Morgan Stanley has adopted a bullish outlook on most major U.S. assets, upgrading both stocks and Treasuries to "overweight" amid reduced tariff uncertainty and room for additional interest rate cuts, according to a comprehensive analysis released Tuesday. The notable exception in this optimistic forecast is the U.S. dollar, which the firm expects will continue to face downward pressure as American rates and growth converge with global peers.
What to Know:
- Morgan Stanley forecasts the S&P 500 to reach 6,500 points by Q2 2026, up from Tuesday's close of 5,940.46
- The firm projects the dollar index to fall an additional 9% over the next year to 91, following this year's 8% decline
- Global real GDP growth is expected to slow to 2.5% by year-end from 3.5% in 2024, though recession is not anticipated
The financial services giant expects U.S. corporate earnings revisions to bottom out soon, with multinational companies benefiting from a weakening dollar that boosts overseas income. This earnings improvement, combined with easing inflation and further interest rate cuts, creates a favorable environment for equities despite broader economic deceleration, according to the firm's analysis.
"We expect USD assets to broadly outperform the rest of the world, with the notable exception being the dollar itself," Morgan Stanley strategists wrote in the Tuesday note. The firm characterized the economic background as "a slowing but still expanding global economy," rejecting both U.S. and global recession scenarios despite moderating growth projections.
The firm's revised outlook represents a significant shift in investor sentiment following recent trade developments. Earlier this year, tariff initiatives from the Trump administration weighed heavily on global growth prospects and prompted investors to redirect their U.S. asset holdings to other regions.
However, market confidence in U.S. assets has strengthened following the announcement of a U.S.-China trade agreement.
Morgan Stanley's forecasts now extend to specific benchmarks across asset classes. For fixed income, the firm projects the 10-year Treasury yield to reach 3.45% by the second quarter of 2026, notably lower than Tuesday's closing yield of 4.481%. This projection aligns with their expectation for continued monetary policy easing from the Federal Reserve.
In currency markets, the dollar's trajectory stands in stark contrast to other U.S. assets. The dollar index, which measures the greenback against a basket of major currencies, has already declined 8% this year to 99.76. Morgan Stanley now predicts further weakness, especially against traditional safe-haven currencies.
"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 its analysis. These projections include specific currency pair targets, with EUR/USD expected to reach 1.25 and USD/JPY to hit 130 by the second quarter of 2026.
The outlook adjustment comes as global investors reassess their portfolio allocations in light of shifting economic conditions. Morgan Stanley's revised timeline for the S&P 500 to reach 6,500 points—now expected in the second quarter of 2026 rather than the end of 2025—suggests a more moderate but sustained growth trajectory for U.S. equities.
While maintaining an overall optimistic stance, the firm acknowledges the likelihood of global growth moderation. Morgan Stanley estimates global real GDP growth will decline to 2.5% by the end of this year, down from 3.5% in 2024, though they emphasize this represents a slowdown rather than a contraction.
Final Thoughts
Morgan Stanley's latest analysis presents a divided outlook for U.S. assets—bullish on stocks and Treasuries while bearish on the dollar. This bifurcated view reflects the complex interplay between domestic economic strength, global growth moderation, and shifting monetary policy expectations. The firm's forecasts suggest opportunities for investors in U.S. markets despite continuing currency weakness.