Morgan Stanley says the US is undergoing a durable shift in economic strategy, with industrial policy and tariffs now entrenched as bipartisan tools of government. The bank notes that for decades, Washington largely pursued lower trade barriers and minimal intervention in private business, but that consensus has been upended. Both the Trump and Biden administrations have embraced tariffs, and the debate has shifted from whether they should exist to how they are applied. This change is most visible in strategic sectors such as technology, healthcare, and energy, with semiconductors a prime example: Biden’s CHIPS Act aimed at securing domestic supply, while Trump has introduced export licensing fees and is considering government stakes in companies.
With policy uncertainty easing, corporate America is regaining confidence to pursue strategic moves. After an unusually quiet start to the year, IPO activity has surged 68% year-on-year, while mergers and acquisitions are up 35%, according to Morgan Stanley. The bank attributes this rebound to strong corporate balance sheets, an abundance of private capital, and fresh investment needs driven by artificial intelligence and technology upgrades. Executives report that a narrower range of policy outcomes has given them the clarity needed to execute long-term plans.
Markets are responding to this backdrop with steeper yield curves and a weaker US dollar. Morgan Stanley sees restrictive trade policy as here to stay, fiscal settings largely locked in, and the Federal Reserve more willing to tolerate higher inflation risks in order to sustain growth. That combination points to a dollar that remains under pressure and long-dated bond yields that stay sticky, even as short-end yields ease on expectations of further Fed rate cuts.
The bank argues that this mix — entrenched industrial policy, greater corporate confidence, and supportive monetary conditions — is creating a more favorable environment for capital markets activity in the medium term. While IPOs and M&A are rebounding from a low base and may slow from current double-digit growth rates, Morgan Stanley expects the overall trend to continue, especially as investment demand for technology and AI accelerates.
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Bolding above is mine.
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US Dollar Outlook Structural weakness:
With tariffs entrenched and the Fed prioritising growth over inflation, the dollar is likely to remain on the defensive.
Yield Curve Dynamics:
Fed cuts lower the front end, but sticky inflation expectations and fiscal deficits keep long yields elevated.
Key Risks to Watch:
Tariff flare-ups that reignite risk aversion could briefly lift the USD.
If inflation overshoots badly, the Fed may have to re-tighten, flattening the curve again.
Fiscal or political shocks (debt ceiling, shutdowns) could add volatility to Treasuries.
