Morgan Stanley has shifted to a more optimistic stance on US equities and bonds, signaling confidence that the market has already seen its lows and is poised for further gains.
The firm’s strategists now forecast the S&P 500 could rise to as high as 7,100 in the coming year, supported by improving earnings prospects, a more accommodative policy environment, and easing global trade tensions.
In a note released Tuesday, the investment bank upgraded its outlook on US assets to “overweight,” citing a combination of supportive macroeconomic trends and diminishing downside risks. While current market sentiment is being tested by rising bond yields and geopolitical uncertainty, Morgan Stanley’s outlook counters prevailing caution, emphasizing structural strengths in US markets.
“We’ve already experienced rolling earnings recessions across the equity market for the last three years,” said the team led by Chief Investment Officer Mike Wilson. “This sets the stage for a more synchronized earnings recovery over our forecast horizon.”
The bank’s base case now projects the S&P 500 reaching 6,500 by the second quarter of 2026, with a bullish scenario envisioning a 21% surge to 7,200. Its bear case sees a more modest retreat to 4,900. The current level for the benchmark index is 5,940.
Key drivers behind Morgan Stanley’s bullish turn include anticipated Federal Reserve rate cuts in 2026, a weaker US dollar, and expected productivity gains from artificial intelligence. The firm also sees the recent US-China tariff pause as having significantly lowered the risk of a recession, allowing investors to refocus on long-term growth prospects.
Looking ahead, strategists believe the next 6 to 12 months will be shaped by expectations of more growth-friendly policies—such as infrastructure spending, deregulation, and tax incentives. These developments, they say, could support higher valuations and attract further investment into US markets.
The bank also expects US corporate earnings revisions to stabilize soon, with multinational companies set to benefit from dollar depreciation. In its outlook, Morgan Stanley projects the ICE Dollar Index (DXY), which has already declined by 8% year-to-date, to fall another 9% to 91 over the next 12 months. The dollar is expected to weaken most notably against safe-haven currencies such as the euro, Swiss franc, and Japanese yen.
On the bond front, the 10-year Treasury yield—currently around 4.53%—is forecast to gradually decline to 3.45% by mid-2026, as the market begins to price in more aggressive rate cuts. Elevated yields in the near term are expected to limit equity valuation multiples temporarily, keeping the S&P 500 in a range of 5,500 to 6,100 through the first half of 2025.
Morgan Stanley also provided updated sector preferences. It upgraded industrials to overweight, noting the sector’s potential to benefit from increased infrastructure investment. Utilities have also been raised to overweight, as part of a broader move away from defensive exposures. The bank favors large-cap over small-cap stocks and continues to prefer US equities to international counterparts.
Despite this generally upbeat assessment, Morgan Stanley highlighted the importance of closely watching Treasury yields, which remain a source of near-term volatility. A $16 billion auction of 20-year Treasury bonds set for Wednesday is being closely monitored, especially in light of Moody’s recent downgrade of US debt.
With input from Reuters and Market Watch.
