Morgan Stanley Fixed-Global Cross-Asset Strategy Morgan Stanley Research Key Fo...-110678767

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. We maintain our BoJ call for January, but any revisions in the fiscal outlook, after the recently called election, could be consequential. The ECB is set to extend its cutting cycle, though soft inflation and growth data bring risks around the pace of easing. The BoE held rates in September, and we expect the next cut at the November meeting. 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, 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 revi-sions. 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, and recommend buying the dip for Europe's best-positioned AI players. 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 5005,7515,40021.7x19.0x239269+8%+13%MSCI Europe2,0642,50013.7x14.8x150164+7.5%+9%Topix2,6943,00014.7x14.0x184205+12%+11%MSCI EM1,1791,16012.7x12.57988+18%+11%MS June 2025 Price TargetCurrent P/EMS June 2025 P/E TargetMS Top Down EPS YoY%04-10-2024Index (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 the path to a soft landing will not be linear. US