'Imported Inflation' Poses Biggest Risk, Says Morgan Stanley CEO

We have a team that I'm so proud of, and we've been building our firm for all these years. We have the strategy set now over the last couple of years: raise, manage, and allocate capital for clients. We've got a wealth and investment manager alongside an investment bank, and the integrated firm are those divisions working together. So it begins and ends with the team. It's one quarter well, the next quarter, but I'm really proud of Morgan Stanley today.

I think you're right about that. The crisis in the Middle East began to bubble up and folks were thinking going into 2026, this would be a year of investment banking tailwinds, large cap corporate health, momentum, upside trade. And then this exogenous event was creeping up, but it wasn't sort of like a bang COVID. It became pretty quickly an uninvestable correlation of assets, and the only thing you could do is put your pencil down. This is one where folks thought, well, we'll see how the conflict evolves. But I'd like to express a view, perhaps on a hedge, some of my portfolio, perhaps I want to diversify. So you start seeing dispersion activity, and our job at Morgan Stanley is to bring content like you and then to get folks to act. And if they're in a mood to act, we're effectively moving inventory, market making our best ideas. And then there are buyers and sellers for hedging insurance and the like. And so in that sense, some volatility is a good thing because you can sort of measure where it becomes bad is if it's risk off and people say, well, I can't do anything, they put their pencils down. So yes, this was a good vol environment because we were close to clients and those clients were listening to our content and evolving and trying to measure through scenarios. And that worked both in equities and in fixed income. It was fascinating as it also worked in the banking side. Usually when you have that kind of volatility, it isn't good for capital markets on the primary side because people are concerned. They sit on their hands, they don't do some of the deals that were expected. That was not the case in the first quarter.

Well, that's an interesting point you're making, that typically when you effectively have market making to sort of protect, you're not going to have the risk spirits of the new issue market or the M&A market functioning at the same time. And I think the M&A market and the new issue market worked in part because there was so much tailwind from the beginning of the year. And in certain sectors, the AI ecosystem, even with geopolitics, they were able to keep going. So the question that hopefully will become a hypothetical would have been if the conflict had gone on for a number of quarters and we started to see energy costs get effectively imported from Asia through Europe to the U.S., what would that do to the calendar, both the M&A calendar, the IPO calendar? And I hope that question will be for another day or maybe no day. Today's question is, if the conflict can be boxed at some level, would we expect the coming to the market of these great companies, but also smaller, very high-quality sponsor companies to either come via IPO or to engage in the M&A trade? That has been sort of the logjam of the last couple of years. And I think we're seeing in pipelines that both corporates and sponsors want to come. So I think what you could have is a period now where we still have some volatility, maybe not the very high levels of charged activity at the beginning of the year. That was, generally speaking, good for trading desks. Maybe you'll see more of a normalization in those types of activities. Remember now the volatility measures are already elevated, so the price of buying rental insurance is high. But then importantly, the core corporate finance life cycle that we've been looking at over the last couple of years hopefully can resume against S&P 7, 10-15% earnings growth. And we can keep going. But the only caveat I'd make here is there are going to be some companies that are just not ready. They're still locked in sponsor portfolios and they need even more time. Five years is not enough. They need six, seven years because of the higher rate of interest and that to sort of carry the debt. But there are going to be other companies clearly that want to come. And we're beginning to see the lead sponsors and lead companies, not necessarily these mega caps. Those are coming in any case. But the next tier of companies we see in bake-offs, sort of like M&A versus IPO type of bake-off, we're seeing those happening. And I think that augurs well.