US Stocks to Power Global Rally, Morgan Stanley Strategists Say

Morgan Stanley strategists are now overweight US stocks and Treasuries, anticipating that US equities will lead a global rally due to improving corporate earnings, a weaker dollar, and expected Fed rate cuts, setting a mid-2026 S&P 500 target of 6,500. This outlook is supported by receding recession fears and a shift away from the "Sell America" trade, though the strategists anticipate range-bound Treasury yields until late 2025 and favor US stocks over European, emerging market, and Japanese equities.

Analysis

Morgan Stanley strategists have adopted an overweight stance on US equities and Treasuries, projecting US stocks to lead a global market rally in the upcoming months. This optimistic outlook, articulated by Serena Tang's team in a May 20 note, is underpinned by an improving corporate earnings forecast, an anticipated weakening of the US dollar, expected Federal Reserve interest rate reductions, and diminishing recession probabilities, encapsulating a 'there is no alternative' (TINA) theme for US assets. Morgan Stanley forecasts the S&P 500 to reach 6,500 points by mid-2026, representing a 9% upside from current levels; this target level is also shared by Goldman Sachs strategist David Kostin for a 12-month horizon, though Kostin cautioned that pricing already appeared optimistic. This positive sentiment shift follows a recent rally where US stocks, including an overbought tech-heavy Nasdaq 100, reversed the prior "Sell America" trade after a temporary US-China tariff truce, leading the S&P 500 to recoup its 2025 declines. Despite this recovery, the S&P 500 has lagged international peers year-to-date. Morgan Stanley anticipates continued market volatility due to ongoing trade negotiations but views the risk-reward profile as favorable for US stocks, maintaining a neutral stance on Europe and a bearish outlook for emerging markets and Japan. Concurrently, the firm foresees range-bound Treasury yields until the final quarter of 2025, after which increased pricing-in of 2026 rate cuts is expected to drive the 10-year yield down to 3.45% by the second quarter of 2026, complemented by a weakening dollar as the US economic growth premium and yield differentials narrow.

Key Decisions for Investors

• Investors should consider increasing exposure to US equities, aligning with Morgan Stanley's overweight recommendation, particularly focusing on companies poised to benefit from an improved earnings outlook and potential Federal Reserve easing.
• Closely monitor corporate earnings reports, Federal Reserve communications regarding interest rate policy, and US dollar exchange rate movements, as these are identified as critical drivers for the anticipated market rally.
• Exercise caution with international allocations, especially in emerging markets and Japan where a downside is projected, and prepare for sustained market volatility influenced by trade policy developments, suggesting a selective approach within equities.
• For fixed income portfolios, anticipate relatively stable US Treasury yields in the near term, with a potential for capital appreciation in longer-duration Treasuries as expectations for 2026 rate cuts are increasingly priced in from late 2025 onwards.