Morgan Stanley weighs in on the 9 big questions that will dominate Wall Street in 2017

There has been a major shift in American politics, on both sides of the aisle, away from free-trade and economic liberalism towards protectionism.

While most analysts are in agreement that protectionist policies will negatively affect emerging markets such as Asia, there is not a consensus on its implications for the US.

Morgan Stanley is not taking an optimistic stance:

"Under a more protectionist regime, there is potential for near-term upside in US growth, driven entirely by a narrowing of the trade balance. However, this would come at a cost of permanent output loss."

It is very likely that there will be corporate tax reform in the US in 2017, according to Morgan Stanley, but what that reform will look like and the degree to which it will benefit the economy is still up for debate.

"The good news for investors and the economy is that Congress has the motive and the opportunity to execute tax reform in 2017 ... the bad news is that this stimulus may lack punch given the likelihood of resulting Fed hawkishness and potential corporate finance disruptions," the bank said.

One of the cornerstones of Donald Trump's campaign was a promise to impose taxes on imports into the US, or border adjustments, in order to buoy America's ailing manufacturing sector.

Traditionally, Republicans have not been in favor of implementing such taxes, but as of late it looks like some key GOP legislators have had a change of heart.

"Recent news suggests House Republicans and President-elect Trump are coming together around [border adjustments]," the bank said.

As such, Morgan Stanley believes border adjustments stand a serious chance in 2017.

However, they don't subscribe to the popular opinion that border adjustments would have a profound affect on FX markets.

"We believe border adjustment would not result in a full exchange rate offset (i.e we don't expect USD appreciation of 25%) ... instead we think a 10-15% rise in USD is reasonable," the bank concluded.

The Wall Street world is abuzz about the return of activist investors, investors who buy up massive amounts of shares in a company with the intent of enacting major changes.

According to Morgan Stanley, the worry that activist investors may have their sights set on the electrical equipment/multi-industry sector has "been spurred by media reports that Trian is building a stake in Honeywell."

Trian Fund Management is a multi-billion dollar alternative investment management firm that has been buying up big stakes in a number of companies including General Electric, Ingersoll Rand, and Pentair.

"Investors are unsure whether activism is a real-positive for sector performance, given a mixed track record," said Morgan Stanley.

"Generally, we find that the market is skeptical of activist involvement, but stocks tend to outperform where a stake is revealed," they added.

Trump's uninhibited practice of shaming companies on social media has researchers at Morgan Stanley thinking that he might use Twitter to call out specific drug companies that try to raise prices.

"We expect President-elect Trump to further scrutinize drug prices and industry participants, potentially using social media to blame and shame specific drug companies if they opt to take an abnormally high price increase," the bank said. "He may also propose to constrain pricing via Medicare negotiations or other mechanism."

The bank's prediction was given support during a press conference on January 11 during which Trump said that "drug companies are getting away with murder."

However, the bank contends that Trump's outbursts on Twitter and populist bent will ultimately be balanced by a Republican controlled congress that will likely refuse any legislation to control drug prices.

Bank stocks have led the so-called Trump Bump stock market rally. The question on everybody's mind now is whether they will continue to outperform the market in 2017.

The answer from Morgan Stanley is a resounding yes.

"[The] Republican sweep with its lower tax and deficit-led economic growth plans is a major tailwind for banks. We expect more growth, higher rates, less regulation and lower taxes, all of which should drive significant upward revisions to EPS in 2017," the bank said.

Inflation is going to make the difference between big gains and even bigger gains.

"Our analysis shows that when inflation lies in the 1-1.5% bucket, bank stocks outperform the S&P 1500 by a median 0.6%. As inflation accelerates to 2-2.5% stock outperformance rises by 80 bps to a median 1.4%," the bank said.

Artificial intelligence and machine learning is the technology behind Apple's ubiquitous Siri and Amazon's Echo, and we've only gotten a glimpse of its full potential.

2016 witnessed a number of companies flirting with AI and machine learning, according to Morgan Stanley, but 2017 will be the year in which they start bringing AI-based products to market.

"50% of [chief information officers] currently use or expect to use Machine Learning or AI technologies," they added.

"GM just announced IBM Watson will be integrated into vehicles in 2017, IBM's early relationship with Pfizer is broadening to additional use cases, and Amazon just introduced Amazon Go, a grocery store without lines or checkout counters that relies upon computer vision, sensors, and machine learning technology," the bank said.

Another innovation in the field of artificial intelligence is the emergence of new specialized chips built specifically for AI. These Field Programmable Gate Arrays or FPGAs are produced by the San Jose-based technology company Xilinx.

These custom chips will compete for market space with graphic hardware chips, which are produced by NVIDIA, Intel, and AMD. Graphics are re-purposed for AI and are "suboptimal," according to Morgan Stanley.

"While it is a small opportunity in 2017, this is a year where early momentum will be established. We see a theoretical basis for FPGAs being the best solution, but the higher complexity of FPGAs leaves a solid role for graphics as well," the bank concluded.

Trump's intention to "make America great again" includes a plan to spend a massive amount of government money on new infrastructure projects across the country.

"While specificity and details on the fiscal stimulus are still scarce, we believe Trump's plans for infrastructure spending could be early in queue," the bank said.

One sector that's positioned to benefit the most from such an initiative would be American steel companies.

"We conservatively estimate Trump's $550 billion stimulus plan could increase steel demand by 20% annually for 5 years," they added.

The implementation of protectionist measures, which Trump has supported, would also cement major gains for the industry as foreign competition would be suppressed.