Thoughts on the Market

Chief Fixed Income Strategist Vishy Tirupattur takes a look at how credit markets are adapting to fund the new phase of AI capex.
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Welcome to Thoughts on the Market. I am Vishy Tirupattur, Morgan Stanley’s Chief Fixed Income Strategist.
Today – The critical question behind the AI-driven capex cycle that is front and center for markets year to date. How is credit market financing this ecosystem evolving?
It’s Wednesday June 3rd at 2 pm in New York.
When we first discussed the role of credit markets in financing the AI and data center build-out around the middle of last year, the direction of travel was clear. Realizing the transformative potential of AI requires unprecedented levels of capex. What has really surprised us since is the scale and speed of that spending, both of which have exceeded our expectations by a wide margin.
The upward revision to capex expectations has been dramatic. A year ago, we projected the combined capex of the five large hyperscalers at roughly $450 billion in both 2026 and 2027. After the first quarter earnings reports, Morgan Stanley’s internet equity analysts, led by Brian Nowak, now expect hyperscaler capex of roughly $800 billion in 2026 and $1.2 trillion in 2027. One data point really captures the surge in the underlying demand for compute. According to OpenRouter, the global weekly token usage, which is a key proxy for compute, has risen by roughly 350 percent since early January, increasing from about 6 trillion tokens to 28 trillion tokens.
Credit channels for financing this capex have not only been broader and deeper than we anticipated, spanning public and private markets, but have seen remarkable in the structural innovation that is blurring the lines between public and private markets. Over $200bn of public AI-related issuance across the different credit channels has happened just in the first five months of this year. We had previously assumed unsecured issuance would be limited by the scale of the largest non-financial issuers, confined to investment grade credit only, and largely USD denominated. Instead, some hyperscaler issuance has now far exceeded even the largest telecom names; funding has expanded well beyond USD into EUR, GBP, CHF, JPY and CAD markets. The issuer base has also broadened to include data center REITs and neoclouds, particularly in the high-yield market.
The scope of financing has also widened beyond the data center shells themselves. GPU financing, which we assumed would be funded entirely through equity capital, has begun to migrate into credit markets. Funding is now coming through broadly syndicated loans and asset based financing, with ABS structures not far behind.
Structural innovation illustrates how rapidly the credit ecosystem is adapting to the complexities of demands of AI-driven capex. Financings that combine elements of project finance, tranching, and residual value guarantees, along with high-yield issuance backed by hyperscaler guaranteed leases – these are innovations that we have never seen before. These structures have expanded the investor base, reduced the funding frictions, and further blurred traditional boundaries – between both corporate and project finance, and public and private credit markets.
At the same time, physical, operational, and political constraints are beginning to shape the pace and the composition of the AI infrastructure build-out – and, by extension, the demand for financing. Grid access, power generation equipment, skilled labor, and permitting delays are emerging as significant constraints. These are compounded by political and regulatory frictions at the local, national, and international level. As power availability becomes a gating factor, the AI build-out is likely to pull energy infrastructure financing more tightly into the orbit of AI infrastructure financing.
The clear takeaway is this. The capex requirements underpinning AI infrastructure are expanding exponentially, and with them the role of credit markets in financing this build-out. Along the way, there will be winners and losers, periods of adjustment, and a range of physical, financial, and political constraints that shape outcomes on the margin.
But the broader trajectory is certain. The scale, duration, and strategic importance of AI infrastructure investment mean that financing of this will remain a defining theme for credit markets and credit investors for years to come.
Thanks for listening. If you enjoy the podcast, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Our Global Head of Fixed Income Research Andrew Sheets takes a closer look at potential investment paths when markets appear increasingly synchronized around a few macro themes.
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Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, how to square a market that is both highly correlated, and highly divergent, at the same time.
It’s Tuesday, June 2nd, at 3pm London.
A market of one. That may be a way that you hear investing described these days, and strictly speaking, it's accurate. Stocks and bonds, the two big asset classes that form the bulk of most investors' portfolios, are moving in unusual lockstep. Stocks are rising when yields fall, and vice versa, with the most consistency in over 20 years.
And both, perhaps unsurprisingly, are moving in close relationship with the price of oil. At this point, it all seems pretty clear. The Iran conflict is a big deal for markets, representing the largest disruption to global energy supply in history. Of course, stocks and bonds, and oil are all moving together based on the perception of how this enormous issue resolves.
In doing so, they suggest that the conflict still remains quite important, even as markets appear quite strong.
Just as we can measure the extent to which stocks, bonds, and commodity prices move together, we can also track how individual stocks move relative to each other. And so, are stocks also rising and falling together like we see with these big asset classes? No. In fact, without exaggeration, it is the complete opposite.
There are a few ways to measure how the individual stocks within, say, the S&P 500, are moving relative to one another. But all of them say the same thing. Day to day, stocks are moving with unusual dispersion and independence. At the same time that the relationship between stocks and bonds is the tightest in over 20 years, the relationship between stocks within the S&P 500 – to each other – is the lowest.
If Iran is the factor driving the tight linkage that we discussed between stocks and bonds, Artificial Intelligence may be the culprit behind the opposite effect when we get down into individual companies. The perception that some companies will be incredible beneficiaries of AI, while others will be left behind, would explain at least part of the divergent performance. And so would an attention gap; with so much focus and positioning in AI sensitive names, other parts of the market can quickly feel forgotten, and thus move more independently.
Indeed, while the S&P 500 is back near all-time highs, the market’s advance-decline line, a measure of how many stocks are going up versus going down, is lower than where it was in late February or mid-April.
We see a few implications to all of this. First, while stocks and bonds are closely linked for the moment, we think that this correlation would flip under more significant energy market stress. Were the price of oil to spike to our Commodity team’s bear case, of $130-$150/bbl, we think yields would start to fall as the market would turn more concerned about the effect of all of this on growth. So, while the diversification of bonds has been disappointing so far, we do think that it will improve and materialize when it really matters.
In equities, this dispersion means that stock selection can allow one to stand out from the overall market. Indeed if one considers themselves a stock picker, low correlation between stocks is exactly the market that you would hope to have. And it also means that many individual names may not be as heady as the broad market levels would imply. As discussed on this program recently, my colleague Mike Wilson and our U.S. Equity Strategy team expects U.S. stock performance to broaden out from here.
Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. Also tell a friend or colleague about us today.

Our U.S. Hardlines, Broadlines and Food Retail Analyst Simeon Gutman explains how affordability and new shopping habits are changing how Americans choose and care for their pets.
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Simeon Gutman: Welcome to Thoughts on the Market. I’m Simeon Gutman, Morgan Stanley’s U.S. Hardlines, Broadlines and Food Retail Analyst.
Today: the state of the pet economy, or as we lovingly call it, the “petriarchy.”
It’s Monday, June 1st, at 10am in New York.
Hey Sammy, who wants to go on a walk?
If you have a pet, you probably know the routine. You go in for one bag of food. Then you remember the treats, the medicine, the grooming appointment. Maybe the toy they definitely do not need. And then the vet bill you hope is not around the corner.
Pets are family. But family has gotten more expensive.
That’s the big shift in the U.S. pet economy. The emotional bond is still powerful. About two-thirds of dog and cat owners strongly agree their pet is an important member of the family. More than one-third say they would take on debt to pay for a pet’s medical expenses.
Today, the growth story in the pet industry has changed. After an extraordinary post-pandemic run, it has entered a slower, more mature phase. We see growth settling around 4 percent, down from nearly 9 percent annually from 2019 to 2025.
That doesn’t mean the market is shrinking. We still see total U.S. pet spending rising from about [$]200 billion in 2025 to more than [$]240 billion by 2030. But the easy growth days look behind us. The industry now has to work harder for each dollar.
Affordability sits at the center of this story. A pet may start as an emotional decision, but it quickly becomes a line item in the household budget. Overall pet ownership remains above pre-COVID levels, at about 67 percent, but it has slipped from the 2024 high. That pressure shows up most clearly among younger consumers for whom cost has become the top barrier.
And consumers are adapting. When pet food prices rise, shoppers stock up on sale items, compare prices online and in-store, and in some cases trade down. Still, pet food remains resilient. Almost all owners plan to keep spending the same or spend more on pet food over the next six months.
The bigger change is that services continue to take share from products, with veterinary care at the center. Services accounted for just over 40 percent of pet industry spending in 2025, and we see that moving higher by 2030. Food and toys still matter, but healthcare, prescriptions, diagnostics and routine care are becoming a bigger part of the wallet.
That brings us to vets – who remain the most trusted source of pet care information, cited by nearly 60 percent of owners. Younger pet owners still rely on vets, but they also turn more to online sources, friends, relatives and even store personnel. About three-quarters of owners visited a vet in the past six months, but average visits fell to under two, which is down from just over two in 2024. This points to a more cautious consumer, especially around routine care.
We also see a subtle shift in the kinds of pets people choose. Cat ownership has moved higher versus pre-COVID levels, while dog ownership among younger adults has pulled back from its 2024 peak. That shift is not surprising, given that cats typically come with lower overall spending than dogs.
Shopping habits are changing as well. Online pet product shopping has grown a lot since 2019, but its share of wallet has leveled off at roughly one-third.
The next leg of digital growth may come less from simply moving store purchases online and more from subscriptions, pharmacy, healthcare and broader pet care ecosystems.
So where does that leave the pet economy? Pet owners are certainly not walking away from their animals. But they are making more practical choices, watching prices more closely, and deciding where convenience, health and value fit into the same budget.
Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Commercial real estate debt is now one of the market’s most avoided asset classes. Our Global Head of Fixed Income Research Andrew Sheets explains why there may be an opportunity to invest in those securities.
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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.
Today, why commercial real estate debt could be overlooked and undervalued.
It's Friday, May 29th at 2pm in London.
Bond yields have risen this year, and it's attracting strong flows into fixed income markets. The problem is that all of that demand is narrowing the risk premium that one receives. Spreads on U.S. mortgage bonds are richer than 89 percent of observations over the last 20 years. Spreads on the U.S. high yield market, well, they're richer than 96 percent of the time. And spreads on U.S. investment grade, it's 99 percent.
We live in a world where the risk premium on most bonds is very low versus history, but there are exceptions. One is debt backed by commercial mortgages or so-called CMBS. Spreads here, notably and unusually, are significantly higher than the long run average. It is a market that we like.
Commercial property is largely comprised of lending against office buildings, apartments, retail complexes, and industrial sites like warehouses. The first three have faced major challenges over the last five years.
Office values have slumped as investors feared more people working from home. Apartments have suffered from significant supply in building, conceived in a low-rate world as this has come online. And retail has faced long-run concern about the trend of more online shopping. And the rise of interest rates, well, that's loomed over everything.
A building, in a lot of ways, is a lot like a bond, promising a dependable stream of rents over time. When an investor can get that stream of cash flows from the bond market, commercial property prices must adjust lower to remain competitive.
These challenges are material, but they are also not new. Indeed, investors may recall that fears around commercial property peaked way back in early 2023 following significant rate hikes by the Federal Reserve. Back then, there were widespread fears that commercial property weakness would ricochet back and threaten the banking system.
Three years later, those worst fears have not been realized. And while defaults and restructurings have happened, overall commercial property fundamentals are beginning to pick back up.
Commercial property transaction volumes increased 27 percent in the U.S. in the first quarter relative to a year prior; and prices are rising, up about 5 percent over the same period. The amount of commercial real estate debt being originated is up about 40 percent over the last year – a sign that lenders are coming back. And the number of commercial deals that are becoming distressed and unable to pay their bills, they just saw their first quarterly decline since all of those problems in early 2023.
Part of this recovery in the commercial real estate market may be explained by U.S. growth, which continues to be resilient, and some of it mirrors other cycles.
When rates rose and commercial lending markets weakened, the construction of new properties really slowed down. It takes several years to build a building, and so it's only now that the impact of everything that was not built is starting to be felt.
With less supply coming online, the value of existing property is better supported, especially relative to the more elevated risk premiums on offer for its debt.
Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today.

Our Deputy Global Head of Research Michael Zezas explains why the recent U.S.-China summit may have eased near-term risks, without changing the bigger picture for investors.
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Michael Zezas: Welcome to Thoughts on the Market. I'm Michael Zezas, Morgan Stanley's Deputy Global Head of Research.
Today, we're talking about what investors should take away from the recent U.S.-China summit.
It's Thursday, May 28th at 10:30am in New York.
It's been two weeks since the much-anticipated U.S.-China summit, where Presidents Trump and Xi met to discuss a wide array of issues in their relationship. Understandably, investors were watching carefully. The relationship between the two countries and its potential impact on global economic conditions has been a driver of markets at key intervals.
Brinksmanship around the trade relationship has been particularly noteworthy. In 2025, the level of tariffs substantially influenced macro markets, and export restrictions for semiconductors and rare earths drove volatility in key equity sectors such as tech hardware. Coming into the summit, the two countries had found a tenuous equilibrium, with the policy volatility of last year giving way to an uneasy calm this year.
So, did the summit change anything?
As best we can tell, not really. Some modest progress was made in lower sensitivity areas, but investors shouldn't confuse that with a durable reset in relations. The summit, in our view, points to a more managed relationship, not a fundamentally stable one.
Here's what investors should keep in mind. At the risk of stating the obvious, the concrete public policy choices of each country matter a lot from here. President Trump emphasized renewed investment in the U.S.-China relationship. That's good. Talking beats not talking. But the bigger issue is what happens next.
So far, we haven't seen broad language around joint efforts to establish trade and investment cooperation boards translated into workable arrangements; which if they materialized might hint at a more stable relationship
So, net-net for investors, the summit is best understood as a continuation of the status quo, not a pivot. It may reduce near-term tail risks, which is sufficient to support the many other positive drivers pushing equity markets higher.
But it does not eliminate the structural forces behind U.S.-China competition.
That means we'll keep tracking this relationship as an economic and markets catalyst and keep you in the loop.
Thanks for listening. If you enjoy the show, please take a moment to rate and review us wherever you listen. And share Thoughts on the Market with a friend or colleague today.