The global market for obesity drugs is expanding. Our U.S. Pharma and Biotech Analyst Terrence Flynn discusses what’s driving the next stage of global growth for GLP-1 medicines.

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Terrence Flynn: Welcome to Thoughts on the Market. I'm Terrence Flynn, Morgan Stanley's U.S. Pharma and Biotech Analyst. The market for obesity medicines is at an inflection point, and today I'll focus on what's driving the next stage of global growth.

It's Thursday, June 5th at 2pm in New York.

GLP-1 medicines have been viewed by many stakeholders as one of the most transformative medications in the market today. They've exploded in popularity over the last few years and become game changers for many people who take them. These drugs have large cap biopharma companies racing to innovate. They've had ripple effects on food, fitness, and fashion. They truly are a major market force. And now we're on the cusp of a significant broadening of use of these medicines.

Currently the U.S. is the largest consumer in the world of GLP-1s. But new versions of these medicines suggest that this market will extend beyond the U.S. to significantly larger numbers of patients globally. On our estimate, the Total Addressable Market or TAM for obesity medications should reach $150 billion globally by 2035, with approximately [$]80 billion from the U.S. and [$]70 billion from international markets.

Now this marks a meaningful increase from our 2024 forecast of [$]105 billion and reflects a greater appreciation of opportunities outside of the U.S. We think obesity drug adoption will likely accelerate as patients and providers become more familiar with the new products and as manufacturers address hurdles in production, distribution, and access.

Current adoption rates of GLP-1 treatments within the eligible obesity population are about 2 to 3 percent. This is in the U.S., and roughly 1 percent in the rest of the world. Now, when we look out further, we anticipate these figures to surge to 20 percent and 10 percent respectively, really driven by five things.

First, after a period of shortages, supply constraints have improved, and the drug makers are investing aggressively to increase production. Second new data show that obesity drugs have broader clinical applications. They can be used to treat coronary heart disease, stroke, hypertension, kidney disease, or even sleep apnea. They could also potentially fight Alzheimer's disease, neuropsychiatric conditions, and even cancer.

Third, we think coverage will expand as obesity drugs are approved to treat diseases beyond obesity. Public healthcare coverage through Medicare should also broaden based on these expected approvals. Fourth, some drug makers are successfully developing obesity drugs, in pill form instead of injectables. Pills are of course easier to administer and can reach global scale quickly. And finally, drug makers are also developing next gen medications with even higher efficacy, new mechanisms of action, and more convenient, less frequent dosing.

All in all, we think that over the next decade, broader GLP-1 adoption will extend well beyond biopharma. We expect significant impacts on medical technology, healthcare services, and consumer sectors like food, beverages, and fashion, where changes in patient diets could reshape market dynamics.

Thanks so much 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 CIO and Chief U.S. Equity Strategist Mike Wilson explains how his outlook on earnings and valuations give him a constructive view on U.S. equities for the next 12 months.

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Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.

Today on the podcast I’ll discuss where there is the most push back to our Mid-year outlook and why I remain convicted in our generally constructive view on U.S. equities for the next 12 months.

It's Monday, June 2nd at 11:30am in New York.

So, let’s get after it.

To briefly summarize our outlook, we have maintained our 6500 12-month price target for the S&P 500 this year despite what has been a very volatile first five months – both in terms of news flow and price action. Part of the reason we didn’t change this view stems from the fact that we expected the first half to be challenging for U.S. stocks but to be followed by a more favorable second half. Much of this was related to our view that the new administration would pursue the growth negative part of their policy agenda first. This played out -- with their focus on immigration enforcement, spending cutbacks and tariffs. In addition to these policy adjustments, we also expected AI capex to decelerate in the first half after such fast growth last year. All of these factors conspired to weigh on both economic growth and earnings revisions.

Second, the way in which tariffs were rolled out on Liberation Day was a shock to most market participants, including us, and served as the perfect catalyst for what can only be described as capitulation selling by many institutional investors. That capitulation has set the stage for the very reflexive snap back in equity prices that is also supported by a positive rate of change on policy, earnings revisions breadth, financial conditions and a weaker U.S. dollar.

The main push back to our views centers on our constructive earnings outlook for high single digit growth both this year and next and our view that valuations can remain elevated at 21.5x forward Earnings. On the earnings front, our calendar year earnings estimates already incorporate a mid-single-digit percent hit to bottoms-up consensus forecasts. Second, our Leading Earnings Indicator which projects Earnings Per Share growth 12 months out is suggesting a sideways consolidation in growth in the high single-digit range over the next year.

Third, a weaker dollar, elements of the tax bill and AI-driven productivity should be incremental tailwinds for earnings that are not in our model. Fourth, we have experienced rolling recessions for many sectors of the private economy for the last 3 years, which makes growth comparisons easier. Finally, and most importantly, the rate of change on earnings revisions breadth has inflected higher from a very low level after a year-long downturn.

On valuation, our work shows that if earnings growth is above the long-term median of 7 percent and if the fed funds rate is down on a year-over-year basis, it's very rare to see multiple compression. In fact, Price Earnings multiples have expanded 90 percent of the time under these conditions to the tune of 9 percent over a 12- month period. Therefore, in some ways we’re being conservative with our forecast for the S&P 500's price earnings ratio to remain flat at current levels over the next year.

With respect to our favorite valuation metric, the equity risk premium, it’s interesting to note that in the week following Liberation Day, the Equity Risk Premium reached the same level we witnessed in the aftermath of the 9-11 shock in 2001 and even exceeded the risk premium reached during the Long-Term Capital Management crisis in 1998. Both episodes resulted in 20 percent corrections to the S&P 500 much like we experienced this year only to be followed by very strong equity markets over the next year.

The bottom line is that I remain convicted in both our earnings forecast for high single digit earnings growth for this year and next; and my view that valuations can remain elevated in this classic late cycle expansion of slower economic growth that typically elicits interest rate cuts from the Fed.

Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review; and if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

Our Head of Corporate Credit Research explains why the legal confusion over U.S. tariffs plus the pending U.S. budget bill equals a revived focus on interest rates for investors.

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Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Head of Corporate Credit Research at Morgan Stanley.

Today I'm going to revisit a theme that was topical in January and has become so again. How much of a problem are higher interest rates?

It's Friday, May 30th at 2pm in London.

If it wasn't so serious, it might be a little funny. This year, markets fell quickly as the U.S. imposed tariffs. And then markets rose quickly as many of those same tariffs were paused or reversed. So, what's next?

Many tariffs are technically just paused and so are scheduled to resume; and overall tariff rates, even after recent reductions towards China, are still historically high. The economic data that would really reflect the impact of recent events, well, it simply hasn't been reported yet. In short, there is still significant uncertainty around the near-term path for U.S. growth. But for all of our tariff weary listeners, let's pretend for a moment that tariffs are now on the back burner. And if that's the case, interest rates are coming back into focus.

First, lower tariffs could mean stronger growth and thus higher interest rates, all else equal. But also importantly, current budget proposals in the U.S. Congress significantly increase government borrowing, which could also raise interest rates. If current proposals were to become permanent. for example, they could add an additional [$]15 trillion to the national debt over the next 30 years, over and above what was expected to happen per analysis from Yale University.

Recall that prior to tariffs dominating the market conversation, it was this issue of interest rates and government borrowing that had the market's attention in January. And then, as today, it's this 30-year perspective that is under the most scrutiny. U.S. 30-year government bond yields briefly touched 5 percent on January 14th and returned there quite recently.

This represents some of the highest yields for long-term U.S. borrowing seen in the last two decades. Those higher yields represent higher costs that must ultimately be borne by the U.S. government, but they also represent a yardstick against which all other investments are measured. If you can earn 5 percent per year long term in a safe U.S. government bond, how does that impact the return you require to invest in something riskier over that long run – from equities to an office building.

I think some numbers here are also quite useful. Investing $10,000 today at 5 percent would leave you with about $43,000 in 30 years. And so that is the hurdle rate against which all long-term investments or now being measured.

Of course, many other factors can impact the performance of those other assets. U.S. stocks, in fairness, have returned well over 5 percent over a long period of time. But one winner in our view will be intermediate and longer-term investment grade bonds. With high yields on these instruments, we think there will be healthy demand. At the same time, those same high yields representing higher costs for companies to borrow over the long term may mean we see less supply.

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 tell a friend or colleague about us today.

Our Global Head of Fixed Income Research & Public Policy Strategy, Michael Zezas, shares the answers to clients’ top U.S. policy questions from Morgan Stanley’s Japan Investor Summit.

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Michael Zezas: Welcome to Thoughts on the Market. I’m Michael Zezas, Morgan Stanley’s Global Head of Fixed Income Research & Public Policy Strategy. Today, takeaways from our Japan Investor Summit.

It’s Wednesday, May 28th at 10:30am in New York.

Last week, I attended our Japan Investor Summit in Tokyo: Two full days of panels on key investment themes and one-on-one meetings with clients from all parts of the Morgan Stanley franchise. During the meeting, Morgan Stanley Research launched its mid year economics and market strategy outlooks. So needless to say there was a healthy dialogue on investment strategy over those 48 hours. And I want to share what were the most frequent questions I received and, of course, our answers to those questions.

As you could guess, U.S. tariff policy was a key focus. Could tariffs re-escalate? Or was the worst behind us; and if so, could investors set aside their concerns about the U.S. economy? It’s a complicated issue so accordingly our answer is nuanced. On the one hand, the current state of play is mostly aligned where we thought tariff policy would be by end of year. It’s just arrived much earlier. Higher overall U.S. tariffs with a skew toward higher tariffs on China relative to the rest of world, as the U.S. has less common ground with them and thus greater challenges in reaching a trade agreement with China in a timely manner. So that might imply we’ve arrived at the end point. But we think that’s too simple of a way for investors to think about it.

First there’s plenty of potential for escalation from current levels as part of ongoing negotiations. And even if it’s only temporary it could affect markets. Second, and perhaps more importantly, even though the U.S. cutting tariffs on China from very high levels recently brought down the effective tariff rate, it’s still considerably higher than where we started the year. So one’s market outlook will still have to account for the pressures of tariffs, which our economists translate into slower growth and higher recession risk this year.

Another key concern – U.S. fiscal policy, and whether the U.S. would be embarking on a path to smaller deficits, in line with campaign promises. Or if the tax and spending bill making its way through Congress would keep that from happening. For investors we think it’s most important to focus on the next year, because what happens beyond that is highly speculative. And we do not expect deficits to come down in the next year. Extending expiring tax cuts, and extending some new ones, albeit with some spending offsets, should modestly expand the deficit next year in our estimates; and some further deficit expansion should come from other factors baked into the budget, like higher interest payments.

It's understandable these two questions came up, because we do think the answers are key to the outlook for markets. In particular, they inform some of the stronger views in our markets’ outlook. For example, slower relative U.S. growth and the related potential for foreign investors to increasingly prefer their portfolios reflect their local currency should keep the U.S. dollar weakening – a key call our team started this year with and now continues. Another example, the shape of the U.S. Treasury yield curve. Higher deficits and the uncertainty about inflation caused by tariffs should make for a steeper yield curve. So while we expect U.S. Treasury yields to fall, making for good returns for high grade bonds including corporate credit, the better returns might be in shorter maturities.

Thanks for listening. If you enjoy Thoughts on the Market, please leave us a review wherever you listen. And if you like what you hear, tell a friend or a colleague about us today.