July 14, 2025 12:25 PM GMT Morgan Stanley Research Global Tariffs Are Back – Implications to the Economy and Markets July 14, 2025 Vishwanath Tirupattur – Chief Fixed Income Strategist | Strategist Diego Anzoategui – US Economist Michael Zezas – Global Head of Fixed Income Research | Strategist Michael Wilson – Chief Investment Officer and Chief US Equity Strategist | Equity Strategist MORGAN STANLEY & CO. LLC Morgan Stanley Global Macro Forum Chetan Ahya – Chief Asia Economist MORGAN STANLEY ASIA LIMITED+ ...

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Market Analysis & Strategy - Morgan Stanley Investment Management highlights the concept of a positive but subpar year in the third year of a bull market, influencing investment strategy [2] - The firm adopted a cautious stance early in the year after a near double-digit market increase, later adding risk in April when the market declined by double digits [3] - Current market levels are perceived as inconsistent with a typical third year of a bull market, prompting a more cautious approach [3] - The firm anticipates strong second-quarter earnings, potentially leading to a few more weeks of market strength [4] - Opportunities are viewed as less favorable compared to the spring when the market was substantially lower [4] Risk Factors & Correction - Tariffs are not expected to be the primary cause of a market correction [5] - The market is not expected to react to known factors like tariffs in the same way it did previously [6] - A potential selloff later in the summer is anticipated to be triggered by unforeseen factors [6] - Potential triggers for a correction include the Federal Reserve's decisions on interest rates, higher yields, or economic concerns [7] - The market is considered vulnerable due to the magnitude and speculative nature of the rally, particularly in euphoric stocks [7]

Core Viewpoint - Morgan Stanley is expected to announce its second-quarter 2025 earnings on July 16, with analysts and investors closely monitoring the performance amid the implications of Trump's tariff plans [1] Financial Performance - The first-quarter performance was strong, driven by solid investment banking and trading results, with second-quarter revenue estimates at $15.92 billion, reflecting a 6% year-over-year growth [2] - The consensus estimate for earnings in the upcoming quarter has been revised down by 1.5% to $1.93, indicating a 6% improvement from the previous year's quarter [2][4] Earnings Surprise History - Morgan Stanley has a strong history of earnings surprises, having exceeded the Zacks Consensus Estimate in the last four quarters with an average beat of 20.3% [4] Factors Impacting Q2 Earnings - Investment Banking (IB) income is projected to decline year-over-year despite a stronger IPO market, with advisory fees estimated at $538 million, down 9.1% from the previous year [6][8] - Trading revenues are expected to surge due to market volatility, with equity trading revenues estimated at $3.46 billion, a 14.8% increase year-over-year [7][13] - Net interest income is projected to grow by 9.8% year-over-year to $2.27 billion, supported by stable rates and solid loan growth [14][15] Underwriting Fees - The consensus estimate for total underwriting fees is $884 million, indicating a decline of 13.9% year-over-year, with fixed-income underwriting fees expected to fall by 17% [10][11] Cost Management - Total non-interest expenses are anticipated to rise by 6.6% year-over-year to $11.6 billion, as the company continues to invest in its franchises [16] Price Performance - In the second quarter, Morgan Stanley's stock performance was strong, outperforming the Zacks Investment Bank industry and the S&P 500 Index, although it lagged behind Goldman Sachs [20]

Group 1 - The current conservative market expectations for Wall Street earnings may create favorable conditions for bank stocks to continue their strong performance [1] - The KBW Bank Index, which includes 24 institutions such as JPMorgan Chase and Citigroup, has risen approximately 37% since April's low, nearing historical highs, outperforming both the S&P 500 and Nasdaq 100 indices [1] - There is a significant expectation gap in the financial sector, with the sector expected to contribute 18.6% to the S&P 500's overall earnings, while its current weight in the index is only 13.7%, exceeding the average gap over the past 15 years [1] Group 2 - Analysts predict a year-over-year decline of about 1% in the S&P 500 financial sector index for the second quarter, indicating potential upside if actual profits exceed expectations [4] - Major banks including JPMorgan, Citigroup, and Wells Fargo are set to report earnings this week, with expectations of improved regulatory environments benefiting large institutions [4] - The completion of stress tests by the Federal Reserve is expected to lead banks to update capital management plans, potentially increasing stock buyback sizes, while the potential weakening of Basel III regulations may further enhance capital flexibility [4] Group 3 - The growth expectations for trading revenue are boosting market confidence, with high trading volumes following the announcement of tariff policies [4] - Challenges remain, as the forward P/E ratio for the S&P 500 financial sector index is approximately 17 times, above the 10-year average of 14 times [4] - Factors such as the impact of trade wars on bank profitability, uncertainties regarding the Federal Reserve's interest rate path, and potential fluctuations in consumer credit quality pose downside risks [5] Group 4 - Supporters argue that regulatory easing and profit growth will drive the sector upward, with analysts noting that current stock prices do not fully reflect the potential for improvement in the industry fundamentals [5] - Multiple favorable factors are expected to contribute to upward momentum in bank stocks [5]

Core Viewpoint - Morgan Stanley analysts suggest that the outcome of the upcoming elections in Japan could significantly impact the 30-year Japanese government bond yield, with potential scenarios leading to yields ranging from 2.90% to 3.2% depending on the ruling party's performance [1] Group 1: Election Impact on Bond Yields - If the ruling party wins a majority, moderate fiscal stimulus measures may lower the 30-year Japanese government bond yield to approximately 2.90% [1] - Conversely, if the ruling party fails to secure a majority, the prospect of large-scale fiscal stimulus could push the 30-year bond yield up to 3.2% [1] Group 2: Market Conditions and Investor Sentiment - Following market deterioration in May, the ultra-long Japanese government bonds temporarily stabilized, but weak supply and demand dynamics resurfaced after the July auction of 30-year bonds [1] - Investors remain concerned about the risks to Japan's fiscal discipline amid a backdrop of structural supply and demand weakness [1]

Core Viewpoint - The article discusses the recent developments in trade negotiations, the impact of tariffs on inflation, and the upcoming economic data releases that could influence monetary policy decisions in the US and Europe [1][3][6]. Trade Negotiations and Tariffs - President Trump announced a new round of reciprocal tariffs on several trade partners, leading to a decline in US stock markets, with the Dow Jones down 1.02% and the S&P 500 down 0.31% for the week [1]. - The deadline for the new tariffs to take effect is August 1, and investors are awaiting further news on trade negotiations [1][3]. - The EU is attempting to reach a trade agreement with the US, with concerns that US tariffs could disrupt transatlantic supply chains [6]. Economic Data and Monetary Policy - The upcoming US inflation data, particularly the Consumer Price Index (CPI) for June, is expected to influence the Federal Reserve's decision on potential interest rate cuts later this year [3]. - The Federal Reserve's June meeting minutes indicated concerns about inflation pressures from tariffs, but a belief that a rate cut may occur later in the year [3]. - In the UK, inflation has risen, with the CPI at 3.4% in May, and expectations for a potential rate cut by the Bank of England if economic data continues to underperform [7]. Commodity Markets - Oil prices have stabilized, with WTI crude oil rising 2.16% to $68.45 per barrel and Brent crude oil increasing 3.02% to $70.36 per barrel, amid concerns over summer supply and demand [4]. - Gold prices have also rebounded, with COMEX gold rising 0.73% to $3356 per ounce, as investors seek safe-haven assets amid trade uncertainties [5]. Upcoming Economic Indicators - Key economic indicators to watch include the US PPI, industrial production, and retail sales data, as well as consumer sentiment surveys [3][9]. - In Europe, the ZEW economic sentiment index for Germany will be released, reflecting the economic outlook amid trade tensions [6].

Core Insights - The article emphasizes the transformative potential of AI in enhancing employee performance, automating operations, and driving product innovation, urging companies to adopt AI as a new work paradigm rather than just software or cloud applications [1] Group 1: Case Studies and Applications - Morgan Stanley implemented a rigorous evaluation process for AI applications, resulting in 98% of advisors using the tool daily and increasing document information retrieval from 20% to 80% [4] - Indeed utilized AI to optimize job matching, leading to a 20% increase in job application initiation rates and a 13% increase in employer hiring preferences [9] - Klarna's AI customer service system autonomously handled over two-thirds of customer inquiries, reducing average response time from 11 minutes to 2 minutes, with 90% of employees integrating AI into their workflows [13][14] - Lowe's collaborated with OpenAI to fine-tune AI models, improving product label accuracy by 20% and error detection capabilities by 60% [18] - Mercado Libre built a developer platform using AI, significantly accelerating application development and enhancing fraud detection accuracy to nearly 99% [22] Group 2: Key Insights from Case Studies - A systematic evaluation process is essential before deploying AI to ensure model performance and reliability [6] - AI should be integrated seamlessly into existing workflows to enhance user experience rather than being treated as an additional feature [10] - Early adoption of AI leads to compounding benefits, as seen in Klarna's case where widespread employee engagement accelerated innovation [15] - Customizing AI models to specific business needs enhances their effectiveness and relevance [19] - Providing developers with AI tools can alleviate innovation bottlenecks and streamline application development [23] Group 3: Deployment Strategies - Companies should adopt an open and experimental mindset, focusing on high-return, low-barrier scenarios for initial AI deployment [31] - A dual-track deployment methodology is recommended: widespread accessibility for all employees and concentrated efforts on high-leverage use cases [33][34] - Ensuring AI reliability and accuracy is crucial for driving workflow transformation within organizations [34] Group 4: Industry Trends - AI adoption in business is accelerating, with 78% of organizations using AI in 2024, up from 55% the previous year [35] - Despite the increase in AI usage, many companies have yet to see significant cost savings or profit increases, with most reporting savings of less than 10% [35] - The trend indicates that while AI tools are becoming more prevalent, organizations are still in the early stages of exploring their full potential [38]

Market Dynamics - Citadel Securities 收购了摩根士丹利专注于美国股票期权电子做市的部门，巩固了其在衍生品市场的主导地位 [1] - 摩根士丹利出售该业务是因为 Citadel Securities 与大型银行之间的竞争非常激烈 [2] - 摩根士丹利是最后一家从事美国股票期权电子做市业务的大型银行 [3] - 银行在股票业务中，融资业务增长迅速且利润丰厚 [4] - 中介业务的回报不高，更多的是一种价值主张，是为机构客户提供全面服务所必需的 [5] - 美国股票期权市场，尤其是在散户交易兴趣浓厚的市场，需要速度和技能，Citadel Securities 等拥有专业技术的公司更具优势 [5] - 摩根士丹利在该领域的支付额仅占 6% 左右 [7] - Citadel Securities 和 Jane Street 等公司正在更大程度地进入大型银行的传统领域 [8] - 印度期权市场占全球交易量的 80% [11] Competitive Landscape - Citadel Securities 在美国股票期权电子做市领域占据主导地位 [7] - Citadel Securities 等公司受到的监管约束较少，并且在技术方面投入巨大 [8][9] - 高盛预计将公布最高的股票交易收入 [9] - GNC 将不得不解决印度期权市场监管不确定性的问题 [11][12][13]

Core Insights - Wall Street analysts expect Morgan Stanley to report quarterly earnings of $1.93 per share, reflecting a year-over-year increase of 6% [1] - Projected revenues are anticipated to be $15.92 billion, also up 6% from the previous year [1] - There has been a downward revision of 0.7% in the consensus EPS estimate over the last 30 days, indicating a reassessment by analysts [1][2] Revenue Projections - Analysts project 'Net revenues - Investment Management' to reach $1.52 billion, indicating a year-over-year change of +9.5% [4] - 'Net revenues - Institutional Securities' are forecasted to be $7.43 billion, reflecting a change of +6.5% from the prior-year quarter [4] - 'Revenues - Wealth Management - Net interest income' is expected to be $1.87 billion, suggesting a change of +4.2% year over year [4] Non-Interest Revenues and Book Value - Total non-interest revenues are predicted to reach $13.65 billion, indicating a year-over-year change of +5.4% [5] - The consensus estimate for 'Book value per common share' is projected at $60.90, compared to $56.80 from the previous year [5] - The estimate for 'Return on average common equity' stands at 13.1%, slightly up from 13.0% year over year [5] Assets Under Management - 'Wealth Management - Total client assets' is estimated at $5962.28 billion, up from $5690.00 billion in the same quarter last year [6] - 'Total assets under management' is expected to reach $1640.63 billion, compared to $1518.00 billion a year ago [6] - 'Assets under management - Liquidity and Overlay Services' is projected at $549.14 billion, up from $483.00 billion in the same quarter last year [7] Equity and Leverage Ratios - 'Assets under management - Equity' is expected to reach $310.77 billion, compared to $301.00 billion in the same quarter last year [8] - The estimated 'Tier 1 Leverage Ratio' is 6.8%, consistent with the previous year's figure [8] Stock Performance - Shares of Morgan Stanley have increased by +8.5% in the past month, outperforming the +4.1% move of the Zacks S&P 500 composite [9] - The company holds a Zacks Rank 3 (Hold), indicating it is expected to mirror overall market performance in the near future [9]