Signals Align for a Growth Cycle

Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley. Today, I'm going to talk about an unusual alignment of signs of optimism for the global cyclical backdrop and why these are important to watch. It's Friday, January 9th at 2 p.m. in London. 2026 is now well underway. Forecasting is difficult and a humbling exercise, and 2025 certainly showed that even in a good year for markets, you can have some serious twists and turns. But overall, Morgan Stanley Research still thinks the year ahead will be a positive one, with equities higher and bond yields modestly lower. It's off to an eventful start, certainly, but we think that core message remains in place. But instead of going back again to our forecasts for the year ahead, I want to focus instead on a wide variety of different assets that have long been viewed as leading indicators of the global cyclical environment. I think these are important, and what's notable is that they're all moving in the same direction, all indicating a stronger cyclical backdrop. While today's market certainly has some areas of speculative activity and excessive valuations, the alignment of these things suggests something more substantive may be going on. First, copper prices, which tend to be volatile but economically sensitive, have been rising sharply, up about 40% in the last year. A key index of non-traded industrial commodities for everything from glass to tin, which is useful because it means it's less likely to be influenced by investor activity, well, it's been up 10% over the last year. Korean equities, which tend to be highly cyclical and thus have long been viewed by investors as a proxy for global economic optimism well they were the best performing major market last year up 80 Smaller cap stocks which again tend to be more economically sensitive well they been outperforming larger ones And last but not least, financial stocks in the U.S. and Europe. Again, a sector that tends to be quite economically sensitive, well, they've been outperforming the broader market and to a pretty significant degree. These are different assets in different regions that all appear to be saying the same thing, that the outlook for global cyclical activity has been getting better and has now actually been doing so for some time. Now, any individual indicator can be wrong. But when multiple indicators all point in the same direction, that's pretty worthy of attention. And I think this ties in nicely with a key message from my colleague Mike Wilson from Monday's episode, that the positive case for U.S. equities is very much linked to better fundamental activity, Specifically, our view that earnings growth may be stronger than appreciated. Of course, the data will have a say, and if these indicators turn down, it could suggest a weaker economic and cyclical backdrop. But for now, these various cyclical indicators are giving a positive read. If they continue to do so, it may raise more questions around central bank policy and to what extent further rate cuts are consistent with these signs of a stronger global growth backdrop. For now, we think they remain supporting evidence of our core view that this market cycle can still burn hotter before it burns out. Thank you, as always, for your time. If you find Thoughts of the Market useful, let us know by leaving a review wherever you listen. And also, please tell a friend or colleague about us today. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.