Investors’ Focus Shifts to Rates and AI

Summary

Serena Tang debriefs investor meetings across Europe and Asia, where two themes dominated: uncertainty around U.S. monetary policy and increasing caution toward AI despite its long-term potential. Morgan Stanley's base case is for lower inflation to keep the Fed on hold and for the AI capex cycle to remain intact, supporting a constructive view on risk assets. At the same time, heavy expected issuance leads to an underperform call on US IG corporate bonds.

• Many investors interpreted the June FOMC as hawkish with a projected rate hike in 2026; Morgan Stanley sees it as cautious and expects the Fed to stay on hold.
• Lower core inflation from travel-related reversals and tariff payback supports the on-hold view.
• AI capex cycle remains strong; 'chipflation' is more likely to reprice infrastructure than derail the cycle.
• Hyperscalers are funding expansion via debt, including non-dollar issuance, with AI-related issuance forecast near $600B in 2026.
• US IG corporate bond supply is expected to reach $1 trillion net issuance, leading to underperformance.
• Morgan Stanley recommends staying constructive on risk assets.