Morgan Stanley
Investment Management

Market Signals: Rates, Earnings and Private Markets

Aug 11, 2026

Our market signals for stocks, bonds and alternatives in the second half of 2026 indicate growth, inflation and interest rates should settle at higher levels.

Key Takeaways

  • Markets remain resilient despite uncertainty created by geopolitical tensions and volatility.
  • A changing Fed could reshape investors’ focus from individual rate moves to the central bank’s new policy regime, with less forward guidance and structurally higher interest rates.
  • Strong earnings—not expanding valuations—are driving stock market gains.
  • Elevated bond yields allow fixed-income investors to be more selective, emphasizing security selection and credit fundamentals.
  • Private equity, private credit and selected real estate sectors could benefit from improving market conditions.

Despite heightened geopolitical tensions and periodic market volatility, the first half of 2026 has been a constructive period for investors. The S&P 500 gained about 10% through the end of June, while higher bond yields have improved the income and return potential in fixed income.

 

As investors reassess portfolios and asset allocation, several themes are likely to shape markets over the remainder of the year, including the Federal Reserve's evolving policy, corporate earnings and opportunities across private markets.

 

“The key investment question for the second half of 2026 is whether investors can adapt to a world where nominal growth, inflation and interest rates settle structurally higher,” says Jim Caron, Chief Investment Officer of Morgan Stanley Investment Management’s Portfolio Solutions Group. "That's what we're trying to understand through our asset allocation strategies, investment selection and portfolio construction."

 

Caron joined other leaders from Morgan Stanley Investment Management on The BEAT (Bonds, Equities, Alternatives, Transition), an investing insights series, to discuss market signals across major asset classes for the rest of the year.

 

Fixed income: Focus on a New Fed Framework

For bond investors, the leadership transition at the U.S. Federal Reserve is now one of the year's defining themes.

 

Kevin Warsh, who became Fed Chair earlier this year, has emphasized restoring price stability as the central bank's primary objective while signaling a move toward providing less forward guidance on future policy decisions.

 

"The important debate right now is not whether the Fed cuts 25 basis points or hikes 50 basis points," says Vishal Khanduja, Portfolio Manager and Head of the Broad Markets Fixed Income Team. "It's whether we are entering a different monetary policy regime altogether. Markets may not be dealing with a committee of dots anymore, but with a stronger chair. As portfolio managers, that means placing less emphasis on predicting moves in the next meeting but more on longer term trajectory of rates."

 

Higher yields are also creating a compelling backdrop for fixed income, with reduced probability of negative returns, Khanduja notes. 

 

"That allows us to be patient as fixed-income investors as higher starting yields and potential income can absorb more volatility and allows the focus to be on identifying the sectors and balance sheets that can consistently generate excess returns," Khanduja says.

 

Equities: Earnings Continue to Support the Market

For equities, the investment case rests on strong corporate fundamentals.

 

In contrast to prior cycles, recent market gains have not been driven primarily by expanding valuation multiples, according to Andrew Slimmon, Head of the Applied Equity Advisors Team. Instead, earnings growth has been the key driver.

 

"Companies are actually doing better than expected," Slimmon says. "This is a very healthy environment, fundamentally driven by strong earnings, and that gives me tremendous comfort in where the market is today."

 

Slimmon notes that a more restrictive monetary policy could challenge that constructive environment if higher rates begin to weigh on corporate profits.

 

He also sees opportunity among large-cap technology companies. Despite continued strong earnings, many have seen their valuation multiples decline this year as investors questioned the scale of spending on artificial intelligence infrastructure.

 

"These are some of the smartest people in technology, and they're all saying the same thing—that they'll generate an attractive return on these investments," Slimmon says. "We're getting an opportunity to buy some very large technology companies with strong earnings at reasonable valuations."

 

Alternatives: Broadening Sources of Return

Private markets are playing a growing role in diversified portfolios.

 

Of roughly 730,000 operating companies in the U.S., only about 4,000—or approximately 0.5%—are publicly listed. At the same time, companies are remaining private for longer, with the average age at an initial public offering now 12 years, compared with about 8 years in the 1980s and 1990s.

 

"As a result, investors focused only on public markets can miss a meaningful portion of corporate growth," said Dennis McCabe, Managing Director and Head of Alternative Investment Distribution. "Private markets have moved from the margins of portfolio construction to the center of the conversation."

 

The objective, McCabe says, is not to replace traditional stocks and bonds but to diversify sources of return, potentially benefiting from liquidity premiums while helping protect portfolios against inflation and market volatility.

 

Private equity may be poised for a stronger second half as firms begin deploying dry powder into an increasingly active market. As buyers and sellers align more closely on valuations, improving deal flow and transaction activity could create a more favorable backdrop for investment opportunities and potential returns. "Higher liquidity and a boost in M&A activity are lining up to create a real tailwind for this strategy and returns overall," McCabe says.

 

In private credit, stress in early 2026 remained concentrated in limited areas of the market. McCabe expects performance to be supported where managers maintain disciplined underwriting, strong sponsor backing and close monitoring of earnings, refinancing and credit quality. Real estate also appears to be entering a more favorable phase after several years of declining prices followed by stabilization.

 

"Supply is down and the cost of capital has declined, but the recovery remains uneven," McCabe says. "Asset allocation is becoming increasingly important amid trends of deglobalization, reshoring and an aging population. We see attractive opportunities in logistics, industrial properties and senior living."

Disclosures

Risk Considerations

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g., natural disasters, health crises, terrorism, conflicts, and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g., portfolio liquidity) of events. Accordingly, you can lose money investing in a portfolio. In general, equities securities’ values also fluctuate in response to activities specific to a company. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes.  Foreign securities are subject to currency, political, economic and market risks. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed countries. Alternative investments often are speculative and include a high degree of risk. Investors could lose all or a substantial amount of their investment. Alternative investments are suitable only for eligible, long-term investors who are willing to forgo liquidity and put capital at risk for an indefinite period of time. They may be highly illiquid and can engage in leverage and other speculative practices that may increase the volatility and risk of loss. Alternative Investments typically have higher fees than traditional investments. Investors should carefully review and consider potential risks before investing.

 

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