Morgan Stanley has adopted a bullish view on U.S. investments, upgrading both stocks and Treasuries to an “overweight” status due to diminishing tariff concerns, a low likelihood of recession, and the potential for interest rate cuts. Despite this optimistic outlook for U.S. assets, the firm holds a negative perspective on the U.S. dollar, noting a convergence of U.S. economic rates and growth with international peers.
The firm’s analysis indicates an expectation for U.S. assets to outperform global counterparts, barring the dollar itself. The global economy is projected to gradually slow, with real GDP growth anticipated to decrease to 2.5% by the end of the year, down from 3.5% in 2024.
Morgan Stanley predicts that corporate earnings for U.S. businesses will soon reach a turning point. The anticipated decline of the dollar is expected to benefit multinational corporations by increasing their earnings when converted back into the U.S. currency. Stock momentum is expected to build as inflation eases and the Federal Reserve is open to additional rate cuts.
As a result of these factors, Morgan Stanley has revised its forecast for the S&P 500, predicting it will hit 6,500 points by the second quarter of 2026, accelerating from a previous forecast aimed for late 2025. The index was noted to be at 5,940.46 recently.
Treasury bonds are also seen favorably, with expectations that the yield on the 10-year Treasury note could drop to 3.45% by Q2 2026, down from the current 4.481%. This projected decline in yields mirrors the broader economic trends of stabilizing inflation combined with consistent monetary policies.
Conversely, Morgan Stanley forecasts continued pressure on the U.S. dollar, which has depreciated by 8% this year, and predicts an additional decline of 9% over the forthcoming year, leading to a projected index of 91 by mid-2026. Factors contributing to this weakness include narrowing interest rate differentials between the U.S. and global markets.
In terms of currency, Morgan Stanley anticipates a robust euro reaching $1.25 against the dollar and the yen climbing to 130 per dollar by Q2 2026.
For financial advisors, this perspective brings various actionable insights. They may consider augmenting their clients’ exposure to U.S. equities projected to benefit from the anticipated economic conditions. Furthermore, as Treasury yields trend downward, advisors should explore opportunities within high-quality bonds. With the dollar’s decline presenting both challenges and openings, advisors might advise clients on hedging strategies while capitalizing on the strengthening of foreign currencies like the euro and yen. It is also crucial for advisors to encourage global diversification, providing balance and additional opportunities.
While the outlook appears positive, it is essential for advisors and investors to remain aware of potential risks, including a sluggish economic recovery, geopolitical volatility, or inflation resurgence, any of which could hinder market projections.
Commenting on this analysis, it is hopeful to see professional firms like Morgan Stanley recognizing the resilience of the U.S. financial markets, which could serve as a positive indicator for investors looking to navigate through uncertain economic conditions. By strategically positioning portfolios, there are promising opportunities for both growth and stability in the upcoming periods.