The Animal Spirits Paradox: When Corporate Aggression Rewards Equity but Punishes Credit

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