Our Global Head of Thematic and Sustainability Research Stephen
Byrd and U.S. Thematic and Equity Strategist Michelle Weaver lay
out Morgan Stanley’s four key Research themes for 2026, and how
those themes could unfold across markets for the rest of the
year.
Read more insights from Morgan Stanley.
----- Transcript -----
Stephen Byrd: Welcome to Thoughts on the
Market. I'm Stephen Byrd, Global Head of Thematic and
Sustainability Research.
Michelle Weaver: And I'm Michelle Weaver,
U.S. Thematic and Equity Strategist.
Stephen Byrd: I was recently on the show to
discuss Morgan Stanley's four key themes for 2026. Today, a look
at how those themes could actually play out in the real world
over the course of this year.
It's Tuesday, February 10th at 10am in New York.
So one of the biggest challenges for investors right now is
separating signal from noise. Markets are reacting to headlines
by the minute, but the real drivers of long-term returns tend to
move much more slowly and much more powerfully. That's why
thematic analysis has been such an important part of how we think
about markets, particularly during periods of high
volatility.
For 2026, our framework is built around four key themes: AI and
tech diffusion, the future of energy, the multipolar world, and
societal shifts. In other words, three familiar themes and one
meaningful evolution from last year. So Michelle, let's start at
the top. When investors hear four key themes, what's different
about the 2026 framework versus what we laid out in 2025?
Michelle Weaver: Well, like you mentioned
before, three of our four key themes are the same as last year,
so we're gonna continue to see important market impacts from AI
and tech diffusion, the future of energy and the multipolar
world.
But our fourth key theme, societal shifts, is really an expansion
of our prior key theme longevity from last year. And while three
of the four themes are the same broad categories, the way they
impact the market is going to evolve. And these themes don't
exist in isolation. They collide and they intersect with one
another, having other important market implications. And we'll
talk about many of those intersections today as they relate to
multiple themes.
Let's start with AI. How does the AI and tech diffusion theme
specifically evolve since last year?
Stephen Byrd: Yeah. You know, you mentioned
earlier the evolution of all of our themes, and that was
certainly the case with AI and tech diffusion.
What I think we'll see in 2026 is a few major evolutions. So, one
is a concept that we think of as two worlds of LLM progress and
AI adoption; and let me walk through what I mean by that. On LLM
progress, we do think that the handful of American LLM developers
that have 10 times the compute they had last year are going to be
training and producing models of unprecedented capability.
We do not think the Chinese models will be able to keep up
because they simply do not have the compute required for the
training. And so we will see two worlds, very different
approaches. That said, the Chinese models are quite excellent in
terms of providing low cost solutions to a wide range of very
practical business cases.
So that's one case of two worlds when we think about the world of
AI and tech diffusion. Another is that essentially we could see a
really big gap between what you can do with an LLM and what the
average user is actually doing with LLMs. Now there're going to
be outliers where really leaders will be able to fully utilize
LLMs and achieve fairly substantial and breathtaking results. But
on average, that won't be the case. And so you'll see a bit of a
lag there. That said, I do think when investors see what those
frontier capabilities are, I think that does eventually lead to
bullishness.
So that's one dynamic. Another really big dynamic in 2026 is the
mismatch between compute demand and compute supply. We dove very
deeply into this in our note, and essentially where we come out
is we believe, and our analysis supports this, that the demand
for compute is going to be systematically much higher than the
supply. That has all kinds of implications. Compute becomes a
very precious resource, both at the company level, at the
national level. So those are a couple of areas of evolution.
So Michelle, let's shift over to the future of energy, which does
feel very different today than it did a year ago. Can you kind of
walk through what's changed?
Michelle Weaver: Well, we absolutely still
think that power is one of the key bottlenecks for data center
growth. And our power modeling work shows around a 47 gigawatt
shortfall before considering innovative time to power solutions.
We get down to around a 10 to 20 percent shortfall in power
needed in the U.S. though, even after considering those
solutions. So power is still very much a bottleneck.
But the power picture is becoming even more challenged for data
centers, and that's largely because of a major political overhang
that's emerging. Consumers across the U.S. have seen their
electricity bills rise and are increasingly pointing to data
centers as the culprit behind this. I really want to emphasize
though this is a nuanced issue and data center power demand is
driving consumer bills higher in some areas like the
Mid-Atlantic. But this isn't the case nationwide and really
depends on a number of factors like data center density in the
region and whether it's a regulated or unregulated utility
market.
But public perception has really turned against data centers and
local pushback is causing planned data centers to be canceled or
delayed. And you're seeing similar opinions both across political
affiliations and across different regional areas. So yes, in some
areas data centers have impacted consumer power bills, but in
other areas that hasn't been the case. But this is good news
though, for companies that offer off-grid power generation, who
are able to completely insulate consumers because they're not
connecting to the grid.
Stephen, the multipolar theme was already strong last year. Why
has it become even more central for 2026?
Stephen Byrd: Yeah, you're right. It was
strong in 2025. In fact, of our 21 categories of stocks, the top
three performing were really driven by multipolar world dynamics.
Let me walk through three areas of focus that we have for
multipolar world in 2026. Number one is an aggressive U.S. policy
agenda, and that's going to show up in a number of ways. But
examples here would be major efforts to reshore manufacturing, a
real evolution in military spending towards a wide range of newer
military technologies, reducing power prices and inflation more
broadly. And also really focusing on trying to eliminate
dependency on China for rare earths.
So that's the first big area of focus. The second is around AI
technology transfer. And this is quite closely linked to rare
earths. So here's the dynamic as we think about U.S. and China.
China has a commanding position in rare earths. The United States
has a leading position in access to computational resources.
Those two are going to interplay quite a bit in 2026.
So, for example, we have a view that in 2026, when those American
models, these LLMs achieve these step changes up in capabilities
that China cannot match, we think that it's very likely that
China may exert pressure in terms of rare earths access in order
to force the transfer of technology, the best AI technology to
China.
So that's an example of this linkage between AI and rare earths.
And the last dynamic, I'd say broadly, would be the politics of
energy, which you described quite well. I think that's going to
be a big multipolar world dynamic everywhere around the world. A
focus on how much of an impact our data centers are having –
whether it's water access, price of power, et cetera. What are
the impacts to jobs? And that's going to show up in a variety of
policy actions in 2026.
Michelle Weaver: Mm-hmm.
Stephen Byrd: So Michelle, the last of our
four key themes is societal shifts, and you walked through that
briefly before. This expands on our prior longevity work. What
does this broader framing capture?
Michelle Weaver: Societal shifts will
include important topics from longevity still. So, things like
preparing for an aging population and AI in healthcare. But the
expansion really lets us look at the full age range of the
demographic spectrum, and we can also now start thinking about
what younger consumers want. It also allows us to look at other
income based demographics, like what's been going on with the
K-economy, which has been an important theme around the
world.
And a really critical element, though, of this new theme is AI's
impact on the labor market. Last year we did a big piece
called The Future of Work. And in it we estimated that
around 90 percent of jobs would be impacted by AI. I want to be
clear: That's not to say that 90 percent of jobs would be lost by
AI or automated by AI. But rather some task or some component of
that job could be automated or augmented using AI.
And so you might have, you know, the jobs of today looking very
different five years from now. Workers are adaptable and, and we
do expect many to reskill as part of this evolving job
landscape.
We've talked about the evolution of our key themes, but now let's
focus a little on the results. So how have these themes actually
performed from an investment standpoint?
Stephen Byrd: Yeah. I was very happy with
the results in 2025. When we looked across our categories of
thematic stocks; we have 21 categories of thematic stocks within
our four big themes. On average in 2025, our thematic stock
categories outperformed MSCI World by 16 percent and the S&P
500 by 27 percent respectively. So, I was very happy with that
result.
When you look at the breakdown, it is interesting in terms of the
categories, you did really well. As I mentioned, the top three
were driven by multipolar world. That is Critical Minerals, AI
Semis, and Defense. But after that you can see a lot of AI in
Energy show up. Power in AI was a big winner. Nuclear Power did
extremely well. So, we did see other categories, but I did find
it really interesting that multipolar world really did top the
charts in 2025.
Michelle Weaver: Mm-hmm.
Stephen Byrd: Michelle, thanks for taking
the time to talk.
Michelle Weaver: Great speaking with you,
Steven.
Stephen Byrd: And thanks for listening. If
you enjoy Thoughts on the Market, please leave us a review
wherever you listen and share the podcast with a friend or
colleague today.
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