Morgan Stanley has shifted to a bullish stance on U.S. stocks and bonds, raising its outlook due to signs of market stabilization and improving growth conditions. Strategists, including Mike Wilson, suggest that the worst is over for equities, citing a rolling earnings recession over the past three years that sets the stage for recovery. The bank maintains a base target of 6,500 for the S&P 500 by mid-2026, with a bullish scenario projecting 7,200. Contributing factors include anticipated Federal Reserve rate cuts in 2026, dollar weakness, and AI-driven efficiency gains. They also note the U.S.-China tariff pause and expectations for pro-growth fiscal policies as bullish signals.
Concerns remain about elevated Treasury yields in the near term, which could cap equity valuations. However, Morgan Stanley sees longer-term yields dropping, with the 10-year falling to 3.45% by Q2 2026. They recommend high-quality cyclical stocks, industrials, and utilities, and prefer large-cap U.S. equities over small caps and international stocks. The firm also predicts a 9% decline in the dollar over the next year. Key market movements and news from companies like Target, Lowe's, and UnitedHealth, as well as geopolitical risks, continue to influence investor sentiment.
With Consumer Confidence readings at three-year lows, sentiment amongst US consumers has "room to rise" in light of the Trump administration's shift in extremes in terms of tariff policies. If the administration's positioning on tariffs is a tool of economic and geopolitical leverage, as many believe, it can be anticipated that extremes in tariffs policy to continue to roll over to more mutual ground. "In April 2025, President Donald Trump imposed a 145% tariff on Chinese imports, significantly escalating trade tensions between the United States and China. However, on May 12, 2025, both countries agreed to a 90-day truce, reducing U.S. tariffs on Chinese goods from 145% to 30% and Chinese tariffs on U.S. goods from 125% to 10%."
Most recently, the Trump administration postponed its 50% European Union tariff one month following a conversation with European Commission President Ursula von der Leyen. "This delay has provided both parties with a window to potentially reach a trade agreement and avoid the imposition of these significant tariffs. The EU has expressed readiness to accelerate discussions, indicating a willingness to make concessions, such as increasing imports of U.S. natural gas and collaborating on artificial intelligence initiatives."
As the risk of tariffs weigh on sentiment, the trajectory in declines in extremes in rhetoric could continue to fade – as Mike Wilson and others have suggested – as more concerted efforts to negotiate could lead to a shift in consumer sentiment, as it was most recently dragged lower on tariff and inflationary concerns. As deals – or delays – lead to next-day and sustained market rallies, pression from rhetoric to resolution could provide tailwinds to the equities market – as Morgan Stanley suggests – and consumer confidence in its wake. |
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