Morgan Stanley Predicts US Stocks Will Regain Edge Over International Markets

After a strong run by international equities, Morgan Stanley is signaling a potential reversal, favoring US stocks—particularly large-cap names—as global economic conditions shift into a late-cycle phase, Market Watch reports.

While the iShares MSCI EAFE ETF, which tracks companies across Europe, Australia, and the Far East, has surged 14% in 2025, the S&P 500 remains down around 3% year-to-date despite recent gains. This disparity has sparked debate over whether the era of US market dominance is ending. But Mike Wilson, chief market strategist at Morgan Stanley, believes the current trend is more cyclical than structural.

“We’re focused less on whether US exceptionalism is fading, and more on the near-term macro environment,” Wilson noted.

He argues that as the economic cycle matures, factors like stable earnings and balance sheet strength will matter more—factors where large US firms tend to outperform.

In particular, Wilson cited the current backdrop of slowing economic momentum, persistent long-term interest rates, and a Federal Reserve in a holding pattern as reasons to favor quality growth stocks. These conditions, he says, naturally benefit US large-cap companies, which tend to have lower earnings volatility and better operational efficiency.

A weakening US dollar could also tip the scales in favor of US companies by boosting the value of overseas earnings, though it could pose a headwind for international rivals.

Wilson’s team has laid out several strategic preferences, including:

• Large-cap over small-cap stocks;

• Healthcare over consumer staples for defensive positioning;

• Industrials over consumer discretionary stocks within cyclicals;

• Companies with low leverage, high operational efficiency, and consistent earnings margins.

Looking ahead, Wilson believes the S&P 500 faces a key technical test near its 100- and 200-day moving averages, in the 5,750–5,800 range. He noted that while optimism around China and corporate earnings has buoyed markets, a more dovish Fed and a drop in the 10-year Treasury yield below 4% may be needed to push stocks higher.

Potential downside risks include a deterioration in the labor market and a breakout in long-term yields above 4.5%, which could pressure equity valuations.

Despite concerns, US futures were only modestly lower as of early Monday, and investors appear cautiously optimistic. The backdrop remains complex, with geopolitical developments, tariff threats, and corporate earnings all playing a role in market sentiment.