2026 Midyear Outlooks

Welcome to Thoughts on the Market. I’m Serena Tang, Morgan Stanley’s Chief Cross-Asset Strategist. Today: our mid-year market outlook across regions and asset classes.

It’s Friday, May 15th, at 10 am in New York.

If you’ve winced at the gas pump, hesitated before booking a flight, or checked your 401(k) a little more often than usual, you already understand the forces driving markets now. Energy prices and geopolitics are creating real uncertainty. But underneath that uncertainty, companies are still investing, earnings are still holding up, and AI is becoming one of the biggest spending cycles in the global economy.

That’s why our message for the rest of 2026 is be constructive, not complacent.

Let’s start with the constructive part. Across markets, macro and micro fundamentals support risk assets. In the US, growth should hold up.

For investors, this suggests favoring stocks over core fixed income and developed-market equities — especially the US – in particular. Our US Equity Strategist’s S&P 500 target for mid-2027 stands at 8,300, supported by expected earnings growth of 23 percent in 2026 and 12 percent in 2027. The momentum is coming from improving earnings.

Now, a striking data point: the median S&P 500 company delivered a 6 percent earnings surprise in the first quarter – the strongest in four years. Earnings revisions breadth also improved sharply.

AI explains a major part of that strength. It has become a capital spending story – and increasingly, a credit market story. A year ago, we projected combined capex for the biggest hyperscalers at around $450 billion in both 2026 and 2027. Now, that estimate has moved to roughly $800 billion in 2026 and $1.16 trillion in 2027. AI infrastructure – data centers, power, chips, networks – should shape equities, credit, rates and even commodities for years to come.

But here’s where the not complacent part matters.

There’s another side to the AI boom. Building all those data centers, chips, power systems and networks requires significant investment. And companies won’t fund all of it with cash. Many will borrow. That means more corporate bonds coming to market, especially from high-quality U.S. companies. Even if those companies look financially healthy, investors may demand better terms when they have so many new bonds to choose from. So, AI can support earnings, but it can also put some pressure on credit markets.

Energy prices also poses major risk. Our base case assumes de-escalation and a gradual reopening of the Strait of Hormuz, but the range of possible outcomes looks unusually wide. Oil prices and the duration of the Middle East supply shock are the single largest variable in our outlook. Higher oil effectively acts like a tax on consumers and businesses alike.

That’s why we recommend a balanced allocation with a risk-on tilt: overweight equities, underweight core fixed income, and hold other fixed income, commodities and cash at benchmark weight. Within equities, we favor the U.S. because earnings look strong and the risk-reward looks better than in other regions. Europe and Japan also offer upside, but Europe has more exposure to energy disruptions, and emerging markets lack a broad macro and micro narrative despite pockets of strength.

This is all to say the cycle has not run out of road. But the road looks bumpier, narrower and more energy-sensitive than it looked a few months ago.

Thanks for listening. If you enjoy the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

Seth Carpenter: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research.

Today, I want to talk about our mid-year outlook that was just published.

It's Thursday, May 14th at 10am in New York.

Oil, AI, and the consumer now sit at the center of our global economic outlook. With AI and the consumer driving economic momentum in the U.S., the key question is whether the energy shock stays manageable or changes the path for inflation, central banks, and recession risks.

We have had and maintain a fundamentally constructive view on global growth, but the energy shock brings unusually high uncertainty. It boosts inflation, it weighs on growth, and it widens the range of outcomes. We forecast global real GDP growth at 3.2 percent in 2026 and 3.4 percent in 2027. That is relative to about 3.5 percent in 2025.

So, in our baseline, growth slows modestly this year and then stabilizes and recovers. Writing a forecast is always hard but knowing what to assume about oil prices is even harder than ever now. Our base case assumes that crude returns to about $90 a barrel by the end of this year and declines further in 2027.

If, and I do mean if, that happens, the global economy can likely absorb the shock. But if the current situation persists and we do not see a normalization of shipments of oil, it could spell recession. That scenario probably sees oil prices surge through $150 a barrel, but more importantly, we could shift from a price shock to a volume shock.

The big risk is physical shortages and supply chain disruptions because it's not just energy, it's also petrochemical inputs to manufacturing and other items. Higher prices slow activity; shortages can stop it.

Exposure to the energy shock differs sharply across regions. Among the major economies, China looks the least exposed. Europe is the most exposed, and the U.S. sits in between. China built up substantial stockpiles of oil, and part of why the global oil market has not seen higher oil prices so far is that China has cut back on those imports dramatically.

Europe, on the other hand, typically faces faster energy passthrough, meaning energy prices show up much more quickly in household bills, business costs, and ultimately inflation. And Europe is a net importer of energy, so the consideration goes beyond oil to include natural gas.

The U.S. is a net exporter of petroleum products, but U.S. consumers will feel the pinch at the gas pump. But even with that in mind, U.S. growth continues to support global growth, thanks largely to strong AI-related capital spending and consumer spending that's being buoyed by the top end of the wealth distribution. We expect that momentum to continue and then ultimately to broaden out. And so we forecast U.S. real GDP growth at about 2.25 in 2026 but rising to about 2.5 percent in 2027. Both of those are up from the 2.1 percent we saw last year.

And AI CapEx sits at the center of this U.S. outlook. It includes data centers, power infrastructure, information processing equipment, software. Over time, we think this investment momentum is part of what allows a broadening out of business investment beyond AI.

That said, the energy shock has triggered global inflation. We're looking for global headline inflation to rise notably almost to 3 percent in 2026 before coming back off in 2027. But while oil and gas prices are pushing headline inflation higher, the pass-through to core, depending on the economy, seems to remain mostly limited. By 2027, we look for those effects to fade. And combined with somewhat slower growth this year, underlying inflation should soften again.

As inflation risks have moved higher, though, central banks have generally become less accommodative. We expect the Fed to now stay on hold all the way through 2026, and then if inflation really does come down, to be able to cut twice in the first half of 2027. We're looking for the ECB to hike twice this year as it grapples with this energy-led inflation, but then reverse course next year in 2027. The Bank of Japan, which had already been hiking policy, probably is set to continue that gradual hiking path.

Looking forward to the second half of this year though, global growth still does have a foundation, and the U.S. is a big part of that. AI investment and consumer spending are all what's driving the economy for now. But the energy outlook will determine how bumpy that path gets.

Thanks for listening. And if you enjoy this show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.