Recently, the global financial markets have experienced severe fluctuations, with cyclical stocks and momentum factors undergoing historic pullbacks, and concerns about the economic cycle peaking have sharply intensified.

Andrew Sheets, the head of global fixed income research at Morgan Stanley, believes that the current price turbulence is more likely to be close to a significant concentration of uncertainty clearing rather than a precursor to the end of the economic cycle.

On a macro level, several key leading indicators have not signaled a peak in the cycle—global manufacturing PMI remains strong, the U.S. yield curve still has a positive slope, and the growth rate of bank loans is increasing in the U.S., Europe, and Asia.

Meanwhile, the Democratic Party's significant victory in the U.S. midterm elections may be favorable for the bond market: the slowdown in AI data center construction could extend the related financing timeline, and the downward pressure on energy prices may also be reinforced.

Morgan Stanley maintains its global growth forecast for the next 6 to 12 months, expecting the U.S. economic growth rate to exceed 2% and Europe to exceed 1%. Andrew Sheets stated that the market could potentially complete its adjustment before uncertainty has fully dissipated, especially given that valuation corrections have quietly persisted for some time.

No Peak Signal in Cyclical Indicators

Andrew Sheets pointed out that the current market volatility echoes typical characteristics of the end of past economic cycles, but several core indicators do not support this assessment.

The global manufacturing PMI continues to remain robust, and recent U.S. PMI data has exceeded expectations; the U.S. leading economic indicators index shows signs of improvement; bank loans in the U.S., Europe, and Asia are all expanding; credit fundamentals are also continuously improving. The latest readings from Morgan Stanley's cross-asset team's cyclical model indicate that the economy is still within a healthy range.

Another closely watched indicator—the yield curve—has also not issued a warning. Whether it is the spread between the 2-year and 10-year or the 3-month and 10-year, the yield curves in the U.S., U.K., Germany, and Japan all maintain a positive slope. This contradicts scenarios of excessively tightening monetary policy and economic growth about to turn downward.

Andrew Sheets stated that historically, true turning points in cycles rarely occur when the aforementioned indicators show such robust patterns.

Midterm Election Impact on AI Construction Expectations

The Democratic Party achieved significant victories in the U.S. midterm elections, flipping control of the House of Representatives, the Senate, and several governorships, including Texas and Ohio, marking the strongest nationwide performance since 1974.

The election results triggered market concerns that the construction of AI infrastructure may face stricter regulation. However, Andrew Sheets believes that while this risk exists, it is not the baseline scenario and is not a new issue.

Semi-conductor stocks had already dropped about 30% from their June peak before election day. The Morgan Stanley research team has previously pointed out that bottlenecks in electricity and financing could slow down the AI construction process and extend the cycle.

Even in the most pessimistic high-constraint scenario—assuming project approvals and power supply face greater challenges—the forecast for the compound annual growth rate of global data center capacity through 2030 still reaches 17%.

From the perspective of the stock market, the risks of delays in AI construction need to be weighed against the significant valuation adjustments that have already occurred. The forward price-to-earnings ratio of the S&P 500 index has declined by approximately 19% since the beginning of the year. Morgan Stanley equity strategists believe that this adjustment has quietly been ongoing within the market for quite some time.

The Bond Market May See Double Benefits

Andrew Sheets believes that the results of the midterm elections have a more direct potential positive impact on the bond market.

He pointed out that this year, the two main sources of pressure on the bond market—high energy prices and massive borrowing for financing data center construction—may be alleviated due to the election results.

• First, the slowdown in AI construction means that related financing needs will be spread over a longer time horizon, thereby reducing the supply pressure that the market needs to absorb in a single period.
• Second, according to election analyses cited by Vice President Vance, voters' unease about the Iranian conflict was a significant factor in this election's outcome. This could prompt the market to lower the risk premium for a resurgence of geopolitical conflicts—oil prices are currently about 17% lower than at the end of October.

The decline in energy prices is particularly crucial for Europe. Morgan Stanley's rate strategists currently favor strategies that enhance the steepness of the European yield curve. Morgan Stanley's emerging markets strategists have also pointed out that lower oil prices will improve fundamentals in emerging markets from multiple dimensions.

Furthermore, the widespread dissatisfaction among voters regarding inflation may further reinforce the market's expectation that tariff measures will ultimately prove to be temporary policies. At the same time, a larger majority in Congress is expected to reduce individual senators' capacity to obstruct, eliminating one of the factors causing market volatility from previous Congressional negotiations.

Andrew Sheets concluded that the most central question at present is: whether the market is experiencing a true cyclical turning point or is approaching the end of a significant concentration of uncertainty clearing?

His judgment leans toward the latter. Cyclical data still provide support, and the results of the midterm elections may be dissipating the two greatest pressures faced by the bond market this year. Morgan Stanley will continue to test this judgment with subsequent evidence.

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