Morgan Stanley's major outlook: 2026 will be the "year of risk restart," with strong US stock earnings and a resonating AI investment cycle—S&P 500 may rise to 7,800 points!

Morgan Stanley Releases 2026 Global Strategic Outlook Morgan Stanley has released its 2026 global strategic outlook, predicting that the triple policy stimulus and the AI investment cycle will resonate, driving a strong year for risk assets. Coupled with robust corporate earnings growth, US equities are expected to lead global markets. On November 17, according to Chasing Wind Trading Desk, Morgan Stanley defines 2026 as "The Year of Risk Reboot" in its latest global economic outlook report. It states that the market focus will shift from macro uncertainty to micro fundamentals, creating a strong environment for risk assets to rise. The firm believes that the "policy trio"—fiscal policy, monetary policy, and regulatory relaxation—will form a rare pro-cyclical combination in 2026, creating a favorable environment for risk assets. At the same time, the AI-related capital expenditure cycle is still in its early stages and is expected to continue powering corporate profits. Chief US Equity Strategist Michael Wilson has raised the year-end S&P 500 target for 2026 to 7,800 points, about a 15% increase from current levels, making it one of the most optimistic voices on Wall Street. The upgrade is mainly due to strong earnings growth, AI-driven efficiency improvements, and a favorable policy environment. Morgan Stanley predicts that the US Treasury yield curve will see significant "bull steepening" in the first half of 2026, with short-term rates dropping sharply due to Fed rate cuts. The firm expects the 2026 credit market to be highly differentiated, with high-yield bonds expected to outperform investment-grade bonds. Surging demand for AI-related financing will increase supply pressure on investment-grade bonds and widen spreads. Morgan Stanley has significantly changed its view on the dollar, no longer extremely bearish, and expects the dollar to weaken in the first half and rebound in the second half. In commodities, the firm prefers metals over energy, with gold as its top pick, setting a target price of $4,500/oz (about 9% upside). “Rare Combined Power of the Three Policy Giants” Morgan Stanley first points out in the report that risk assets will have strong performance in 2026, driven by a shift from the global macro narrative dominating 2025—such as trade tensions and policy uncertainty—to micro and asset-specific stories. The key catalyst for this shift is the rare "policy triumvirate": fiscal policy, monetary policy, and regulatory relaxation working together in a pro-cyclical manner, which is very rare outside of recession periods. Specifically: Fiscal Policy: The report expects the US "One Big Beautiful Bill Act (OBBBA)" to grant $129 billion in corporate tax cuts in 2026-27. Monetary Policy: The Fed is expected to cut rates by another 50 basis points in the first half of 2026 to support a stable macro environment and thus loosen financial conditions. Regulatory Relaxation: The US government will prioritize regulatory relief, especially in energy and finance. Morgan Stanley believes this combination will jointly lift market sentiment and so-called "Animal Spirits." The report highlights that such a synchronous push of fiscal, monetary, and regulatory policy outside of recession eras is extremely rare—the last occurrence being in the late 1980s. This unique policy combination will inject a booster into risk markets, enabling investors to focus more on corporate profits and AI investments at the micro level. Core Growth Driver: Huge Potential in AI Investment AI is one of the most important micro themes for 2026. Morgan Stanley sees AI-related capital expenditure as long-term and immune to business cycle fluctuations. Of an estimated $3 trillion total capex in data centers, only less than 20% has been deployed so far, meaning most investment is yet to come. How will this huge investment be financed? The report estimates that about half the funding will come from operating cash flows of tech giants, but a gap as high as $1.5 trillion remains. This gap must be filled by various credit channels, including: Public Credit Markets: Large net issuance of investment grade (IG) corporate bonds is expected in the US and Europe in 2026, mainly from AI-focused hyperscalers. Securitized Credit Markets: The supply of data center asset-backed securities (ABS) will also increase significantly. Despite continued strong demand for high-quality credit, such huge supply pressure is expected to cause a moderate widening of credit spreads for investment-grade bonds and data center ABS. US Stocks to Take the Lead, S&P 500 Target at 7800 Within the broader "risk reboot" theme, Morgan Stanley clearly states that US stocks will outperform other global markets. Beyond the policy environment and AI investment cycle, Morgan Stanley's core bullish logic for US equities is driven by earnings per share (EPS) growth well above market consensus. The firm forecasts S&P 500 EPS of $272 in 2025 (up 12%), $317 in 2026 (up 17%), and $356 in 2027 (up 12%). This forecast is based on four pillars: Improved corporate pricing power, AI-driven efficiency gains, accommodative tax and regulatory policy, and a stable interest rate environment. These factors will drive S&P 500 EPS growth by 17% and 12% over the next two years. Although Morgan Stanley admits US stock valuations are high (CAPE P/E ratio up to 38x, near historical highs), it believes strong macro drivers will support sustained high valuations. The S&P 500 has already risen 14% YTD, with gains over 20% in each of the prior two years. With Morgan Stanley’s latest forecast, this would mark the fourth consecutive year of double-digit returns. Notably, this strategist maintained a rare bullish stance during the broad US tariff hikes that sank the market this April, which proved correct in the end. The firm is also positive on Japanese equities, while relatively cautious about Europe and emerging markets. Japan is set to benefit from rising inflation and corporate governance reforms. Under new Prime Minister Sanae Takaichi, fiscal and regulatory reforms are expected to lift corporate ROE. Domestic inflows, including buybacks and the NISA 2.0 initiative, will structurally support the market. Morgan Stanley sets the TOPIX target at 3,600, up 7% from current levels. (NISA is a Japanese individual investment tax exemption system modeled after Britain’s ISA, now a Japanese-style small investment tax exemption scheme. Normally, Japanese investment profits are taxed at 29%. With NISA, investment gains within a NISA account are tax-free.) Europe faces structural challenges. As "old economy" sectors dominate, earnings growth prospects are bleak. While European stocks may benefit from spillover effects of US stocks, growth will mainly come from valuation expansion, not earnings improvement. Emerging market performance is expected to diverge. With the dollar expected to stabilize, the firm is neutral on EM overall but bullish on India (strong domestic credit growth and tax breaks), Brazil (elections may impact the market trajectory), and the UAE. Fixed Income: US Treasury Curve "Bull Steepening" Morgan Stanley’s core view is that the US Treasury yield curve will experience significant "bull steepening" in the first half, as the market has not fully priced in future Fed rate cuts and tail risks of slower economic growth. As the Fed cuts rates, short-term yields will fall sharply, while long-end yields remain rangebound. By the end of 2026, the firm expects the 2-year US Treasury yield to drop to 2.60%, while the 10-year yield will close at 4.05%. This would put the 2s/10s spread at 145bps, the steepest since 2021. Unlike the "bear steepening" driven by surging long rates in 2021, this time it will be driven by falling short-term rates. Currency Market: Dollar Weak in H1, Rebound in H2 Morgan Stanley’s view on the dollar has changed significantly, no longer extremely bearish. The bank’s forecast for the dollar shows a clear "two halves" pattern—index weakening to 94 in the first half of 2026, then rebounding to 99 in the second half, ending the year roughly flat. This forecast is based on shifts in US rate cycles and risk preferences. In H1, continued Fed rate cuts and improved global risk sentiment will prompt negative USD risk premium and dollar weakening. In H2, as the US economy recovers and long-end rates rebound, the dollar should strengthen again. EURUSD is expected to rise to 1.23 before falling back to 1.16. The ECB will be forced to cut rates further, diverging clearly from US policy. The pressure on GBP will be even greater, with the Bank of England cutting rates sharply and eroding GBP’s yield advantage. The yen’s path will largely follow US bonds; USDJPY to drop to 140, then rebound to 147. Risk currencies such as the AUD will shine in H1, thanks to strong risk sentiment and supportive local factors. Credit Market: High Yield Bonds to Outperform IG Morgan Stanley expects significant differentiation in the 2026 credit market, with high-yield bonds outperforming investment-grade bonds due to divergent impacts from the surge in AI-related financing needs. Investment-grade credit faces supply pressure. Net issuance of US IG bonds is expected to jump 60%, mainly from AI and data center financing. Though demand remains robust, heavy supply will likely push IG spreads out to 95bps. In contrast, high yield technicals are more balanced. New issues from LBOs and M&A activity will be offset by retiring stock via strategic buyouts, leaving supply/demand relatively stable. US high yield spreads are expected to widen modestly to 300bps. European credit should outperform the US. The revival of "animal spirits" in European firms is more subdued, leading to less supply pressure. Steady GDP growth, central bank rate cuts, and broadening EPS growth will support EU credit. Structured products will benefit from regulatory relaxation. Looser rules in the US and EU are expected to free up capital at banks and insurers, boosting demand for structured products. The bank recommends overweighting agency MBS and shifting from IG credit to high-quality structured paper. Commodities: Metals Preferred, Gold as Top Pick Morgan Stanley favors metals over energy in commodities, with gold as its top pick, setting a target price of $4,500/oz (9% upside). Gold’s demand structure continues to improve. ETF inflows have largely reversed a four-year outflow trend, while central banks continue to buy despite slowing purchases, and jewelry demand has stabilized. Demand for real assets to hedge inflation and persistent economic uncertainty further support gold prices. Base metals face supply challenges. Copper mining is impacted by earthquakes, landslides, falling ore grades, etc.; the disruption tolerance for 2025 has been reached at 5%. This creates a small deficit in 2025, expanding further to a 600,000-ton shortfall in 2026; the copper price target for 2026 is $10,600/ton. Energy outlook is relatively bleak. Brent faces weak demand, rising non-OPEC supply, and OPEC output at high levels. The bank forecasts oil prices to stay rangebound near $60/barrel, with little room for significant gains. Risk Warning and Disclaimer Markets involve risk, and investment needs caution. This article does not constitute personal investment advice, nor does it take into account individual users’ specific investment objectives, financial circumstances, or needs. 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