Morgan Stanley has shifted to a bullish outlook on key U.S. assets, upgrading stocks and Treasuries to "overweight" based on diminishing tariff risks, a negligible chance of recession, and additional room for rate cuts. The firm, however, maintains a bearish stance on the U.S. dollar, citing "a convergence in U.S. rates and growth to peers," according to a recent note.
In its analysis, Morgan Stanley predicts broad outperformance of U.S. assets relative to global counterparts, with the exception of the dollar. "We expect USD assets to broadly outperform the rest of the world, with the notable exception being the dollar itself," the note said. The firm attributes this to a gradually slowing yet still expanding global economy, which it estimates will see real GDP growth decline to 2.5% by year-end, down from 3.5% in 2024.
Investor sentiment toward U.S. assets has rebounded following a U.S.-China trade agreement that eased the uncertainty caused by the Trump administration's tariffs, which had previously dampened global growth and driven capital flows toward non-U.S. markets.
Corporate Earnings and Equity Outlook
Morgan Stanley anticipates that earnings revisions for U.S. corporations will bottom out soon. A weaker dollar is expected to benefit multinational companies by enhancing their income when converted back into U.S. currency. The firm also sees equities gaining momentum as inflation moderates and the Federal Reserve remains open to further rate cuts.
Reflecting these positive factors, Morgan Stanley has revised its forecast for the S&P 500, now projecting the index to reach 6,500 points by the second quarter of 2026, an accelerated timeline compared to its earlier estimate of the end of 2025. For context, the index closed at 5,940.46 on Tuesday.
Treasury Yields: A Constructive View
Treasuries have also garnered a favorable outlook. Morgan Stanley projects the yield on the 10-year Treasury note to decline to 3.45% by Q2 2026, down from the current 4.481%. Lower yields would reflect the broader economic environment of easing inflation and stable monetary policy.
The Dollar’s Decline
In contrast to its optimistic stance on equities and Treasuries, Morgan Stanley sees continued pressure on the U.S. dollar. The dollar index (DXY), which has already dropped 8% this year to 99.76, is forecasted to weaken further. The firm anticipates the index will decline an additional 9% over the next 12 months, landing at 91 by mid-2026.
The primary drivers of this weakness are a narrowing gap between U.S. and global interest rates and economic growth levels, along with shifts in safe-haven currency preferences. "We now forecast the DXY to fall an additional 9% over the next 12 months to 91, with USD weakness most pronounced against its safe-haven peers – EUR, JPY, and CHF," the firm stated.
In currency-specific terms, Morgan Stanley predicts the euro to strengthen to $1.25 against the dollar (EUR/USD) and the yen to reach 130 per dollar (USD/JPY) by the second quarter of 2026.
Opportunities for Wealth Advisors
For financial advisors, this nuanced outlook offers several actionable takeaways:
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Equity Allocation: With the S&P 500 projected to achieve significant gains, advisors may consider increasing exposure to U.S. equities, particularly in sectors likely to benefit from easing inflation and a weak dollar, such as technology and multinational corporations.
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Fixed Income Strategies: As Treasury yields are expected to trend lower, advisors should evaluate opportunities in high-quality bonds, especially for clients seeking income and stability in a potentially volatile global economic environment.
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Currency Considerations: The dollar’s projected decline presents both risks and opportunities. Wealth managers may advise clients with international exposure to hedge against dollar weakness while capitalizing on the expected strength of the euro, yen, and Swiss franc.
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Global Diversification: Despite the favorable U.S. outlook, advisors should continue to diversify globally, as other markets may offer growth opportunities that complement domestic holdings.
Key Risks to Monitor
While Morgan Stanley’s outlook is positive, advisors must remain vigilant about potential risks. A slower-than-expected economic recovery, geopolitical tensions, or a resurgence of inflation could disrupt these forecasts. Additionally, currency volatility may create challenges for clients with significant foreign asset exposure.
In summary, Morgan Stanley’s revised stance underscores the resilience of U.S. financial markets in a slowing global economy. For advisors, this environment offers a window to optimize portfolios by capitalizing on equity momentum, managing fixed-income allocations effectively, and navigating currency trends with precision.
