Wall Street giant Morgan Stanley has released a research report projecting that the U.S. economy will enter a "Goldilocks-style soft landing" in 2026, driven by three key factors: the growth-stimulating effects of the OBBBA ("One Big Beautiful Bill") passed under the Trump administration in 2025, the fading of temporary inflationary pressures from tariff policies, and the accelerated construction of AI data center infrastructure by tech giants like Google and Microsoft. The firm characterizes 2026 as the beginning of a "rolling recovery" that will spark a broad-based equity bull market, shifting leadership from mega-cap AI beneficiaries like Nvidia to cyclical sectors and small-mid cap stocks.
Morgan Stanley's strategists, led by Michael Wilson, argue that the U.S. stock market has transitioned from a three-year "rolling recession" to a "rolling recovery" phase, marked by improving cost structures, strong earnings revisions, operational leverage gains, and pent-up demand release. They anticipate the Federal Reserve's rate cuts will kickstart a new capital expenditure cycle, with AI and manufacturing investments becoming key growth engines. While the "Magnificent 7" tech stocks will continue leading earnings upgrades in 2025, the momentum is expected to spread to S&P 493 components—particularly industrials and financials—by 2026.
The bank recommends overweighting cyclical sectors (financials, industrials, healthcare, and discretionary consumption) while underweighting defensive plays (staples and real estate), with neutral allocations to tech and energy. This positioning reflects their view that market leadership will broaden beyond AI-centric names, with small-mid caps and cyclicals benefiting from earnings elasticity, operating leverage improvements, and pro-growth policies.
Concurrently, Bank of America has published research suggesting commodity investments will emerge as a top 2026 trade theme, anticipating all commodities will mirror gold's upward trajectory amid what it calls a post-pandemic "fiscal expansion + deglobalization" paradigm shift.
Morgan Stanley's "Goldilocks" scenario envisions moderate GDP growth, contained inflation, and a declining rate environment. The firm notes early signs in 2025 economic data—including consumer spending resilience and GDP revisions—that support this outlook. With major policy frameworks (tariffs, immigration, and tax cuts) largely settled by 2026, the economy is expected to shift focus from policy uncertainty to private sector adaptation under the OBBBA's stimulus measures.
Strategists project the S&P 500 could reach 7,800 in their base case, with a "bull scenario" target of 9,000 if AI-driven productivity gains exceed expectations. They highlight the rare confluence of pro-cyclical fiscal, monetary, and regulatory policies—last seen in the late 1980s—as creating ideal conditions for risk assets. As confidence in long-term growth strengthens and real rates normalize, cyclical sectors (industrials, financials, and consumer discretionary) are positioned to outperform both the S&P 500 and Nasdaq 100 during this phase of the recovery.
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