A top Morgan Stanley strategist says the market’s long obsession with the Magnificent 7 may be giving way to something broader and potentially healthier.
In a new Bloomberg interview, Jim Caron, chief investment officer of portfolio solutions at Morgan Stanley Investment Management, says that the rally could expand beyond mega-cap tech if productivity-driven growth takes hold.
“So we’ve come off a market over the past couple of years that’s been highly concentrated: Mag 7, Mag 7, Mag 7. And people just forgot about the other 493 in the S&P 500.”
Caron says the key shift would be a pickup in growth and productivity, which could support a wider range of companies.
“And the point here is that if we get this rise in economic growth, this higher productivity, there should be a cyclical broadening of the markets. Look at the ISM data. The ISM is well above 50 right now. Even new orders are around 57. You’ve got the manufacturing above 52. You’ve got GDP growth, which is still pretty reasonable, and the job market seems pretty stable.
Let’s keep our eye on the bigger picture. And the reality here is that I do think that the cyclical broadening of the markets is actually really a healthy sign for more diversified growth.”
According to Caron, the capital rotation and the growth potential could be early signals that the economy will start favoring everyday Americans.
“I think the big complaint out there, and I did a podcast on this, which was to make a $20 hamburger affordable again. And my point was that, you know, the price of that hamburger is not likely coming down. What’s going to make it more affordable is that incomes and wages need to start to go up. But they have to go up in a non-inflationary way.”
According to Caron, the mechanism that makes that possible is productivity.
“And the way that happens, this is the magic trick that the economy does, is through higher productivity. So higher productivity is the non-inflationary speed limit on growth, meaning that you can have higher wages, better growth, but that higher wages don’t necessarily increase goods inflation or anything like that.
That’s what productivity does.
Right now, the productivity numbers are accelerating higher. So it is likely that if we get a recovery, these incomes and wages can go up without creating inflation. And that’s what makes the $20 hamburger more affordable.”
In an interview, Fed Chair nominee Kevin Warsh said that the AI productivity boom is setting the stage for real wage gains. His view mirrors Caron’s take that higher productivity usually triggers sustained wage growth.
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