Morgan Stanley Fixed-Global Cross-Asset Strategy Morgan Stanley Research Key Fo...-110845056

M Global IdeaMorgan Stanley Research1 Next-12-Months Outlook: Our High-Conviction Calls Calibrating the Fed Reaction Function: We continue to expect moderate growth and disinflation around the world. We expect two consecutive 25bp cuts this year after seeing Powell recognize a balanced economy. Risks to the outlook will depend on the labor market. Ex-US, the rest of the global economy is holding up. The policy pivot in China is an important step in the right direction but still short of what is needed to drive inflation back to target (3%) over a horizon to 2026. We maintain our BoJ call for January, but keep an eye on data and any shift in the fiscal outlook after the upcoming election. The BoE and ECB are set to extend their cutting cycles at their next meetings. Sunny with a chance of rain: The strength in September payrolls keeps our economists in the soft-landing camp, which would typically be a good backdrop for risk-asset performance. However, valuations are likely to be challenged if US data materially weaken. To cushion against these risks, we favor a cautiously bullish stance, and staying OW in global equities and in spread products within fixed income. 'CCC's – carry, convexity, and cheap optionality: Uncertainties beyond year-end mean investors should look for markets that give cheap optionality for bull and/or bear scenarios, good convexity where downside is limited versus upside, and attractive carry. We think European and Japanese equities and spread products fit the bill. Equities: Preference for Japan and Europe We prefer Japan and Europe, which we think have attractive valuations and resilient earnings revisions. In the US, we forecast robust EPS growth alongside modest multiple compression, upgrade cyclicals to OW versus defensives, and move to neutral on large-caps versus small-caps. In Europe, we expect multiples to break out and re-rate into year-end based on our mid-90s playbook, and recommend buying AI best-positioned and rate-sensitive stocks. In Japan, we recommend a defensive stance with a focus on domestic stocks, for now. For EM, we've moved to a more defensive stance, taking profit on our long-standing IT OW and moving to EW, and upgrading Consumer Staples ex-China to OW. 20242025S&P 5005,8155,40021.9x19.0x239269+8%+13%MSCI Europe2,0772,50013.6x14.8x150164+7.5%+9%Topix2,7063,00013.8x14.0x184205+12%+11%MSCI EM1,1601,16012.3x12.57988+16%+11%MS June 2025 Price TargetCurrent P/EMS June 2025 P/E TargetMS Top Down EPS YoY%11/10/2024Index (Local Ccy) Source: Markit Box, MSCI, RIMES, Datastream, IBES, Bloomberg, Morgan Stanley Research forecasts. Also, see MSCI Europe source ; S&P source report; Topix source report; MSCI EM source report Morgan Stanley Research: Key Forecasts Next-12-Months Snapshot: Growth Resilience Global growth is steady, but the mix changes as the US decelerates and ex-US improves, particularly in Europe and EM. Data volatility in the US affirms our view that t