Our Head of Corporate Credit Research Andrew Sheets argues that while investor hopes are running high, corporate confidence isn’t.

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Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley. Today I’m going to talk about optimism, how we measure it, whether it’s overly excessive and what lies ahead.

It's Friday January 24th at 2pm in London.

A central tenet of investing, including credit investing, is to be on the lookout for excessive optimism. By definition, the highest prices in a market cycle will happen when people are the most convinced that only great things lie ahead. The lowest prices, when you’d love to buy, happen when investors have given up all hope.

But identifying peak optimism, in real time, is tricky. It’s tricky because there is no generally agreed definition; and it's tricky because, sometimes, things just are good. Investors have been excited about the US Technology sector for more than a decade now. And yet this sector has managed to deliver extraordinary profit growth over this time – and extraordinarily good returns.

Yet this debate does feel relevant. The US equity market has soared over 50 per cent in the last two years. Equity valuations are historically high, both outright and relative to bonds. Credit risk premiums are near 20-year lows. Speculative investor activity is increasing. And so, have we finally hit peak optimism, a level from which we can go no further?

Our answer, for better or worse, is no. While we think investor optimism is elevated, corporate optimism is not. And corporations are really important in this debate, enjoying enormous financial resources that can invest in the economy or other companies. While we do think corporate confidence will pick up, it is going to take some time.

One of our favorite measures of corporate confidence is merger and acquisition activity. Buying another company is one of the riskiest things management can do, making it a great proxy for underlying corporate confidence. Volumes of this type of activity rose about 25 per cent last year, but they are still well below historical averages. And it would be really unusual for a major market cycle to end without this sort of activity being above-trend.

Another metric is the riskiness of new borrowing. Taking on new debt is another measure of corporate confidence, as you generally do something like this when you feel good about the future, and your ability to pay that debt off. But for the last three years the volume of low-rated debt in the US market has actually been shrinking, while the issuance of the riskiest grades of corporate borrowing is also down significantly from the 2017-2022 average. Again, these are not the types of trends you’d expect with excessive corporate optimism.

Uncertainties around tariffs, or the policies from the new US administration could still hold corporate confidence back. But the low starting point for corporate confidence, combined with what we expect to be a deregulatory push, mean we think it is more likely that corporate activity and aggressiveness have room to rise – and that this continues throughout 2025. Such an increase usually does present greater risk down the line; but for now, we think it is too early to position for those more negative consequences of increasing corporate aggression.

Thanks for listening. If you enjoy the show, leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

On his first day in office, President Trump issued a series of executive orders, signaling his intent to deliver on campaign promises. Our Global Head of Fixed Income and Public Strategy Michael Zezas takes a closer look at economic impacts of Trump’s proposed policy path.

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Welcome to Thoughts on the Market. I’m Michael Zezas, Global Head of Fixed Income and Public Policy Strategy. On this episode of the podcast, we’ll discuss how trade policy uncertainty is creating volatility in markets.

It’s Wednesday, January 22nd, at 10am in New York.

Earlier this week, Donald Trump was again inaugurated as President of the United States. In the days that have followed, we’ve fielded tons of questions from investors, who are trying to parse the meaning of myriad executive orders and answers to press questions – looking through that noise for signals about the if, when, and how of policy changes around tariffs, taxes, and more. This effort is understandable because – as we’ve discussed here many times – the US public policy path will have substantial effects on the outlook for the global economy and markets.

And while we’ve spent some time here explaining our assumptions for the US policy path, it's important for investors to understand this. Even if you correctly forecast the timing and severity of changes to trade, tax, immigration, and other policies, you shouldn’t expect markets to consistently track this path along the way. That’s because there’s bound to be a fair amount of confusion among investors, as President Trump and his political allies publicly speculate on their policy tactics and make a wide variety of outcomes seem plausible.

Take tariff policy for example. On Monday, the President announced an America First Trade Policy, where the whole of government was instructed to come up with policy solutions to reduce goods trade deficits and related economic and national security concerns. Tariffs were cited as a tool to be used in furtherance of these goals, and instructions were given to develop authorities on a range of regional and product-specific tariff options. Said more simply, while new tariffs were not immediately implemented, the President appears to be maximizing his optionality to levy tariffs when and how he wants. That will mean that all public comments about tariffs and deadlines, including Trump’s comments to reporters on tariffs for Mexico, Canada, and China, must be taken seriously – even if they don’t ultimately come to fruition, which currently we don’t think they will for Mexico and Canada.

For markets, that max optionality can drive all sorts of short term outcomes. In the US Treasury market, for example, our economists believe these tariffs and a variety of other factors ultimately make for slower economic growth in 2026; and so we expect Treasury yields will ultimately end the year lower. But along the way they could certainly move higher first. As my colleague Matt Hornbach points out, tariff threats can drive investor concerns about temporary inflation leading markets to price in a slower pace of Fed interest rate cuts, which helps push short maturity yields higher.

So bottom line: investors should be carefully considering US public policy choices when thinking about the medium term direction of markets. But they should also expect considerable volatility along the way, because the short term path can look a lot different from the ultimate destination.

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.