Morgan Stanley upgrades US equities to 'overweight'

Morgan Stanley has upgraded its outlook on U.S. stocks and Treasuries to "overweight," citing reduced tariff uncertainty, a lack of recession risk, and the potential for further rate cuts; the firm projects the S&P 500 to reach 6,500 by Q2 2026 and the 10-year Treasury yield to fall to 3.45% by the same period. However, Morgan Stanley remains bearish on the U.S. dollar, anticipating a 9% decline in the DXY index over the next 12 months due to converging U.S. rates and growth relative to peers, forecasting EUR/USD at 1.25 and USD/JPY at 130 by Q2 2026.

Analysis

Morgan Stanley has adopted a bullish stance on most major U.S. assets, upgrading U.S. stocks and Treasuries to "overweight" based on several key factors: diminished tariff uncertainty, the absence of an anticipated recession, and the potential for additional 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, and anticipates the 10-year Treasury yield will fall to 3.45% by the same period, down from 4.481%. However, this optimism does not extend to the U.S. dollar, which Morgan Stanley expects to remain under pressure due to a "convergence in U.S. rates and growth to peers." The dollar index (DXY), already down 8% year-to-date to 99.76, is forecasted to weaken by an additional 9% over the next 12 months to 91, with specific Q2 2026 targets of EUR/USD at 1.25 and USD/JPY at 130. This outlook is supported by expectations that U.S. corporate earnings revisions are nearing a bottom and that a weaker dollar will bolster income for multinational companies, while easing inflation and further rate cuts are also seen as tailwinds for equities. Despite forecasting a slowdown in global real GDP growth from 3.5% in 2024 to 2.5% by the end of the current year, Morgan Stanley does not foresee a global or U.S. recession, and notes that revived investor sentiment following a U.S.-China trade deal supports U.S. assets.

Key Decisions for Investors

• Investors may consider increasing allocations to U.S. equities and Treasuries, aligning with Morgan Stanley's "overweight" recommendation and positive catalysts such as reduced tariff uncertainty and potential rate cuts.
• Given the forecasted significant U.S. dollar weakness, particularly against EUR, JPY, and CHF, investors should evaluate currency hedging strategies for U.S. dollar-denominated assets or consider tactical positions to capitalize on this pronounced trend.
• Closely monitor U.S. corporate earnings reports, especially for multinational firms which are expected to benefit from a weaker dollar, and track macroeconomic indicators for confirmation of easing inflation and continued economic expansion.
• Investors holding or considering U.S. Treasuries should note the projected decline in the 10-year yield to 3.45% by Q2 2026, which suggests potential for price appreciation and may warrant adjustments to duration strategies within fixed income portfolios.