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Thoughts on the Market

Thoughts on the Market

De: Morgan Stanley
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Short, thoughtful and regular takes on recent events in the markets from a variety of perspectives and voices within Morgan Stanley.

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  • Oil Rally Tests Diversification Strategy

    Oil Rally Tests Diversification Strategy
    Mar 10 2026

    Our Chief Cross-Asset Strategist Serena Tang discusses how rising oil prices and geopolitical tensions could make stocks and bonds move in the same direction, challenging one of the key principles of portfolio diversification.

    Read more insights from Morgan Stanley.


    ----- Transcript -----


    Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist.

    Today: what happens if your main diversification strategy suddenly stops working because of oil price moves?

    It’s Tuesday, March 10th, at 10am in New York.

    For decades, investors have relied on the idea that stocks and bonds return tend to move in opposite directions. When equities fall, bonds often rise, helping cushion portfolio losses. But that relationship isn’t guaranteed. Between 2021 and 2023, coming out of the pandemic, stocks and bonds sold off together, and the traditional 60/40 equity-bond portfolio suffered its worst annual performance in nearly a century.

    Now, recent geopolitical tensions and rising oil prices are raising a familiar concern for investors: Could that uncertainty dynamic return? At first glance, oil prices may seem like a narrow commodity story. But in reality, they can shape the entire macroeconomic environment.

    The classic negative correlation between stocks and bonds depends on a fairly simple economic pattern: growth and inflation moving in the same direction. When economic growth accelerates, inflation often rises as well. In that environment, equities may perform well while bonds weaken. But when growth and inflation move in opposite directions, the relationship between stocks and bonds can flip. That’s what happened coming out of the pandemic. Bond investors worried about rising inflation, while equity investors were worried about slowing growth. In that scenario, both asset classes' returns declined at the same time.

    A sustained oil price shock could potentially recreate those conditions. Higher oil prices can push up inflation while also weighing on economic activity – a combination that economists often refer to as stagflation. If markets begin to price in that kind of environment again, the relationship between stocks and bonds could shift back toward that less favorable regime.

    Despite recent volatility tied to tensions in the Middle East, the relationship between stocks and bonds today still largely reflects the traditional pattern. Overall, stock-bond returns correlation remains negative, meaning bonds can still help diversify equity risk. In fact, correlations between U.S. stocks and 2-year Treasury returns have been trending negative since 2024, and on a longer-term basis they are now extremely negative relative to the past three years. But the key point here is that not all bonds behave the same way.

    Many investors think of government bonds as a single asset class. But the maturity of the bond – how long it takes to repay – matters a lot for diversification. Shorter-dated bonds, such as 2-year U.S. Treasuries, have maintained stronger negative correlations with equities. Longer-dated bonds, however – particularly the 30-year Treasury – have behaved a bit differently. Their correlation with stocks has been stickier and less negative, partly because markets increasingly view longer-dated bonds as risky. As a result, the difference between how 2-year and 30-year Treasuries move relative to stocks has remained unusually wide for several years.

    In recent days oil prices have been rising -- linked in part to concerns around the Strait of Hormuz. That’s pushing up yields at the front end of the Treasury curve, creating what’s known as a bear-flattening. In other words, short-term interest rates are rising faster than long-term ones, reflecting markets placing more emphasis on inflation risks. And that brings us to the key questions for investors: Which risks will dominate from here – is it going to be higher inflation or slower growth? The answer could determine which assets provide better diversifications in the months ahead.

    So the takeaway is this: Higher oil prices and geopolitical risks could increase the chances that stocks and bonds move together again. But diversification isn’t disappearing. It’s just becoming more nuanced. For investors, the real question isn’t whether bonds diversify portfolios. It’s which bonds do.

    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.
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    5 m
  • The Reasons for the Bull Market to Resume

    The Reasons for the Bull Market to Resume
    Mar 9 2026
    Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why history, technicals and fundamentals suggest a clearer runway for U.S. stocks six months out, despite geopolitical concerns.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 the conflict in Iran and what it means for equities. It's Monday, March 9th at 11:30 am in New York. So, let’s get after it. While most believe the current equity market correction began in February, it's clear to me that it actually began last fall when liquidity began to tighten. In fact, back in September I warned that the Fed was not doing enough with the balance sheet – and financial conditions were likely to tighten and cause some stress in equities. Starting in October, that stress manifested as a sharp correction in the most speculative parts of the equity market and crypto currencies. The Fed responded by ending its balance sheet reduction earlier than expected and restarting asset purchases which led to strong equity performance in January. At this point, the correction is very well advanced in both time and price, with many stocks down 30 percent, or more. Meanwhile, dispersion has rarely been higher with the spread between winners and losers the highest we have seen in 20+ years. As usual, the markets got it right by anticipating many of the concerns that are now obvious to all. The questions for equity investors now are what will the world look like in six months and are prices cheap enough to start assuming a better future? The short answer is not yet, but get your shopping lists ready. In many ways, we find ourselves in a very similar position to last year. Recall that the major indices started to accelerate lower in Late February and early March. The concern at the time was centered around tariffs, but like today, equity markets had already been trading poorly for months on concerns that had nothing to do with tariffs. This time around, markets have been worried about AI labor disruption, private credit defaults and liquidity shortages long before the Iran conflict escalated. Corrections typically don’t end until the best stocks and highest quality indices get hit and that usually takes a bigger shock, like Liberation Day or war. That process has begun with the S&P 500 having its worst week since October. The other thing to consider is that market levels tend to be tied to where they were a year ago. This year-over-year comparison is very important when thinking about support. Given the sharp decline last year, it tells me we have another month during which the equity markets are likely to struggle. Based on this simple observation and other technical indicators, I think the S&P 500 could trade toward 6300 by early April before our favorable fundamental outlook can take hold again. Does this mean we shouldn’t worry about the conflict in Iran taking oil prices sustainably above $100? No, but since no one seems to be able to predict the outcome of military conflicts or oil prices, I am not going to try either. Instead, I am going to assume that in six months, things have likely settled down after this initial surge, much like we saw after Russia invaded Ukraine. Importantly, the spike in oil prices is the result of a logistical logjam in the Straits of Hormuz rather than a shortage of supply. That logjam is a real constraint, but necessity is the mother of ingenuity and will likely be solved. Another reason to be optimistic six months out is the broadening in earnings growth, a trend that remains intact and a key call in our 2026 outlook. Secondarily, the US is much more resilient than Asia and Europe to an oil shock given its energy independence. This should attract investor flows back to the US. And finally, tax incentives for capital spending and tax cuts for individuals in the [One] Big Beautiful Bill should provide a positive offset to the higher oil prices in the short term. On the negative side, the flight to quality and safety could lead to more US dollar strength which is a headwind to global liquidity. Bottom line, oil and US dollar strength is likely to persist until the conflict simmers down. While much of the damage has likely been done to the most vulnerable parts of the equity market, the index remains vulnerable to another 5-7 percent downside in my opinion while crowded stocks could see double digit declines before a final low appears next month. Remember market lows happen faster than tops so be ready to add risk in anticipation of the bull market resuming later this year. 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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    5 m
  • AI’s $3 Trillion Question: How to Pay the Bill?

    AI’s $3 Trillion Question: How to Pay the Bill?
    Mar 6 2026
    In the second of our two-part panel discussion from Morgan Stanley’s TMT conference, our analysts break down the complexity of financing AI’s infrastructure and the technological disruption happening across industries.Read more insights from Morgan Stanley.----- Transcript -----Michelle Weaver: Welcome back to Thoughts on the Market, and welcome to part two of our conversation live from the Technology, Media and Telecom conference. I'm Michelle Weaver, U.S. Thematic and Equity Strategist at Morgan Stanley. Today we're continuing our conversation with Stephen Byrd, Josh Baer and Lindsay Tyler. This time looking at financing AI and some of the risks to the story. It's Friday, March 6th at 11am in San Francisco. So yesterday we spoke about AI adoption. And while there's a lot of excitement on this theme, there've also been some concerns bubbling up. Lindsay, I want to start with you around financing. That's another critical component of the AI build out. What's your latest on the magnitude of the data center financing gap, and what role [are] credit markets playing here? Lindsay Tyler: Yeah, in partnership with Thematic Research, Stephen and team, and colleagues across fixed income research last summer, we did put out a note, thinking about the data center financing gap, right? So, Stephen and team modeled a $3 trillion global data center CapEx need over a four-year timeframe. So, in partnership with fixed income across asset classes, we thought: okay, how will that really be funded? And we came to the conclusion that the hyperscalers, the high quality hyperscalers, generate a good amount of cash flow, right? So, there's cash from ops that can fund approximately half of that. But then we think that fixed income markets are critical to fund the rest of the funding gap. And really private credit is the leader in that and then aided by corporate credit and also securitized credit. What we've seen since is that yes, private credit has served a role. There is this difference between private credit 1.0, which is more of that middle market direct lending. And then private credit 2.0, which is more ABF – Asset Based Finance or Asset Backed Finance. And what we see there is an interest in leases of hyperscaler tenants, right? We've also seen in the market over the past nine months or so, investment grade bond issuance by hyperscalers. Obviously, a use of cash flow by hyperscalers. We've seen the construction loans with banks and also private credit per reports. We've also seen high yield bond issuance, which is kind of a new trend for construction financing. We've seen ABS and CMBS as well. And then something new that's emerging in focus for investors is more of a chip-backed or compute contract backed financings, like more creative solutions. We're really in early innings of the spend right now. And so, there is this shift. As we start to work through the construction early phases, the next focus is: okay, but what about the chips? And so, I think a big focus is that, you know, chips are more than 50 percent of the spend for if you're looking at a gigawatt site. And it depends what type of chips and kind of what generation. But that's the next leg of this too. So, it's kind of a focus, you know, for 2026. Michelle Weaver: And how do you view balance sheet leverage and financing when you think about hyperscaler debt raising magnitude and timelines? Lindsay Tyler: So just to bring it down to more of a basic level, if you need compute, you really might need two things, right? A powered shell and then the chips. And so, if you're looking for that compute, you could kind of go in three basic ways. You could look to build the shell and kind of build and buy the whole thing. You could lease the shell, from, you know, a developer, maybe a Bitcoin miner too – that is converted to HBC. And then you kind of buy the chips and you put them in yourselves. Or you could lease all the compute; quote unquote lease, it's more of a contract. In terms of the funding, if you're thinking about the cash flows of some of the big companies – think of that as primarily being put towards chip spend. If you're thinking about the construction that's kind of split between cash CapEx but also leases. And so, what we've seen is that there is more than [$]600 billion of un-commenced lease obligations that will commence over the next two to five years, across the big four or five players. And then my equity counterparts estimate around [$]700 billion of cash CapEx that needs this year for some of those players as well. So, these are big numbers. But that's kind of how, at a basic level, they're approaching some of the financing. It's a split approach. Michelle Weaver: And what have you learned around financing the past few days at the conference? Anything incremental to share there? Lindsay Tyler: Sure. Yeah. I think I found confirmation of some key themes here at the conference. The first being that ...
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    14 m
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