Commodity surge, stock-bond logic reverses again! Morgan Stanley warns of three major "changes" in 2026

The team of strategists at Morgan Stanley pointed out in their latest outlook report that, although Wall Street generally expects another year of strong stock market growth in 2026, three potential "unexpected" shifts may reshape the market landscape.

In this report led by Matthew Hornbach, the core warning from strategists is that the U.S. economy could experience a “jobless productivity boom.” In this scenario, a weak labor market would restrain wage growth and inflation, while accelerated productivity would sustain steady economic growth. Morgan Stanley estimates that this trend could drive core inflation below 2%, opening the door for the Federal Reserve to cut rates aggressively without concerns of an inflation rebound. This aligns with investors’ current aggressive pricing for policy easing.

Meanwhile, the firm notes that the correlation logic between stocks and bonds may fundamentally change in 2026. Although 2025 saw both stocks and bonds rise together, as inflation expectations drop to target levels, the “bad news is good news” trade may come to an end. Instead, risk assets’ sensitivity to negative economic data will increase, allowing U.S. Treasuries to re-establish their traditional role as a portfolio safe haven.

In commodities, Morgan Stanley predicts that, driven by a weakening dollar and a recovery in demand from major consuming countries, energy and metal prices may see a new round of surges. Previously, gold broke a historic record of $4,400 per ounce on Monday, while silver and copper also hit all-time highs. The firm maintains its benchmark forecast that the S&P 500 index will rise 13% in 2026, but emphasizes that the above variables could cause the market’s path to deviate from conventional expectations.

"Jobless" Productivity Boom

According to the Morgan Stanley report, the first potential shift is that the U.S. economy may experience an upgraded version of a "jobless recovery," namely a "jobless productivity boom." Matthew Hornbach points out that, in this scenario, a weak labor market would effectively cap wage growth and depress inflationary pressure; meanwhile, accelerated productivity gains would ensure stable economic growth.

Strategists estimate that in this scenario, core inflation may fall below 2%. Hornbach says this supply-side-driven disinflationary trend would give the Fed room to lower policy rates to more accommodative levels, without investors worrying that policy would reignite inflation. Furthermore, this scenario could help ease market concerns about the growing U.S. deficit.

Early labor market data seems to support this trend. Data from the U.S. Department of Labor shows that in the second quarter, hourly output per employee at nonfarm businesses grew 3.3% year-on-year, compared to a 1.8% decline in the previous quarter, indicating an upward productivity trend. Currently, investors’ expectations for rate cuts are more aggressive than those officially projected by the Fed. According to the CME FedWatch tool, while Fed officials expect only one rate cut in 2026, market pricing shows a 72% probability of rates moving even lower that year.

Stock-Bond Correlation Paradigm Reshaping

The second potential surprise involves another reversal in the correlation between stock and bond prices. Traditionally, stock prices and bond prices move inversely, and when risk assets fall, investors flock to bonds for safety. However, in 2025, this dynamic broke down, with both stock and bond prices rising steadily throughout the year. Morgan Stanley points out that this was partly attributed to the “bad news is good news” mechanism in the market—weak economic data boosted stock markets by fueling optimism about Fed rate cuts.

However, strategists warn that if inflation drops to the Fed’s target next year, this dynamic may reverse again. Once inflation expectations stabilize or face downward risk, risk assets will return to a “bad news is bad news” logic. At that point, U.S. Treasuries will reclaim their attributes as safe haven assets and inflation hedges, resuming their pre-pandemic, two-decade role as the “ballast” in investment portfolios during periods of low inflation.

Commodity Price Explosion

The third shift lies in the potential surge in commodities and energy prices. After the strong performance in 2025, Morgan Stanley speculates that a series of macroeconomic events may lead to a “commodity price explosion” in 2026. The firm’s analysis posits that if the Fed keeps cutting rates while other central banks raise them, the dollar’s appeal versus other global currencies will fall, driving its value lower.

A weaker dollar, combined with stimulus policies, is expected to fuel an economic recovery in China, the world’s largest producer of rare earth, precious metals, and a major energy consumer. Morgan Stanley points out:

“A weak dollar and China’s robust consumption story will drive energy prices, including gasoline, to new highs, even as gasoline prices are currently at five-year lows.”

Indeed, the commodity market is already showing strength. Boosted by tight supply, demand surges from AI-driven trading, and rising safe haven sentiment, gold broke above $4,400 for the first time on Monday, setting a new historical high. Its gains this year have nearly reached 70%, poised for the best annual performance since 1979. Additionally, as core metals for AI-related trading, silver and copper also hit historic highs this week. The market widely expects that, supported by these factors, energy and the overall commodity market will continue to perform positively in 2026.

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