This Jobs Report Is 'Largely the Real Deal,' Says Morgan Stanley's Gapen

Speakers

Michael Gapen — Chief US Economist at Morgan Stanley

Summary

The recent jobs report (170k private payrolls) is viewed as "largely the real deal," supported by corroborating data in durable goods and manufacturing output.
While December retail sales were soft, Gapen views this as a "second order" signal, maintaining a forecast for solid 2.3% consumption growth in Q4 driven by upper-income spending.
The current economic recovery remains "narrow," driven primarily by AI-related business spending and wealthy consumers, but a "broadening out" into Small Caps and the wider economy is the core thesis for 2026.
Structural job growth is heavily concentrated in non-cyclical sectors like Health Care and Education, driven by demographics rather than the business cycle.

Trade Ideas

Ticker	Direction	Speaker	Thesis	Time
RSP /SMALL CAPS	LONG	Michael Gapen Chief US Economist at Morgan Stanley	"Her thesis is that you will see some broadening out in 2026. As you mentioned, the rebounding small caps... We think if you get a stabilization in the labor market inflation does come down. It can support purchasing power of other parts of the economy." The speaker explicitly validates the "broadening out" thesis. As inflation cools and purchasing power restores beyond the top percentile, capital will rotate from the concentration in mega-caps to the average stock (Equal Weight) and smaller companies which are more sensitive to domestic economic health. LONG Small Caps and Equal Weight indices to capture the rotation. Inflation remains sticky, preventing the purchasing power restoration required for the rotation.	2:35
INDUSTRIALS	LONG	Michael Gapen Chief US Economist at Morgan Stanley	"Durable goods have been strong. ISM has picked up. Manufacturing output has been on an upward trend." Gapen uses these specific data points to validate the jobs report. If manufacturing output and durable goods are in a confirmed uptrend, the industrial sector is entering a cycle of expansion, justifying long exposure to industrial vendors and manufacturers. LONG Industrials based on hard data strength (ISM/Durables). A sudden reversal in manufacturing demand or supply chain disruptions.	—
HEALTH CARE	LONG	Michael Gapen Chief US Economist at Morgan Stanley	"Winners have come from a couple of sectors that are independent of the cycle... Health and social assistance... It is that we are getting older." Job creation is the leading indicator of sector health. Gapen identifies this sector as "independent of the cycle," meaning it provides defensive growth regardless of whether the "soft landing" occurs or not. The demographic tailwind (aging population) makes this a structural long. LONG Health Care as a defensive, structural compounder. Regulatory changes or government pricing intervention.	—
AI SECTOR	LONG	Michael Gapen Chief US Economist at Morgan Stanley	"The narrowness of growth in the economy has always been an issue. It is... AI-related business spending." While Gapen predicts a broadening eventually, he acknowledges that the current economic engine is almost entirely fueled by AI business spending. Until the rotation to small caps is confirmed by data, the AI sector remains the primary source of realized growth. LONG AI Sector (continuing the trend until the breakdown). Over-investment or a pause in capex spending by hyperscalers.	—
US CONSUMER	NEUTRAL	Michael Gapen Chief US Economist at Morgan Stanley	"There is softness in that [Retail Sales] report... It is spending by upper income consumers." There is a bifurcation in the consumer. Aggregate numbers look okay (2.3% consumption), but it is carried entirely by the wealthy. General retail sales are weak. This makes the broad consumer sector risky unless targeting luxury/upper-income specific stocks. NEUTRAL/WATCH due to the split between weak retail data and strong upper-income spending. Upper-income spending dries up (wealth effect reversal) before the lower-income consumer recovers.	—