Morgan Stanley turns bullish on most US assets, except dollar

Morgan Stanley has upgraded its outlook on U.S. stocks and Treasuries to "overweight," citing reduced tariff uncertainty, no expected recession, and potential for further rate cuts, forecasting the S&P 500 to reach 6,500 by Q2 2026. However, the firm remains bearish on the U.S. dollar, anticipating continued weakness due to converging U.S. rates and growth with other nations, projecting a further 9% decline in the DXY index over the next 12 months to 91 and forecasting EUR/USD at 1.25 and USD/JPY at 130 by the second quarter of 2026.

Analysis

Morgan Stanley has adopted a bullish stance on most major U.S. assets, upgrading both stocks and Treasuries to an "overweight" position. This revised outlook is predicated on several factors: diminished uncertainty surrounding tariffs, a low probability of a recession, and anticipated further interest rate cuts. The firm projects the S&P 500 index will reach 6,500 points by the second quarter of 2026, a significant increase from its recent close of 5940.46 points, and expects the 10-year Treasury yield to decline to 3.45% by the same period, from its current 4.481%. This optimism is partly fueled by an expected bottoming out of U.S. corporate earnings revisions and the positive impact of a weaker dollar on multinational company income. Despite this positive view on U.S. assets, Morgan Stanley remains bearish on the U.S. dollar itself. The brokerage forecasts the dollar index (DXY), which has already fallen 8% year-to-date to 99.76, will weaken by an additional 9% over the next 12 months to 91. This anticipated dollar depreciation is attributed to a convergence of U.S. interest rates and economic growth towards those of its global peers. Specific currency forecasts include EUR/USD at 1.25 and USD/JPY at 130 by the second quarter of 2026. The overall global economic backdrop is seen as slowing but still expanding, with global real GDP growth projected to decrease to 2.5% by year-end from 3.5% in 2024, though neither a global nor a U.S. recession is expected.

Key Decisions for Investors

• Investors should consider increasing allocations to U.S. equities and Treasuries, aligning with Morgan Stanley's 'overweight' recommendation and positive S&P 500 and yield targets.
• It may be prudent to evaluate strategies for hedging U.S. dollar exposure or selectively shorting the dollar, particularly against safe-haven currencies like the EUR, JPY, and CHF, given the forecasted continued weakness.
• Monitor upcoming U.S. corporate earnings reports and inflation data closely, as these are key catalysts underpinning the bullish equity thesis and potential for further Federal Reserve rate cuts.
• While a recession is not anticipated, investors should remain cognizant of the projected slowdown in global real GDP growth and its potential implications for broader market sentiment and risk appetite.