MS Michael Wilson Weekly Warm up Treasury Buybacks in the Context of Our Run It Hot Thesis

M August 24, 2026 04:30 AM GMT

US Equity Strategy | North America Morgan Stanley & Co. LLC Idea

Michael J Wilson Equity Strategist

Buybacks in the Context of Our

Quantitative Strategist The post-COVID return of inflation has ushered in shorter cycles, Nicholas Lentini, CFA Equity Strategist more reactive policy and more frequent leadership changes. We

favor large-cap quality, AI adopters and the S&P 500 over international peers. With oil the near-term risk, Energy equities offer the best hedge. • The Quality Rotation... Our quality rotation call is playing out: high free cash flow, high gross margin, high sales growth stability and low capex-to-sales factors are up 16%, 9%, 9% and 8%, respectively, over the past two months. Thematic leadership is also shifting toward services-oriented, fee-based and asset-light sectors and stocks, which are also showing some of the strongest earnings revisions in the market. Financial Services and Insurance stand out within our Financials overweight. • What Is the Treasury Doing with Buybacks and Why? At the trough of the COVID shock, we were one of the first and loudest voices to suggest it was the end of disinflation, helped by policy makers’ decisions to use "Helicopter Money" to avoid a deflationary bust. Six years later, the story continues to evolve with the Treasury intervening in the currency markets and then last week's surprise increase of the Treasury's buyback program just 2 weeks after their Quarterly Refunding Announcement. In our view, higher rates are more a function of strong nominal growth as opposed to structural concerns around the debt and deficit. While the Treasury and Fed actions are aimed at maintaining market functioning rather than restarting QE, gold and crypto markets have traded as if more aggressive policy actions could occur. • Crude Is the Near-Term Risk—and It’s Asymmetric... Brent is up 13% over the past two weeks, and rising oil has been a much more reliable equity headwind than falling oil has been a tailwind. The constructive view therefore does not require crude to reverse, only to stop rising. Nevertheless, a renewed spike in oil prices tied to the continued closure of the Strait would pressure input costs and likely push yields and bond volatility higher. In that context, Energy stocks provide a useful hedge for equity portfolios. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision. For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.

Treasury Buybacks in the Context of Our "Run It Hot" Thesis

Over 6 years ago, at the depths of the COVID recession, we made a call that investors should get ready for a return of inflation. At the time, the world was mired in deflation, with stocks down sharply from their recent highs, the 10-year US Treasury yield below 1% and gold near $1500/oz. Our core recommendation at the time for equities was to position aggressively in lower-quality, early-cycle stocks that would benefit the most from a reversal in the changing inflationary trend. Over the following year, low-quality cyclical stocks outperformed significantly until the rate of change on money supply growth peaked in late March 2021, a time when we pivoted on our recommendations and moved to a large cap high-quality bias.

Over the last 12 months, we have made a similar call, recommending a preference for lower-quality cyclicals near the trough of the Liberation / "Capitulation" Day lows of the rolling recession and then pivoting back in July of this year to a large cap quality preference. This all aligns with our Hotter but Shorter Cycle thesis we laid out in 2021 that can be summarized as follows: In a world of returning inflation, it is likely that economic cycles will no longer be able to persist for the extended 8-10 year periods like we experienced during the ~40-year disinflationary boom between…