Morgan Stanley Investment Outlook Midyear 2026

AI infrastructure investment is boosting the outlook for risk assets, particularly U.S. equities, despite geopolitical risks. Credit markets could face challenges as companies increase bond issuance.

U.S. equities should lead global market gains, with an advance of 12% for the S&P 500 in the next 12 months, boosted by resilient earnings growth. As companies raise more debt to finance AI spending, increased supply in corporate bond markets could weigh on credit performance. Moderating inflation and expectations of lower U.S. interest rates should pressure the dollar in the coming months, but a recovery could begin in 2027. Oil and natural gas prices are likely to remain elevated the rest of the year, even if exports through the Strait of Hormuz begin recovering in the short term. Global markets are approaching the midpoint of 2026 with heightened uncertainty driven by geopolitical tensions. Oil prices—and the duration of supply disruptions stemming from the conflict in Iran—are likely to remain key factors shaping the outlook for the economy and financial markets. As a counterweight to these risks, rising investment in artificial intelligence infrastructure is likely to continue supporting most asset classes. Morgan Stanley Research expects developed-market equities to deliver returns in the low teens over the next 12 months, led by U.S. stocks. “Even as volatility in the energy markets drives a wider-than-average range of return outcomes, risk assets are supported by strong macro and micro fundamentals, which are reinforced by a powerful AI-driven capex cycle,” says Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. “Investors should be constructive, but not complacent: AI can support earnings, but it can also put some pressure on credit markets.” Morgan Stanley Research recommends an overweight position on equities, an underweight position in core fixed income and equal weight in other fixed income, commodities and cash. Source: Morgan Stanley Research

First-quarter results from S&P 500 companies exceeded expectations by 6%, the strongest beat rate in four years. That resilience is likely to continue supporting U.S. stocks. Despite ongoing uncertainty, companies have maintained positive operating leverage, improved their pricing power and begun benefiting from AI adoption. Morgan Stanley Research raised its year-end target for the S&P 500 to 8,000 from 7,800. The mid-2027 forecast is now 8,300, representing a 12% increase from the index’s level of 7,400 on May 12, 2026. Preferred U.S. sectors include industrials, hyperscalers, financials and consumer discretionary. “The main risk to our constructive view would be an acceleration in inflation to levels the Federal Reserve could not ignore, leading to tighter liquidity conditions,” Tang says. Improvements in earnings growth are also expected to support equities in Europe and Japan, with the MSCI Europe Index projected to rise 11% and Japan’s TOPIX Index forecast to gain 12% by mid-2027.

The credit market is set to lag other asset classes as companies issue more debt to finance AI-related investments, particularly among high-quality U.S. issuers. “Even if those companies look financially healthy, investors may demand better terms when they have so many new bonds to choose from,” Tang explains. A year ago, Morgan Stanley Research projected that combined capital expenditures for the five largest U.S. technology companies would reach $450 billion in both 2026 and 2027. Following first-quarter earnings reports and calls, those estimates have risen sharply—to roughly $800 billion this year and $1.16 trillion in 2027. “The scale, duration and strategic importance of AI infrastructure investment mean that its financing will remain a defining theme for credit markets and credit investors for years to come,” Tang says.

The expectation of a steady economy in the U.S.—slowing down but avoiding a recession—should sustain demand for U.S. Treasuries. However, uncertainty surrounding oil prices, as well as greater supply of government bonds, raises questions about how long Treasuries can sustain positive performance. European government bonds, meanwhile, are expected to outperform U.S. Treasuries as Morgan Stanley economists expect a soft patch of growth and disinflation.

The U.S. dollar is likely to remain weak relative to its peers in the second half of the year as U.S. core inflation moderates, lower expectations of interest-rate increases and global risk appetite remains strong. Strategists forecast the U.S. dollar to reach a bottom and start a recovery into 2027. Stronger economic growth should attract more capital to the U.S. in that time frame, while the French presidential election next spring could increase concerns around political risk in Europe, weighing on the euro.

Developments related to the Iran conflict—and their implications for central-bank policy, energy prices and currency markets—remain central to commodity performance. In Morgan Stanley’s base-case scenario, energy exports through the Strait of Hormuz begin recovering in early June. However, logistical and operational challenges are likely to keep oil markets tight through the fourth quarter, leading to higher prices for oil and natural gas. Gold, which has underperformed other asset classes since the start of the conflict, could recover as central banks and exchange-traded funds resume physical purchases and as markets price in lower Fed rates.

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions. Investing in securities involves risk, including possible loss of principal. Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an AI-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias. You should always verify the results of any AI-generated output. Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment. Companies paying dividends can reduce or stop payouts at any time. Fixed Income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall. Copyright © Morgan Stanley 2026. All rights reserved. Sign up to get Morgan Stanley Ideas delivered to your inbox. Thank You for Subscribing! Would you like to help us improve our coverage of topics that might interest you? Tell us about yourself.