Current Read: No Excessive Stress Yet

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.

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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 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.