Morgan Stanley is reaffirming its bullish stance on U.S. equities and Treasurys, pushing back against recent sentiment favoring international diversification.
Despite a brief wave of selling in U.S. assets following renewed deficit concerns, the firm expects American markets to lead global performance through mid-2026, underpinned by rate cuts, technological gains, and resilient demand for high-quality U.S. debt.
The so-called “Sell America” narrative has gained traction in recent sessions, as investors responded to the implications of a new federal spending package. The S&P 500 slid roughly 1% over two days, and the yield on the 10-year Treasury rose 10 basis points in four days. However, Morgan Stanley strategists contend that this pullback is temporary and that the underlying fundamentals still favor U.S.-centric allocations.
“We push back against the idea that foreign investors would or should abandon U.S. assets significantly,” the team wrote in a recent note. Instead, the firm argues, relative opportunity continues to favor the U.S., supported by favorable policy tailwinds and limited alternatives abroad.
Equities: Positioned for Outperformance
Morgan Stanley sees continued volatility over the next two quarters, but expects U.S. equities to resume leadership across global markets. The firm projects the S&P 500 will reach 6,500 by Q2 2026—implying a roughly 10% gain from current levels.
Three key themes support this outlook:
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Monetary Policy Support:
The Federal Reserve is expected to cut rates seven times over the course of 2026. Easing financial conditions should improve discount rates and risk appetite, supporting valuation expansion. -
AI-Driven Efficiency Gains:
Corporate America’s adoption of generative AI and related automation tools is forecast to deliver margin improvements and earnings upside. Morgan Stanley anticipates broader recognition of these productivity gains to accelerate in the second half of 2025, becoming a key equity catalyst. -
De-escalation in Trade Policy:
With trade tensions easing, some of the more acute downside risks tied to tariffs and geopolitical frictions have diminished. This shift reduces the likelihood of a retest of April’s market lows and allows for a more constructive investment environment.
Taken together, these factors point to improving earnings visibility, higher forward multiples, and continued demand for U.S. equity exposure—particularly in large-cap and technology-driven segments.
Fixed Income: Long-Duration Still Attracts
While yields on long-dated Treasurys have moved higher in recent sessions, Morgan Stanley views this as a temporary adjustment rather than a structural shift. The firm expects the 10-year Treasury yield to fall to 3.45% by mid-2026, aided by cooling inflation expectations and a dovish Fed policy cycle.
In the near term, yields are likely to remain rangebound, with downward pressure building as the market begins to price in 2026 rate cuts by late Q4 of this year.
Crucially, Morgan Stanley disputes the notion that foreign investors are exiting U.S. fixed income in any meaningful way. On the contrary, the firm notes:
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Foreign Holdings at Record Highs:
The volume of U.S. dollar-denominated bonds held by international investors is at its highest level ever, signaling continued global confidence in U.S. credit markets—especially for high-quality sovereign and investment-grade debt. -
Global Equity Flows Remain Stable:
International equity funds have not meaningfully rotated out of U.S. exposure, and allocations remain largely in line with benchmark weights over the last quarter. This suggests that portfolio managers globally are not retreating from U.S. markets despite recent headlines.
The combination of attractive yield, deep liquidity, and perceived safety continues to make Treasurys a compelling core holding, particularly in multi-asset and global allocation portfolios.
Strategic Allocation Implications for Advisors
For wealth advisors and RIAs, Morgan Stanley’s position reinforces a constructive view of the U.S. investment landscape over the coming year. In equity portfolios, this supports maintaining overweight allocations to U.S. large-cap growth—especially those positioned to benefit from automation, AI, and margin expansion.
In fixed income, while short-duration exposure may continue to benefit from current yield levels, the firm’s outlook makes a case for gradually increasing duration as the Fed approaches an inflection point. Intermediate to long-term Treasurys may offer price appreciation potential as rates decline, making them a useful hedge against equity market volatility or economic deceleration.
Additionally, Morgan Stanley’s dismissal of the “Sell America” trade challenges the premise that global diversification must come at the expense of U.S. core holdings. Instead, the firm views American markets as retaining their leadership due to structural strengths, policy stability, and deep capital markets—factors that are unlikely to shift materially in the near term.
Conclusion
In contrast to rising investor anxiety around fiscal policy and asset rotation, Morgan Stanley is leaning into the resilience of U.S. markets. The firm expects stocks to rise on the back of monetary easing and technological transformation, while bonds benefit from continued foreign demand and declining rate expectations.
“There is no alternative” may be an old refrain, but in Morgan Stanley’s view, it remains the operative reality for global allocators—at least for now.
