00:00It does feel like people are risk off at the moment, obviously.
00:03You've got this, on the one hand, dissonance in the fact that people want to play global reflation, small caps,
00:10international.
00:10And on the other hand, you're seeing just bond yields lower in terms of, I think, further fears or further
00:17concern around the AI trade within the U.S.
00:19You're linking the AI trade dynamics over to price up, yield down.
00:23You can't do it with the economic data, whether it be the surprise index at multi-month highs, whether it
00:29be the jobs data as of the last week or two.
00:31So you can't link it that way.
00:33Dan, I mean, nobody does tech research better than the Morgan Stanley Complex.
00:38You guys have been leaders on that for decades here.
00:40What do you guys make of this fade software, just broadly defined?
00:44I mean, software is a story that just works for everybody all the time.
00:47Now it's really under some risk here.
00:49Sure, and thank you, Paul.
00:50Appreciate that kudos.
00:51So, number one, I think it's one of these many examples of dissonance at the moment.
00:55On the one hand, the market is fearful over AI spending.
00:58On the other hand, the market is saying software is going to be disrupted.
01:01So I can't explain that one in terms of efficacy versus disruption.
01:06And, look, I would say not all software, not to be that completely out of consensus, but not all software
01:12is created equal.
01:12When I look at the varying types of software, some of these companies are actually partnered with the AI model
01:18makers today.
01:19You know, it's funny, we were talking about software and just tech research, and you think Mary Meeker, she was
01:26in the news again this weekend, Mary Meeker.
01:28She won the AT&T Pebble Beach Pro-Am.
01:31Wow.
01:31No way.
01:32Way.
01:33Go away.
01:34Way.
01:34What did she do?
01:35Hand her PowerPoint?
01:36I don't know what she did.
01:38I saw her in the news.
01:39Remember PowerPoint?
01:40Oh, yeah.
01:40And you had to sit there in a bar.
01:42Alexis, you'd sit at a bar in midtown Manhattan with the beverages of your choice.
01:48Beverages.
01:49Uh-huh.
01:49Because it'd be, what, Dan?
01:51It'd be 64 pages.
01:52And the problem with Mary, every page had value.
01:55Yep.
01:56Yep.
01:56That was the problem.
01:56You know, it was good stuff.
01:57And 64 was the intro.
01:59Yes.
02:00Yes, exactly.
02:01So what are we doing here?
02:04Broadly defined with equities here, 2025, excellent returns in the U.S., even better returns outside of the U.S.
02:11What's the setup here for 2026?
02:13So, number one, we're saying to stick with the international trade, right?
02:16So, on the one hand, whereas the AI-centric optimism has now ceded to concern, that's obviously benefiting international, number
02:24one.
02:24Number two, you've got policy and fiscal tailwinds helping Japan, helping Latin America, helping arguably Europe in some degree with
02:32this defense spending and a revamping of the military-industrial complex there.
02:37Number two, we're telling folks, don't abandon the large-cap quality adopters in the U.S.
02:42I think the biggest dissonance I've observed over the last month, and we've known software is going to be disrupted
02:48for the last two years.
02:48So that's not the big surprise.
02:51It's that every other sector of the market has seemingly been taken out to the disruption woodshed.
02:57And a lot of these, by the way, were the names that were the biggest adopters of AI previously.
03:02That's the big dissonance.
03:03Earnings were, you know, three-quarters of the way through earnings.
03:07It seems pretty solid out there.
03:08Has earnings been solid enough for this market?
03:11Not at the moment.
03:12I think the market is losing sight of, we talked about the macroeconomic data earlier, pretty solid in and above
03:19itself.
03:20And earnings is broadening out.
03:21I think the key trend at the moment is that you're seeing Russell 3000 median earnings growth of around 11%.
03:28And that's up from low single digits the last year or so.
03:31I mean, I look at the Google bond deal the other day.
03:33Lisa Schell loaded the boat for Morgan Stanley on a 100-year British piece.
03:38But I'm sitting there this week and going, okay, Microsoft's in the tank.
03:42Down a couple dollars this morning as well.
03:45It's closed at 401.
03:46It's trading now $399.
03:48Okay, Dan Scully, fine.
03:50But can't they and others in one Bloomberg headline change the zeitgeist by saying we're going to do a ginormous
04:00bond deal off Dan Scully's desk at Morgan Stanley?
04:04Well, we'd welcome the partnership, no doubt.
04:08Listen, I think when you look at the majority of AI spend, it's still being funded from cash flow.
04:13On the margin, there is leverage coming into the system.
04:16But, Tom, as you know, many of the MAG-7 balance sheets are net cash balance sheets.
04:20They're net cash positive.
04:20They could afford to take on some leverage.
04:23Am I right that they could do one?
04:24What do your tech people say?
04:25Can they do one tranche, two tranches, $30 billion here, $20 billion there, $16.5 billion there?
04:31The demand is off the charts, as you know.
04:33And so, you know, we think there's someā¦
04:35Am I nuts, Paul?
04:35No, I'm with you.
04:37We think there's some room to take on some leverage here.
04:39But, look, at the end of the day, we think the market is efficiently and probably rightfully taking a pause
04:46on MAG-7 at the moment and the S&P because we've had this massive spending ramp up.
04:51We have alternatives.
04:52For the first time in a decade, we have other markets with momentum.
04:56And we all know what momentum as a factor has meant for equities over the last several years.
05:01It has truly taken the baton from valuation.
05:04And so, at the moment, momentum matters.
05:06So, does that lean outside of the U.S. versus U.S. here?
05:10Because, I mean, when you look at the European markets, they've always traded at a discount to the U.S.
05:14because they don't have that tech exposure that we have.
05:16Is that now the time for them to shine, as they did last year?
05:19Yeah, it's a fabulous point, Paul.
05:21And, number one, that's true.
05:22It's the absence of a negative at the moment.
05:25Number two, it's real fundamental catalysts.
05:27So, whether it be defense we talked about, in a post-Ukraine recovery effort, we might see a Marshall Plan
05:33type equivalent rebuilding infrastructure out there.
05:36And, number three, when I look at fiscal policy, right, we've talked a lot about the U.S. fiscal and
05:42political situation.
05:43Look at what's going on with Japan post the elections.
05:45We now have a supermajority.
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