The Investment Management team’s November outlook predicts a temporary slowdown as the year comes to an end - but it’s not all bad, with business investment from US tax incentives set to drive growth while keeping supply-side forces intact.
“A look through 4Q turbulence is positive; we just need to get past the 4Q soft patch. The consumer stimulus of tax refunds is roughly US$160-190 billion … While some uncertainties remain, the pro-growth direction seems clear.”
Morgan Stanley is confident the temporary setback will be followed by a swift rebound and catch-up in 1Q26.
“The 2026 setup looks more favourable. Growth poised to accelerate, bolstered by corporate investment, personal tax returns and AI-driven labor productivity trends. In our view, market segments investing in technology will see higher efficiency and productivity gains, and higher valuations.”
The investment firm says the policy mix is supportive heading into 2026, as monetary easing and fiscal policy provide GDP growth tailwinds.
“Tailwinds from the One Big Beautiful Bill Act were front-loaded, providing a net fiscal tailwind in 2026,” the report said.
“Financial conditions add another support to 2026, with Fed cutting rates entering the year … Most major countries will likely benefit from positive fiscal impulses in the coming 1-2 years. Partly spurred by Trump, partly by industrial policy.”
Morgan Stanley highlighted a possible trinity in 2026: labour, inflation, and productivity.
“Labour is available at a reasonable price, supporting higher growth expectations in 2026. This is the silver lining to a softer labour market, where inflation pressures should stay low as wages remain tame,” the report said. “This, plus business investment, should drive higher productivity. All three are possible in 2026 and would support higher asset valuations.”
Gold, equities and crypto
Gold, equities, and crypto have all seen strong performance, and one common thread is long-term inflation protection. Morgan Stanley believes all three assets may benefit from USD concerns.
“While the unsustainable trajectory of US debt is not new, it has drawn increased focus with a consequent recognition that monetary debasement is a probable component of the ultimate solution – supporting demand for assets offering protection.”
As economic growth continues to surprise to the upside amid broad expectations for tariff-induced weakness, Morgan Stanley remains overweight US equities.
“We continue to hold a view of balanced risks for global equities, with growing optimism as we approach 2026 with growth data continuing to display resilience amid broad expectations for tariff-induced weakness,” the report stated.
“Regionally, we remain overweight the US, where we see structural support for equities in the form of fiscal policy, monetary policy and productivity gains linked to the adoption of AI.”
In addition to its core US exposure, the firm remains overweight on select industrial and construction companies, given the coordinated efforts across trade, fiscal, and deregulation policy to support US industrial production.
Meanwhile, emerging markets are supported by resilient global growth, a soft USD, benign inflation, and the Fed pivoting to a cutting cycle, according to Morgan Stanley, which remains neutral on EM.
“In China, equity risk premiums remain stable, with focus turning to US-China trade talks despite recent rare earths-induced volatility. Asia’s tech supply chain continues to benefit from the global AI theme. By contrast, India has faced domestic growth setbacks, AI-related headwinds and strained US relations.”
Morgan Stanley maintains a continued preference for US large-caps over small and mid-caps.
“We remain overweight large-caps in the US, as the cohort continues to show stronger earnings revisions trends relative to small and mid-caps.”
The Mag-7 continues to be the primary driver of positive earnings revisions, and Morgan Stanley says expectations for the S&P493 have not yet recovered following the April downgrades.
When it comes to equities, EPS needs to be the key upside driver.
“Tech and related sectors see solid but decelerating growth; cyclical sectors expected to accelerate relative to weak trend,” the report stated.
Morgan Stanley believes the current bull market is still young relative to previous cycles.
“The current bull market now spans 36 months, well-short of the 67-month average for historical bull markets.”
According to the investment bank, funding of AI investment is a key distinction relative to the dot-com bubble. Highlighting the four biggest spenders - Alphabet,
Amazon, Meta, and Microsoft - Morgan Stanley said the massive amounts of CAPEX underpinning AI development have been funded through free cash flow (not debt or equity) and are not dependent on outside investment.
Fixed income and Fed cuts
Morgan Stanley says corporate credit remains expensive, maintaining a relative preference for emerging debt market hard currency, asset-backed securities, and bank loans.
“With spreads sitting near all-time tights, we continue to view the risk/reward asymmetry within corporate credit as unfavourable. We retain selective exposure to higher yielding credit (MBS, Bank Loans).”
With UST 10-year yields breaking below 4 per cent, Morgan Stanley remains underweight in this asset class. “We continue to believe current market pricing for Fed cuts in 2026 appears overly optimistic given the growth tailwinds to come in 2026,” the report stated.
“We see two to three additional Fed cuts (vs. expectations of 5 through 2026) but ultimately expect stronger growth and sticky inflation to limit cuts beyond that and keep long rates elevated.”
Floating-rate loans continue to show resilience: as the Fed cuts interest rates, fundamentals continue to improve, while the asset class offers yields of ~8 per cent, according to Morgan Stanley.
Asset-backed securities remain the firm’s highest conviction in fixed income.
“Yield per unit of credit quality remains attractive, and the asset class continues to benefit from structural tailwinds.”
With economic growth prospects for 2026 looking robust, Morgan Stanley sees value in owning bank loans given the high carry associated with the asset class.
“Additionally, we believe loans should benefit from a repricing in the front end of the curve, which we feel is too aggressively pricing in rate cuts based on this outlook.”
US private credit
Morgan Stanley ruled out systemic issues across US private credit, in response to the collapse of firms First Brands and Tricolor.
“From a private credit perspective, losses in these positions were not a result of credit risk. Investment processes were mainly impacted by fraud – and we do not think fraud is systemic.”
When it comes to energy commodity markets, Morgan Stanley remains neutral, as geographical upside risks are balanced by high spare capacity in markets such as crude, which limits upside absent physical disruptions.
“In the current environment we continue to see precious metals as a segment that could enjoy structural tailwinds.”
Morgan Stanley also highlighted an EU investment renaissance, and is currently overweight EU banks, German fiscal policy beneficiaries and credit.
“After decades of underinvestment, the EU, led by Germany, is expanding fiscal capacity.”
