Morgan Stanley has released its 2026 global strategy outlook, predicting that a rare combination of policy stimulus and the AI investment cycle will propel risk assets to a strong performance, further bolstered by robust corporate earnings growth, positioning U.S. stocks to lead global markets.
On November 17, reports indicated that Morgan Stanley has dubbed 2026 the "Year of Risk Reboot" in its latest global economic outlook, shifting the market focus from macroeconomic uncertainties to micro-level fundamentals, creating a favorable environment for risk assets.
The bank highlights that fiscal policy, monetary policy, and deregulation—termed the "policy triumvirate"—will align in a rare pro-cyclical manner in 2026, fostering a supportive backdrop for risk assets. Meanwhile, AI-related capital expenditure remains in its early stages, expected to sustain corporate earnings momentum.
Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, raised the year-end target for the S&P 500 to 7,800, reflecting a 15% upside from current levels—one of Wall Street’s most bullish calls—driven by strong earnings growth, AI-driven efficiency gains, and favorable policy conditions.
Morgan Stanley anticipates a significant "bull steepening" of the U.S. Treasury yield curve in the first half of 2026, with short-term rates declining sharply due to Fed rate cuts. Credit markets are expected to diverge, with high-yield bonds outperforming investment-grade (IG) debt. Surging AI-related financing needs will pressure IG bond supply, widening spreads.
The bank has revised its dollar outlook, no longer bearish, forecasting weakness in H1 followed by a rebound in H2. In commodities, metals are favored over energy, with gold remaining the top pick at a target of $4,500/oz (9% upside).
**The Rare "Policy Triumvirate"** Morgan Stanley notes that 2026’s risk asset rally will pivot from macro narratives (e.g., trade tensions) to micro-driven stories, catalyzed by the "policy triumvirate": - **Fiscal Policy**: The U.S. "One Big Beautiful Bill Act" (OBBBA) is projected to deliver $129B in corporate tax cuts for 2026–27. - **Monetary Policy**: The Fed is expected to cut rates by 50bps in H1 amid stable macro conditions. - **Deregulation**: The U.S. will prioritize easing regulations, particularly in energy and finance.
This alignment, last seen in the late 1980s outside a recession, is set to revive "animal spirits" and investor focus on earnings and AI.
**AI: The Core Growth Driver** AI remains a pivotal theme, with data center capex (projected at ~$3T) still in early stages (<20% deployed). Half the funding will come from tech giants’ cash flows, leaving a $1.5T gap to be filled via: - **Public Credit Markets**: Surge in IG bond issuance from AI "hyperscalers." - **Securitized Markets**: Increased data center ABS supply.
Despite strong demand, supply pressures may widen IG spreads modestly.
**U.S. Stocks to Outperform: S&P 500 Target 7,800** Morgan Stanley forecasts S&P 500 EPS growth of 12% ($272) in 2025, 17% ($317) in 2026, and 12% ($356) in 2027, supported by: - Improved pricing power, AI efficiency gains, tax/regulatory easing, and stable rates.
While valuations are elevated (CAPE at 38x), macro drivers justify the premium. The S&P 500, up 14% YTD after two 20%+ years, could log a fourth straight double-digit gain.
**Regional Views** - **Japan**: TOPIX target 3,600 (+7%) on inflation recovery, governance reforms, and domestic inflows (e.g., NISA 2.0). - **Europe**: Structural headwinds; gains likely from valuation expansion, not earnings. - **EM**: Neutral overall; favor India (credit growth, tax cuts), Brazil (election impact), and UAE.
**Fixed Income: "Bull Steepening" in Treasuries** - 2-year yield to drop to 2.60%, 10-year at 4.05% by end-2026, with curve steepening to 145bps (most since 2021).
**FX: Dollar Weakness Then Rebound** - DXY to dip to 94 in H1 (Fed cuts, risk-on) before recovering to 99 in H2 (U.S. growth). - EUR/USD to peak at 1.23, then fall to 1.16; USD/JPY to 140, then 147.
**Credit: High-Yield Over IG** - IG spreads to widen to 95bps on supply; high-yield to 300bps amid balanced technicals. - Europe credit to outperform on milder supply and supportive GDP/rates.
**Commodities: Gold at $4,500, Metals Over Energy** - Gold supported by ETF inflows, central bank demand, and inflation hedging. - Copper to face 600kt deficit in 2026 ($10,600/t target); oil range-bound near $60/bbl.
Comments