AI-Driven Productivity and Rate Cuts Fuel Market Broadening

Key Quotes

"Our view coming into this year is still pretty bullish for 2026. We've been bullish on [20]25 as you have, probably for, you know, similar -- maybe some slightly different reasons. I think one of our differentiating views is that we do think inflation is still a major risk for individual investors. And institutional investors, quite frankly, which is why stocks have done so much better."

Mike Wilson explains that despite potential volatility, Morgan Stanley maintains a bullish outlook for the U.S. stock market in 2026. Wilson highlights inflation as a significant risk for individual investors, suggesting that its persistence has contributed to the strong performance of stocks.

"We think, for instance, owning parts of the AI infrastructure cohort is one of the ways of hedging, whether that be in utilities, pipelines, energy infrastructure in general. These are areas that we think are a necessary hedge against inflation risk. And number two are a positive diversifier."

Daniel Skelly suggests that investing in AI infrastructure, including sectors like utilities, pipelines, and energy infrastructure, can serve as a hedge against inflation. Skelly also notes that these areas can act as a positive diversifier within an equity portfolio.

"Look, we all know that in many ways the Mag 7 -- and the technology strength that we've seen this past year -- has driven a fairly concentrated market. I think what people, particularly on the individual side, are recognizing less is just how much AI cuts across many other sectors and parts of the market."

Daniel Skelly points out that the market's performance has been heavily influenced by the "Mag 7" stocks and technology sector, leading to concentration. Skelly emphasizes that investors, especially individuals, may not fully grasp the extent to which Artificial Intelligence (AI) impacts and integrates across numerous other market sectors.

"I think one of the key factors we think about, in terms of a bottom-up perspective, which is what we focus on in across the portfolio, is definitely pricing power. Who owns the pricing power and the key data and the key AI adoption outlook in order to absorb all the different tools and technology diffusion we've seen in the last three years."

Daniel Skelly explains that from a bottom-up perspective, pricing power is a crucial factor to consider. Skelly highlights the importance of identifying entities that possess pricing power, control key data, and have strong AI adoption outlooks to effectively navigate the widespread adoption of new technologies.

"I think the one thing I would argue that I've observed in looking at all of our vast data sets is that despite all these different bullish factors, this still maybe has been a theme or a sector that investors have traded in and out of, right? I don't think I've even seen like a real strong, consistent overweight."

Daniel Skelly observes that despite numerous positive economic indicators, the financial sector has been a theme or sector where investors have frequently traded in and out. Skelly notes a lack of consistent strong overweight positions in financials, suggesting it presents an opportunity.

"First and foremost, I think we got past the point of maximum policy concern and risk. And ironically, we saw some kind of nominal or surface level deal signed with the government around most favored nation pricing. And it was really, not a lot to write home about. It wasn't as egregious as a policy inflection as some had feared."

Daniel Skelly discusses the healthcare sector, indicating that a major catalyst for its potential improvement was the reduction of policy-related concerns. Skelly mentions a government deal on most-favored-nation pricing that was not as impactful as feared, thereby alleviating significant policy risk for the sector.