Executive Summary
Morgan Stanley's global head of corporate credit research identifies a structural divergence emerging in 2026: animal spirits will drive equity outperformance while simultaneously punishing credit markets through aggressive corporate issuance. Andrew Sheetz expects roughly $1 trillion in net US investment grade supply—a massive uptick from 2025—as corporates abandon years of restraint to fund AI capital expenditure, M&A, and expansion. This creates an unusual but historically precedented scenario where equities rise double digits while credit spreads widen, similar to 2005 and 1997-1998 cycles. The thesis rests on three converging forces: easier monetary policy removing corporate caution, fiscal support sustaining growth momentum, and the largest capital spending cycle since railroads through AI infrastructure. Sheetz argues gradual Fed easing actually benefits this environment more than aggressive cuts, which historically coincide with economic deterioration and credit stress. The opportunity lies in positioning for this equity-credit divergence: overweighting small/mid-cap stocks over large caps, high yield over investment grade, and European credit over US credit markets. The key risk involves AI spending companies becoming price-insensitive issuers who continue flooding markets even as spreads widen, potentially amplifying the credit underperformance beyond base case expectations.
Key Insights
what Andrew Sheetz said“Corporates have been impressively restrained over the last several years. They've really kind of held back despite lots of fiscal easing, despite very low rates. Those reasons for waiting are falling away.”
what Andrew Sheetz said“maybe the biggest capital spending cycle since the railroads through AI. These are some pretty powerful forces of animal spirits... the companies that are doing it are some of the wealthiest companies in the world... if you were to ever have an issuer or a set of issuers who were just less price sensitive, who would keep issuing into the market, even if it was starting to reprice that market and push spreads wider, this might be the group.”
what Andrew Sheetz said“periods where the Fed is cutting more gradually tend to be more consistent with policy in the right place, the economy being in an okay place... a scenario where the Fed ends up doing a little bit less than the market or even we expect with rate cuts because the economy is holding up, that can still be we think an okay scenario for markets.”
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