations. And that's the opposite of what we've seen historically with institutions leaning in ahead of retail in areas, whether it's commodities or private markets. But it's still early days.On the institutional side, we're starting to see some pensions, endowments, foundations begin to make some small allocations to Bitcoin as a long-term inflation hedge. But keep in mind, institutions tend to make investments in the context of strategic asset allocations, often with a broader macro framework.Denny, you've written quite a bit about the four-year crypto cycle. Could you explain what that is and where you think we are in the current crypto cycle?Denny Galindo: Yeah, if you look at the data, you see a pretty clear trend of a four-year cycle. So, there's three up years and one down year, and it's been like clockwork, since Bitcoin was invented.Now when you see something like that, you always try to explain like: why is this happening? So, there's two kind of dominant explanations that we've seen. So, one's macro, one's micro. Now the macro version for crypto is really the M2 cycle. So, we see that M2 to that global M2 money supply has kind of accelerated and decelerated in four-year cycles, and Bitcoin tends to really match that cycle. It tends to accelerate when M2's accelerating and it tends to decline when it's decelerating or declining.But there's also this bottoms-up way of looking at it, and commodities are really the place we go to for that analysis. So, a lot of commodities, you know, could be coffee, could be oil – if something disrupts supply, you tend to get the shortage, you get the price moving up.Then you get commodity speculators piling in, adding leverage. And it'll just kind of go parabolic. At some point something pops the bubble, usually more supply, and then you get like a great depression. You get like an 80 percent draw down. All the leverage comes out and the whole thing crashes. So crypto has also followed that.Now, we break the four-year cycle into four seasons: spring, summer, fall, and winter. And each season has a different characteristic about which parts of the market work, which don't work, what things look like. We are in the fall season right now. And that tends to last about a year. We wrote a note last year on this. Fall is the time for harvest. So, it's the time you want to take your gains.But the debate is, you know, how long will this fall last? When will the next winter start? Or maybe this pattern won't even hold in the future. And so, this is the big debate in the crypto circles these days.And Mike, given the volatility, given the great depressions we talked about in Bitcoin with these, you know, 70-80 percent drawdowns, how do you see it fitting into institutional portfolios compared to other cryptocurrencies?Michael Cyprys: Compared to other cryptocurrencies, Bitcoin is still viewed as the flagship asset within the crypto space – just given higher adoption, greater liquidity, the sheer market value. It has longer history and better regulatory clarity as compared to other tokens. But given the volatility as you mentioned, and the early days nature of cryptocurrencies, adoption is still quite nascent amongst institutional investors.Some institutional investors view Bitcoin as digital gold or macro hedge against inflation and monetary debasement. It's also sometimes viewed as a low correlation diversifier within multi-asset portfolios. But even that's also been a debate in the marketplace too.As we look forward from here, crypto adoption within institutional portfolios could potentially expand as regulatory clarity establishes a clear framework for digital assets, right? We had the Genius Act recently that focused on stablecoins. Next up is market structure. There's a bill working its way through Congress.We've also had developments on the ETF side that lower[s] barriers for institutions to gain exposure there. Not only is it more accessible within traditional portfolios, but the ETF fits nicely into day-to-day workflow.So, bottom line is institutional views on Bitcoin and crypto are evolving, and how firms view Bitcoin – we think will depend upon the institution's objectives, their risk tolerance and portfolio context. And keep in mind that institutional allocations don't turn on a dime. They tend to be slower moving.Denny, do retail clients take a similar approach or are they more likely to take bigger bets?Denny Galindo: Our clients struggle with this question. And so, we get a lot of questions like, ‘Okay, I don't want to miss this. I'm a little nervous about it. What allocation should I use here?’ And so, we go back to our three, kind of, typical investors when we try to answer this question. We really try and help people figure out where is equal weight.So, we wrote a note in February called “Are you Underweight Bitcoin?” And we have three different answers depending on how you're thinking of it. And, you know, there's a big debate. There's no clear answer. And that's not really where we want our clients. We want them to be smaller where they can have some exposure if they want it. Not everyone wants it, but if you do want it, you can have it. And it won't really dominate the volatility of the portfolio.Now, on another note, Mike, are you seeing legacy platforms start to offer crypto as well?Michael Cyprys: So crypto ETFs are generally available in self-directed brokerage accounts across the industry today. Schwab, for example, commented that their customers hold $25 billion in crypto ETFs, which is about, call it 20 percent share of the ETF space. But access to these crypto ETFs is a bit more restricted within the Advisor-led channel. But we're starting to see that broaden out for ETFs and eventually might see model portfolios with allocations toward crypto ETFs.But when you look at spot crypto trading, though, that generally remains out of reach of most legacy platforms. The key hurdle for that has been regulatory clarity and with a more crypto friendly administration that is changing here.So, Schwab, for example, acknowledged that they have the regulatory clarity needed and they're working towards launching their spot crypto trading platform in the first half of next year.On that topic, Denny, how do you view the merits of holding crypto directly versus through an exchange-traded product like ETFs?Denny Galindo: Yeah, I mean, our clients are mostly not day trading this product and kind of moving it back and forth.So, the ETPs have been a pretty good answer for them. The one issue is liquidity. And so, we're not used to thinking of this in; the U.S. equity markets are the most liquid markets. But in crypto, the crypto markets, the spot markets are actually more liquid than the equity markets.So, you get a lot of liquidity even after hours, even 24x7. And as other markets around the world kind of take the lead. But most of our investors aren't treating it that way. They're not day trading it, and they're really keeping it more like that digital gold allocation. And so, they just need to adjust the position size, you know, once a month, once a year maybe; just kind of buy and hold.But I wonder, you know, as more people get more comfortable, it could become more important in the future. So, it's an open question, but for now, the ETPs have been a pretty good answer here.Michael Cyprys: Fascinating space. Denny, thanks so much for taking the time to talk.Denny Galindo: It was great speaking with you, Mike.Michael Cyprys: 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.
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10:42
Relief and Volatility Ahead for U.S. Stocks
Our CIO and Chief U.S. Equity Strategist Mike Wilson unpacks why stocks are likely to stay resilient despite uncertainties related to Fed rates, government shutdown and tariffs.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’ll be discussing recent concerns for equities and how that may be changing. It's Monday, November 10th at 11:30am in New York. So, let’s get after it.We’re right in the middle of earnings season. Under the surface, there may appear to be high dispersion. But we’re actually seeing positive developments for a broadening in growth. Specifically, the median stock is seeing its best earnings growth in four years. And the S&P 500 revenue beat rate is running 2 times its historical average. These are clear signs that the earning recovery is broadening and that pricing power is firming to offset tariffs. We’re also watching out for other predictors of soft spots. And over the past week, the seasonal weakness in earnings revision breath appears to be over. For reference, this measure troughed at 6 percent on October 21st, and is now at 11 percent. The improvement is being led by Software, Transports, Energy, Autos and Healthcare. Despite this improvement in earnings revisions, the overall market traded heavy last week on the back of two other risks. The first risk relates to the Fed's less dovish bias at October's FOMC meeting. The Fed suggested they are not on a preset course to cut rates again in December. So, it’s not a coincidence the U.S. equity market topped on the day of this meeting. Meanwhile investors are also keeping an eye on the growth data during the third quarter. If it’s stronger than anticipated, it could mean there’s less dovish action from the Fed than the market expects or needs for high prices.I have been highlighting a less dovish Fed as a risk for stocks. But it’s important to point out that the labor market is also showing increasing signs of weakness. Part of this is directly related to the government shutdown. But the private labor data clearly illustrates a jobs market that's slowing beyond just government jobs. This is creating some tension in the markets – that the Fed will be late to cut rates, which increases the risk the recovery since April falls flat. In my view, labor market weakness coupled with the administration's desire to "run it hot" means that ultimately the Fed is likely to deliver more dovish policy than the market currently expects. But, without official jobs data confirming this trend, the Fed is moving slower than the equity market may like. The other risk the market has been focused on is the government shutdown itself. And there appears to be two main channels through which these variables are affecting stock prices. The first is tighter liquidity as reflected in the recent decline in bank reserves. The government shutdown has resulted in fewer disbursements to government employees and other programs. Once the government shutdown ends which appears imminent, these payments will resume, which translates into an easing of liquidity.The second impact of the shutdown is weaker consumer spending due to a large number of workers furloughed and benefits, like SNAP, halted. As a result, Consumer Discretionary company earnings revisions have rolled over. The good news is that the shutdown may be coming to an end and alleviate these market concerns. Finally, tariffs are facing an upcoming Supreme Court decision. There were questions last week on how affected stocks were reacting to this development. Overall, we saw fairly muted relative price reactions from the stocks that would be most affected. We think this relates to a couple of variables. First, the Trump administration could leverage a number of other authorities to replace the existing tariffs. Second, even in a scenario where the Supreme Court overturns tariffs, refunds are likely to take a significant amount of time, potentially well into 2026.So what does all of this all mean? Weak earnings seasonality is coming to an end along with the government shutdown. Both of these factors should lead to some relief in what have been softer equity markets more recently. But we expect volatility to persist until the Fed fully commits to the run it hot strategy of the administration. 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!
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4:30
Fed’s Path Uncertain as Key Data Lags
Our Chief U.S. Economist Michael Gapen and Global Head of Macro Strategy Matthew Hornbach discuss potential next steps for the FOMC and the risks to their views from the U.S. government shutdown. 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: The October FOMC meeting delivered a quarter percent rate cut as widely expected – but things are more complicated, and policy is not on a preset path from here.It's Friday, November 7th at 10am in New York.So, Mike, the Fed did cut by 25 basis points in October, but it was not a unanimous decision. And the Federal Open Market Committee decided to end the reduction of its balance sheet on December 1st – earlier than we expected. How did things unfold and does this change your outlook in any way?Michael Gapen: Yeah, Matt, it was a surprise to me. Not so much the statement or the decision, but there were dissents. There was a dissent in favor of a 50-basis point cut. There was a dissent in favor of no cut. And that foreshadowed the press conference – where really the conversation was about, I think, a divided committee; and a committee that didn't have a lot of consensus on what would come next.The balance sheet discussion, which we can get into, it came a little sooner than we thought, but it was largely in line with our view. And I'm not sure it's a macro critical decision right now. But I do think it was a surprise to markets and it was certainly a surprise to me – how much Powell's tone shifted between September and October, in terms of what the market could expect from the Fed going forward.So, what he said in essence, the key points, you know. The policy's not on a preset path from here. Or [a] cut in December is maybe not decidedly part of the baseline; or certainly is not a foregone conclusion. And I think what that reflects is a couple of things.One is that they're recalibrating policy based on a risk management view. So, you can cut almost independent of the data, at least in the beginning. And so now I think Powell's saying, ‘Well, at least from here, future cuts are probably more data dependent than those initial cuts.’ But second, and I think most importantly is the division that appeared within the Fed. I think there's one group that's hawkish, one group that's dovish, and I think it reflects the division and the tension that we have in the economic data.So, I think the hawkish crowd is looking at strong activity data, strong AI spending, an upper income consumer that seems to be doing just fine. And they're saying, ‘Why are we cutting? Financial conditions for the business community is pretty easy. Maybe the neutral rate of interest is higher. We're probably less restrictive than you think.’ And then I think the other side of the committee, which I believe still that Chair Powell is in, is looking at a market slowdown in hiring a weak labor market. What that means for growth in real income for those households that depend on labor market income to consume; there's probably some front running of autos that artificially boosted growth in the third quarter.So, I think that the dissents, or I should say the division within the FOMC, I think reflects the tension in the underlying data. So, to know which way monetary policy evolves, Matt, it's essentially trying to decide: does the labor market rebound towards the activity data or does the activity data decelerate at least temporarily to the labor market?Matthew Hornbach: Mike, you talked a lot about data just now, and we're not exactly getting a lot of government data at the moment. How are you thinking about the path for the data in terms of its availability between now and the December FOMC meeting? And how do you think that may affect the Fed's willingness to move forward with another rate cut in the cycle?Michael Gapen: Right. So that's key and critical to understanding, right? We're operating under the assumption, of course the federal government shutdowns going to end at some point. We're going to get all this back data released and we can assess where the economy is or has been. I think the way markets should think about this is if the government shutdown has ended in the next few weeks, say before Thanksgiving – then I think we, markets, the Fed will have the bulk of the data in front of them and available to assess the economy at the December FOMC meeting.They may not have it all, but they should get at least some of that data released. We can assess it. If the economy has moderated and weakened a bit, the labor market has continued to cool, the Fed can cut. If it shows maybe the labor market rebounding downside risk to employment being diminished, maybe the Fed doesn't cut.So that's a world and it is our expectation the shutdown should end in the next few weeks. We're already at the longest shutdown on record, so we will get some data in hand to make the decision for December. Perhaps that's wishful thinking, Matt, and maybe we go beyond Thanksgiving, and the shutdown extends into December.My suspicion though, is if the government is still shut down in December, I can't imagine the economy's getting better. So, I think the Fed could lean in the direction of taking one more step.Matthew Hornbach: This is going to be very critical for how the markets think about the outlook in 2026 and price the outlook for 2026. The last FOMC meeting of the year has that type of importance for markets – pricing, the path of Fed policy, and the path of the economy into 2026. Because if we end up receiving a rate cut from the Fed, the dialogue in the investment community will be focused on when might the next cut arrive. Versus if we don't get that rate cut in December, the dialogue will focus on, maybe we will never see another rate cut in the cycle. And what if we see a rate hike as we make our way through the second half of 2026? So that can have a dramatic impact on the U.S. Treasury market and how investors think about the outlook for policy and the economy.Michael Gapen: So, I think that's right. And as you know, our baseline outlook is at least through the first quarter, if not into the second quarter. The private sector will still be attempting to pass through tariffs into prices. And I think in the meantime, demand for labor and the hiring rate will remain low.And so, we look for additional labor market slack to build. Not a lot, but the unemployment rate moving to more like 4.6, maybe 4.7 – and that underpins our expectation the Fed will be reducing rates in in 2026. But I think as you note, and as I mentioned earlier, there is this tension in the data and it's not inconceivable that the labor market accelerates. And you get, kind of, an animal spirits driven 2026; where a combination of momentum in the data, AI-related business spending, wealth effects for upper income consumers and maybe a larger fiscal stimulus from the One Big Beautiful Bill Act, lead the economy to outperform.And to your point, if that is happening, it's not farfetched to think, well, if the Fed put in risk management insurance cuts, perhaps they need to take those out. And that could build in a way where that expectation, let's say towards the second half or the fourth quarter maybe of 2026, maybe it takes into 2027. But I agree with you that if the Fed can't cut in December because the economy's doing well and the data show that, and we learn more of that in 2026, you're right.So, it would… And may maybe to put it more simply, the more the Fed cuts, the more you need to open both sides of the rate path distribution, right? The deeper they cut, the greater the probability over time, they're going to have to raise those rates. And so, if the Fed is forced to stop in December, yeah, you can make that argument.Matthew Hornbach: Indeed, a lot of the factors that you mentioned are factors that are coming up in investor conversations increasingly. The way I've been framing it in my discussions is that investors want to see the glass as half full today, versus in the middle of this year the glass was looking half empty. And of course, as we head into the holiday season, the glass will be filled with something perhaps a bit tastier than water. And so…Michael Gapen: Fill my glass please.Matthew Hornbach: Indeed. So, I do think that we could be setting up for a bright 2026 ahead. And so, with that, Mike, look forward to seeing you again in December – with a glass of eggnog perhaps. And a decision in hand for the meeting that the Fed holds then. Thanks for taking the time to talk.Michael Gapen: Great speaking with you, Matt.Matthew Hornbach: 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.
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9:39
Supreme Court Tests Trump Tariffs
Earlier this week, the U.S. Supreme Court heard a case challenging the current administration’s tariff policy. Our Head of Fixed Income Research and Public Policy Research explains the potential magnitude of the case’s outcome for markets.Read more insights from Morgan Stanley.----- Transcript -----Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy.Today, we discuss the challenge against tariffs at the Supreme Court and how it might affect markets.It’s Thursday, Nov 6th at 11am in New York.This week, the U.S. Supreme Court heard arguments about the legality of most of the tariffs implemented by the Trump administration. Investors are paying close attention because if the Supreme rules against the administration, it could undo much of the four-five times tariff increase that’s taken place in the U.S. this year. That would seem to set up this hearing, and a subsequent ruling which could come as early as this month, as a clear market catalyst. But, like many policy issues affecting the economic and markets outlook, the reality is more complicated. Here’s what you need to know.First, there’s ample debate among experts about how the court will rule. That may seem surprising given the court’s makeup. Three of the nine judges were appointed by President Trump, and six of the nine by Republican Presidents. But it's not clear they’ll agree that the President used his executive power in a way consistent with the law that granted the executive branch this particular power. That law is the International Emergency Economic Powers Act, or IEEPA. And, without getting into too much detail, the law appears to have been designed to deal with economic crises and foreign adversaries, which the court might argue is not evident when considering tariffs levied against traditional allies.But, the next important point is that a ruling against the Trump administration might not actually change much around U.S. tariff levels. How is that possible? It's because the administration has other executive tariff powers it can deploy if needed, and ones that are arguably more durable. For example, Section 301 gives a President wide latitude to designate a trading partner as undertaking unfair trade practices. So this authority could be swapped in for IEEPA. That could take time, as Section 301 requires a study to be submitted, but there are other temporary authorities that could bridge the gap. So the U.S. can likely ensure continuity of current tariff levels if it wants – keeping tariffs more of a constant than a variable in our outlook.Of course, we have to consider ways we could be wrong. For example, the administration could use a ruling against it to re-focus instead on product specific tariffs through Section 232. That likely would result in U.S. effective tariff rates drifting a bit lower, alleviating some of the pressure our economists see on the consumer and corporate importers, adding more support to risk assets. But that scenario might come with some volatility along the way if the administration feels the need to float larger product specific tariff levels before settling on more palatable levels – similar to what happened in April.So bottom line, there’s more tariff policy noise to navigate this year. It could bring some market volatility, and maybe even a bit of upside, but the most likely outcome is that we circle back to the approximate levels we are today. Setting up for 2026, that means other debates – like how companies respond to tariffs and capital spending incentives – are probably more important to the outlook than the level of tariffs themselves. We’re digging in on all that and will keep you in the loop.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.
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3:47
Future of Work: AI’s Paradigm Shift for Labor
Concluding a two-part roundtable discussion, our global heads of Research, Thematic Research and Firmwide AI focus on the human impacts of AI adoption in the workplace.Read more insights from Morgan Stanley.----- Transcript -----Kathryn Huberty: Welcome to Thoughts in The Market, and to part two of our conversation on AI adoption. I'm Katy Huberty, Morgan Stanley's Global Head of Research. Once again, I'm joined by Stephen Byrd, Global Head of Thematic Research, and Jeff McMillan, Morgan Stanley's Head of Firm-wide AI. Today, let's focus on the human level. What this paradigm shift means for individual workers. It's Wednesday, November 5th at 10am in New York. Kathryn Huberty: Stephen, there's a lot of simultaneous fear and excitement around widespread AI adoption. There's obviously concern that AI could lead to massive job losses. But you seem optimistic about this paradigm shift. Why is that? Stephen Byrd: Yeah, as I mentioned in part one, this is the most popular discussion topic with my children. And I would say younger folks are quite concerned about this. There's a lot of angst among young folks thinking about what is that job market really going to look like for them. And admittedly, AI could be quite disruptive. So, we don't want to sugarcoat that. There's clearly going to be impacts across many jobs. Our work showed that around 90 percent of jobs will be impacted in some way. Oh, in the long term, I would guess nearly every job will be impacted in some way. The reason we are more optimistic is that what we see is a range of what we would think of as augmentation, where AI can essentially help you do something much better. It can help you expand your capabilities. And it will result in entirely new jobs. Now with any new technology, it's always hard to predict exactly what those new jobs are. But examples that I see in my world of energy would be smart grid analysis, predictive maintenance, managing systems in a much more efficient way. Systems that are so complicated that they're really beyond the capability of humans to manage very effectively. So, I'm quite excited there. I'm extremely excited in the life sciences where we could see entire new approaches to curing some of the worst diseases plaguing humankind. So, I am really very excited in terms of those new areas of job creation. In terms of job losses, one interesting analysis that a lot of investors are really focused on that we included in our Future of Work report was the ratio – within a job – of augmentation to automation. The lower the ratio, the higher the risk of job loss in the sense that that shows a sign that more of what AI is going to do, is going to replace that type of human work. Examples of that would be in professional services. As I mentioned, you know, one of my former professions, law would be an example of an area where you could see this. But essentially, tasks that don't require a lot of proprietary data, require less creativity. Those are the types of tasks that are more likely to be automated. Kathryn Huberty: One theme I hear both in Silicon Valley and in our industry is the value of domain expertise goes up. So, the lawyer that's very good in the courtroom or handling a really complicated situation because they have decades of experience, the value of that labor and talent goes up. And so, when my friends ask me what their kids should pursue in school and as a career, I tell them it's less about what job they pursue. Pick a passion and become a domain expert really quickly. Stephen Byrd: I think that's excellent advice. Kathryn Huberty: Jeff, how do you see AI changing the skills we'll need at Morgan Stanley and the way that people should think about their careers? Jeff McMillan: I think you have to break this down into three pieces – and Stephen sort of alluded to it. One, you have to look at the jobs that are likely to disappear. Two, you have to look at the jobs that are going to change. And then finally, you have to look at the new jobs that are going to actually emerge from this phenomena. You should be thinking right now about how you are going to prepare yourself with the right skills around learning how to prompt and learning how to move into those functions that are not going to be eliminated. In terms of jobs that are changing, they're going to require a far, far greater sense of collaboration, creativity. And again, prompting; prompt engineering is sort of the center of that. And I would highly encourage every single person who's listening to this to become the single best prompt engineer in their group, in their friend[s group], in their organization. And then in terms of the jobs that are being created, I'm actually pretty optimistic here. As we build agents, there's actually a bull case that we're going to create so much complexity in our environment that we're going to need more people to help manage that. But the skills are not going to be repetitive linear skills. They're going to require real time decision-making, leadership skills, collaboration skills. But again, I would go back to every single person: learn how to talk to the machine, learn how to be creative, and practice every day your engagement with this technology. Kathryn Huberty: So then how are companies balancing the re-skilling with the inevitable culture shifts that come with any new paradigm? Jeff McMillan: So, first of all, I think if you think about this as a tool, you've already lost the plot. I think that number one, you have to remind yourself what your strategy is; whatever that strategy is, this is an enabler of your strategy. The second point I'd make is that you have to go from both – the top down, in terms of leadership messaging that this change is here, it's important and it needs to be embraced. And then it's a bottoms-up because you have to empower people with the right tools and the technology to transform their own work. Because if you're trying to tell people that this is the path that they have to follow. You don't get the buy-in that you need. You really want to empower people to leverage these tools. And what excites me most is when people walk into my office and say, ‘Hey Jeff, let me show you what I built today.’ And it could be some 22-year-old who; it's their first month on the job. And what's exciting about this technology is you do not need a technology background. You need to be smart; you need to be creative. And if you've got those skills, you can build things that are really innovative. And I think that's what's exciting. So, if you can combine the top down that this is important and the bottoms up with giving people the skills and the technology and the motivation – that's the secret sauce. Kathryn Huberty: Jeff, what's your advice for the next generation college students, recent college graduates as they're thinking about navigating the early parts of their career in this environment? Jeff McMillan: Well, Katy, I first of all, I'd agree with what you say. You know, everyone's like, ‘What should I study?’ And the answer is – I don't actually know the answer to that question. But I would study what you care about. I would do something that you're passionate about. And the second point, and I hate to be a broken record on this. But I would be the single best user of GenerativeAI at your college. Volunteer with some nonprofit, build a use case with your friends. When you walk into your first job, impress in your interview that you are able to use this technology in really effective ways – because that will make a difference, in your first job. Kathryn Huberty: And I'm curious, are there areas where you think humans will always beat AI, whether it's in financial services or other industries? Jeff McMillan: I like to think that we are human and that gives us the ability to build trust and emotional relationships. And I think not only are we going to be better at that than machines are. But I think that's something that we as humans will always want. I think that there may be some individuals in the society that may feel differently. But I think as a general rule, the human-to-human relationship is something that's really important. And I like to think that it will be a differentiator for a long time to come. So, Katy, from where you sit as the Head of Global Research, how has GenAI changed the way research is being done? Kathryn Huberty: With the help of your team, Jeff, we have now embedded AI through the life cycle of investigating a hypothesis, doing the analysis, writing the research in a concise, effective way. Pushing that through our publishing process, developing digital content in our analysts’ voice, in the local language of the client. And now we're working on a client engagement tool that helps direct our research team's time. And so, the impact here is it reduces the time to market to get a alpha generating idea to our clients and, you know, and it's freeing up time for our teams. Stephen Byrd: So, Katy, I want to build on that. Productivity is a big theme. And away from the research itself, from a management perspective, how are you and your team using AI? And what do you see as the benefits? And how are you spending the extra time that's freed up by AI? Kathryn Huberty: I like to say that the research AI strategy is less about the tools. I mean, those are critical and foundational. But it's more about how we're evolving workflow and how our teams are spending time. And so, the savings are being reinvested in actually your area – thematic research – which takes a lot more coordination, collaboration. A global cross-asset view, which just takes more time to develop, and test a hypothesis, and debate internally, and get those reports to market. But it's critical for our core strategy, which is to help our clients generate alpha. When you look at equity markets over the past 30 years, a very small number of stocks drive all of the alpha. And they tend to link to themes. And so, we're reinvesting time in identifying those themes earlier than the market to allow our clients to capture that alpha. And then the other piece is when we look at our analyst teams, they spend about a quarter of their time with clients because they have to meet with experts in the industry. They need to do the analysis, they have to build the financial forecast, manage their teams. You know, we have internal activities, build culture. And with the ability to leverage these tools to speed up some of those tasks, we think we can double the amount of time that our analysts are spending with clients. And if we're putting thought-provoking, you know, often thematic global collaborative content into the market, our clients want to spend more time with us. And so, that's the ultimate impact. On a personal level, and I think both of you can relate. I think a lot of the freed-up time right now is just following the fast pace of change in AI and keeping up with the latest technology, the latest vendors. But long term, my hope is that this frees up time for more human activities on a personal level. Learning the arts, staying active. So, this could be potentially very beneficial to society if we reinvest that time in both productive activities that have impact in business. But also productive, rewarding activities outside of the office.As we wrap up, it's clear that the influence of AI is expanding rapidly, not just in digital- and knowledge-based sectors, but increasingly in tangible real-world applications. As these innovations unfold, the way we interact with both technology and our environments will continue to evolve – both on the job and elsewhere in our lives. Jeff, Stephen, thank you both for sharing your insights. And to our listeners, thank you for joining us. If you enjoy the show, please leave us a review wherever you listen, and share Thoughts on the Market with a friend and colleague today.
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