Andrew Sheets

Morgan Stanley's base case sees inflation pressures easing in the second half of the year, driven by moderating housing and tariff-impacted goods costs, leading to lower inflation than the market expects over the next 12 months. This benign inflation outlook supports a forecast for lower bond yields and higher stock prices over that horizon.

Due to energy uncertainty, relative earnings, and relative monetary policy, Morgan Stanley continues to prefer US equities and government bonds over their European counterparts.

The new Fed chair Kevin Warsh will provide less forward guidance, which combined with a potentially smaller Fed balance sheet and uncertainty around inflation and AI will mean every data point can shift market thinking, leading to higher volatility in two-year interest rates and currencies.

CMBS (commercial mortgage-backed securities) offer significantly higher spreads than the long-run average, while commercial real estate fundamentals are improving: transaction volumes up 27% in Q1, prices up 5%, debt origination up 40% year-over-year, and distress declining for the first time since early 2023. Reduced new construction due to past rate hikes will support existing property values, making CMBS an attractive risk-reward versus other fixed income where spreads are near historic lows.

New leadership in Hungary may lead to warmer relations with the EU, potentially unfreezing EU funds (adding 1-1.5% to GDP growth) and steps toward euro adoption, reducing the risk premium in Hungarian assets. Morgan Stanley strategists expect further interest rate declines (0.5-1%), currency appreciation (2-4%), and are overweight Hungarian equities.

Due to energy uncertainty, relative earnings, and relative monetary policy, Morgan Stanley continues to prefer US equities and government bonds over their European counterparts.