Morgan Stanley says these are the main debates for stocks next year - including DOGE and AI

MW Morgan Stanley says these are the main debates for stocks next year - including DOGE and AI

By Louis Goss

IT contractors and renewables may be in for a tough 2025, say analysts

Could Google lose its dominance to artificial intelligence powered startups? Will the new Department of Government Efficiency's (DOGE) cost cutting hit America's top IT companies? Might Starbucks' turnaround plans actually work?

These are just some of the big questions Morgan Stanley's analysts are asking as investors ready themselves for a new year that is expected to see the inauguration of a new president, more interest rate cuts from the Federal Reserve and a broadening of economic growth away from the "Magnificent Seven" tech giants.

In the investment bank's annual "Big Ideas" report, a team led by Michelle Teitsch looked at major themes expected to affect markets in 2025, including President-elect Donald Trump and his incoming administration, the transition to clean energy and the continuing development of the AI sector.

The analysts took a look at whether the creation of DOGE could lead to sharp reductions in spending on IT contractors.

DOGE, which is set to be led by Tesla $(TSLA)$ CEO Elon Musk and former Republican contender Vivek Ramaswamy, will be tasked with slashing government spending, including by reducing head counts, when Trump comes into power on Jan. 20. Morgan Stanley's analysts said DOGE's plans could see Federal work cease to be a growth driver for IT services providers.

Accenture $(ACN)$, the IT consultancy that was split out from Arthur Andersen in 1989, is most exposed to any potential cuts, with the firm deriving around 8% of its revenue in the financial year 2024 from its federal government outsourcing arm, the analysts said.

Investors have also raised concerns Trump could drive a widespread overturning of the Inflation Reduction Act (IRA), in what could potentially serve a major blow to the U.S. renewable energy sector.

Morgan Stanley's analysts took a more nuanced view, stating that while a wholesale repeal of the IRA is unlikely, the new administration could still introduce changes that would hit the sector, with electric vehicle makers and offshore wind developers most vulnerable.

The analysts added that America's nuclear, carbon capture, and hydrogen industries will likely be most shielded from any changes. Nuclear power generators could separately receive a boost from the build out of data centers, which are expected to drive a 110 gigawatt increase in power demand between 2025 and 2030, they said.

Trump's threatened tariffs are, meanwhile, likely to hit wind and solar project developers in the immediate term, Morgan Stanley's analysts noted. Still, any levies could also help drive an increase in U.S. production in the longer-term, with companies like solar panel maker First Solar Inc $(FSLR)$ and battery manufacturers Fluence Energy $(FLNC)$ and Tesla $(TSLA.UK)$ set to benefit most.

More broadly, the investment bank's analysts argued Trump's tariff plans are likely to have little impact on the state of the U.S. steel industry, considering heavy levies are already in place. Aluminum makers could, however, be boosted by new tariffs, with current levies relatively low.

As for AI, the analysts said they expect to see a broadening out of gains, away from the "Magnificent Seven," as hurdles to widespread adoption of new technologies start to fall away in 2025. The rise of agentic computing could prove a boost for the sector in this case, they say.

Agentic computing systems see multiple separate AI powered 'agents' operate together to complete more complex tasks. The analysts believe the 'agentic' model will soon become the primary model through which AI tools operate, opening up $150 billion worth of new AI opportunities.

Nonetheless, they believe Google's $(GOOG)$ dominance in the search engine market is probably secure, despite the emergence of new AI driven startups. Meta Platforms $(META)$ is instead the likely top challenger to Google's hegemony, the analysts said.

Away from tech and politics, Starbucks $(SBUX)$, which has seen its stock price take a volatile trajectory this year, gets an optimistic mention from Morgan Stanley. New CEO Brian Niccol's plans to renovate stores and rethink the coffee chain's China business could provide a boost the company as early as the second quarter of 2025, they say.

Niccol, who previously led the revival of Chipotle Mexican Grill $(CMG)$, is planning to remove surcharges for nondairy milks, simplify Starbucks' menu, and overhaul the app to improve the ordering experience. Starbucks' new CEO has also vowed to halt price hikes on coffee.

-Louis Goss

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December 12, 2024 07:33 ET (12:33 GMT)

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