Our Head of European Sustainability Research Rachel Fletcher talks about how AI’s is quickly reshaping employment and productivity across key industries and regions.

Read more insights from Morgan Stanley.

----- Transcript -----

Rachel Fletcher: Welcome to Thoughts on the Market. I am Rachel Fletcher, Head of European Sustainability Research at Morgan Stanley.

Today, how AI is shaking up the global job market.

It's Friday, February 20th at 2pm in London.

You've probably asked yourself when all the excitement around AI is going to move beyond demos and headlines, and start showing up in ways that matter to your job, your investments, and even your day-to-day life. Our latest global AlphaWise AI survey suggests that the turning point may already be unfolding – especially in the labor market where AI is beginning to influence hiring, productivity, and workplace skills.

Our survey covered the U.S., UK, Germany, Japan, and Australia, across five sectors where we see a significant AI adoption benefit. Consumer staples, distribution in retail, real estate, transportation, healthcare, equipment and services, and autos.

We found that AI contributed to 11 percent of jobs being eliminated over the past 12 months, with another 12 percent not backfilled. These job cuts were partially offset by 18 percent new hires, which results in a net 4 percent global job loss. It's important to note that the survey focused on companies that had already been adopting AI for at least a year. In fact, most of the companies in our survey had been adopting AI for more than two years. So, this is likely the most significant downside case in terms of the impact of AI on jobs, but it is still an early signal of potential job disruption.

In Europe, the picture is nuanced. The UK saw the highest net job loss at 8 percent. This was primarily driven by a lower level of new hires in the UK compared to other countries that we surveyed, as well as a high level of positions not backfilled. This compares to Germany, which posted a 4 percent net job loss in line with the all-country average. There could be some other factors amplifying the impact in the UK. For example, broader labor market weakness driven by higher labor costs and higher levels of unemployment amongst younger workers. Ultimately, disentangling AI from macro forces remains challenging.

Moving to sector impacts in Europe, autos experience the largest net job loss at 13 percent, and this compares to a 10 percent global average for the sector. It's possible these numbers reflect persistent sales weakness, and AI driven cost cutting.

Transportation was least affected at 3 percent, whilst other sectors clustered around 6 to 7 percent. If we look at the top quintile of European companies reducing headcount, they've outperformed other companies that are more actively hiring. This suggests that investors are rewarding efficiency. On the downside, staffing firms face potential growth risks from AI displacement. On productivity, European firms report 10 to 11 percent gains from AI, close to the 11.5 percent global average, and the U.S. at 10.8 percent. It's worth noting that whilst Europe lags the U.S. in exposure to AI enablers, adopters and adopter enablers make up more than two-thirds of the MSCI Europe Index. However, European AI adopters have traded at a material discount versus their equivalent U.S. AI adoption peers. So, turning AI adoption into real ROI and defending pricing power is crucial for European companies.

If we shift our focus to the U.S., there's a contrast. Whilst the global net job change was a 4 percent loss, the U.S. actually saw a 2 percent net gain, driven by AI related hiring. Our U.S. strategists have lifted expectations for S&P 500 margin expansion by 40 basis points in 2026 and 60 basis points in 2027.

In our survey, the most frequently cited goals of AI deployment in the U.S. are boosting productivity, personalizing customer interactions, and accelerating data insights. Other common use cases include search, content generation, dashboards, and virtual agents.

What's becoming clear is AI is no longer theoretical. Our survey data suggests that it is reshaping hiring, productivity and margins. The investor question is not whether AI matters, but who captures the value.

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.

Iconic investors sit down with Morgan Stanley leaders to go behind the scenes on the critical moments – both successes and setbacks – that shaped who they are today.

Watch and listen to the series on your favorite platform.

Arunima Sinha, from the U.S. and Global Economics team, discusses how an upcoming Supreme Court decision could reshape consumer prices, retail margins and the inflation outlook in 2026.

Read more insights from Morgan Stanley.

----- Transcript -----

Arunima Sinha: Welcome to Thoughts on the Market. I'm Arunima Sinha from Morgan Stanley's U.S. and Global Economics Teams.

Today: How a single Supreme Court ruling could change the tariff math for U.S. consumers.

It's Friday, February 13th at 10am in New York.

The U.S. Supreme Court is deciding whether the U.S. president has legal authority to impose sweeping tariffs under IEEPA. That decision could come as soon as next Friday. IEEPA, or the International Emergency Economic Powers Act, is the legal backbone for a significant share of today's consumer goods tariffs. If the Supreme Court limits how it can be used, tariffs on many everyday items could fall quickly – affecting prices on the shelf, margins for retailers, and the broader inflation outlook.

As of now, effective tariff rates on consumer goods are running about 15 percent, and that's based on late 2025 November data. And that's quite a bit higher than the roughly 10 percent average, which we're seeing as tariffs on all goods. In a post IEEPA scenario, we think that the effective tariff rate on consumer goods could fall to the mid-11 percent range.

It's not zero, but it is meaningfully lower.

An important caveat is that this is not going to be eliminating all tariffs. Other trade tools – like Section 232s, which are the national security tariffs, Section 301s, the tariffs that are related to unfair trade practices – would remain in place. Autos and metals, for example, are largely outside the IEEPA discussion.

The main pressure point we think is consumer goods. IEEPA has been used for two major sets of tariffs. The fentanyl-related tariffs on Mexico, Canada, and China, and the so-called reciprocal tariffs applied broadly across trading partners. And these often stack on top of the existing tariffs, such as the MFN, the Most Favored Nation rates, and the section 301 duties on China that were already existing before 2025.

The exposure is really concentrated in certain categories of consumer goods. So, for example, in apparel and footwear, about 60 percent of the applied tariffs are IEEPA related. For furniture and home improvement, it's over 70 percent. For toys, games, and sporting equipment, it's more than 90 percent. So, if the IEEPA authority is curtailed, the category level effects would be meaningful.

There are caveats, of course. The court's decision may not be all or nothing. And policymakers could turn to alternative authorities. One example is Section 122, which allows across the board tariffs for up to 15 percent for 150 days. So, tariffs could just reappear under different tools. But in the near term, fully replacing IEEPA-based tariffs on consumer goods may not be straightforward, especially given ongoing affordability concerns.

So, how does that matter for the real economy? There are two key channels, prices and margins. On prices we estimate that about 60 percent of the tariff costs are typically passed on to the consumers over two to three quarters, but it’s not instant. Margins though could respond faster. If companies get cost relief before they adjust prices downwards, that creates a temporary margin tailwind. That could influence hiring, investment and earnings across retail and consumer supply chains.

Over time, lower tariffs could also reinforce that broader return to core goods disinflation starting in the second quarter of this year. And because tariff driven inflation has weighed more heavily on the middle- and lower-income households, any eventual price relief could disproportionately benefit those groups.

At the end of the day, this isn't just a legal story. It is a timing story. If IEEPA authority is curtailed, the arithmetic shifts pretty quickly. Margins move first, prices follow later, and the path back to goods disinflation could accelerate. That's why this is one ruling worth watching before the gavel drops.

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.

Our Global Head of Fixed Income Research Andrew Sheets explains how key market indicators reflect a constructive view around the global cyclical outlook, despite a volatile start to 2026.

Read more insights from Morgan Stanley.

----- Transcript -----

Andrew Sheets: 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 the unusual alignment of a number of key indicators.

It's Thursday, February 12th at 2pm in London.

A frustrating element of investing is that any indicator at any time can let you down. That makes sense. With so much on the line, the secret to markets probably isn't just one of a hundreds of data series that a thousand of us can access at the push of a button.

But many indicators all suggesting the same? That's far more notable. And despite a volatile start to 2026 with big swings in everything from Japanese government bonds to software stocks, it is very much what we think is happening below the surface. Specifically, a variety of indicators linked to optimism around the global cyclical outlook are all stronger, all moving up and to the right.

Copper, which is closely followed as an economically sensitive commodity, is up strongly. Korean equities, which have above average cyclicality and sensitivity to global trade is the best performing of any major global equity market over the last year. Financials, which lie at the heart of credit creation, have been outperforming across the U.S., Europe, and Asia. And more recently, year-to-date cyclicals and transports are outperforming. Small caps are leading, breadth is improving, and the yield curve is bear steepening.

All of these are the outcomes that you'd expect, all else equal, if global growth is going to be stronger in the future than it is today.

Now individually, these data points can be explained away. Maybe Copper is just part of an AI build out story. Maybe Korea is just rebounding off extreme levels of valuation. Maybe Financials are just about deregulation in a steeper yield curve. Maybe the steeper yield curve is just about the policy uncertainty. And small cap stocks have been long-term laggards – maybe every dog has its day.

But collectively, well, they're exactly what investors will be looking for to confirm that the global growth backdrop is getting stronger, and we believe they form a pretty powerful, overlapping signal worthy of respect.

But if things are getting better, how much is too much. In the face of easier fiscal, monetary, and regulatory policy, the market may focus on other signposts to determine whether we now have too much of a good thing. For example, is there signs of significant inflation on the horizon? Is volatility in the bond market increasing? Is the U.S. dollar deviating significantly from its fair value? Is the credit market showing weakness? And do stocks and credit now react badly when the data is good?

So far, not yet. As we discussed on this program last week, long run inflation expectations in the U.S. and euro area remain pretty consistent with central bank targets. Expected volatility in U.S. interest rates has actually fallen year-to-date. The U.S. dollar’s valuation is pretty close to what purchasing power parity would suggest. Credit has been very stable. And better than expected labor market data on Wednesday was treated well.

Any single indicator can and eventually will let investors down. But when a broad set of economically sensitive signals all point in the same direction, we listen. Taken together, we think this alignment is still telling a story of supportive fundamental tailwinds while key measures of stress hold.

Until that evidence changes, we think those signals deserve respect.

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.