After policy and macroeconomic uncertainties dominated most of 2025, the investment landscape is shifting toward a more favorable environment—particularly for risk assets. Companies and economies are likely to benefit from AI-related productivity gains, while global disinflation and growth should converge toward a sustainable pace in 2027—with potential for further upside.
In this environment, Morgan Stanley Research recommends an overweight position in stocks, equal-weight in fixed income and underweight in commodities and cash, with a strong preference for U.S. assets.
“The triumvirate of fiscal policy, monetary policy and deregulation are all working together in a way that rarely happens outside of a recession,” says Serena Tang, Morgan Stanley’s Chief Global Cross-Asset Strategist. “This unusually favorable policy mix allows markets to shift focus from global macro concerns to asset-specific narratives—particularly those related to AI investments.”
Higher Gains for U.S. Stocks
U.S. equities should outperform global peers in 2026, with the S&P500 rising to 7,800 in the next 12 months—a 14% gain from its current level, compared with expected gains of 7% for Japan’s TOPIX and 4% for the MSCI Europe.
U.S. earnings and cash flow growth are poised to benefit from several factors, including a market-friendly policy mix, interest-rate cuts by the Federal Reserve, a reduction of $129 billion in corporate tax bills through 2026 and 2027 from the One Big Beautiful Act, positive operating leverage, the re-emergence of pricing power and AI-driven efficiency gains.“There will be some bumps along the way, but we believe that the bull market is intact,” Tang says.
European and emerging market equities aren’t likely to benefit from similar tailwinds that are boosting U.S. stocks. Tepid forecasts for growth in the eurozone and structural challenges, with the region losing ground in manufacturing to China, cloud the outlook for European equities. Chinese stocks face headwinds from the country’s slow reflation progress.
In Japan, the narrative is more positive: stocks are likely to get support from fiscal and regulatory reforms, besides domestic flows into equities.
A Choppy Path for the U.S. Dollar
Although the dollar should continue weakening through the first half of 2026, a rebound is likely around the second quarter, marking the end of its bear market. The U.S. dollar index, which tracks the currency value against its major peers, lost more than 10% in the first half of 2025.
“2026 should be a choppy year for the U.S. dollar index,” Tang says. “The decline and rebound reflect shifts in rate differentials and changes in risk premium.”
Concerns around the U.S. labor market, Fed leadership and rate cuts may lift the dollar’s risk premium, though not to the levels seen earlier this year. European currencies, which led G10 gains in 2025, are expected to weaken as the European Central Bank and Bank of England cut rates.
Dips in Government Bond Market Momentum
Fixed-income markets may rally in the first half of 2026 as central banks pivot from inflation control to equilibrium management. Investors should consider overweighting government bonds during this period.
The yield on the U.S. 10-year Treasury is expected to decline into midyear as the Fed lowers rates, before rebounding just above 4% at yearend. Yield curves in the eurozone and the UK are also likely to steepen, although less dramatically than in the U.S.
AI Funding Needs a Factor for Credit Markets
Tech-related financing is set to be the dominant theme in credit markets next year. Growing demand for AI and data infrastructure means greater financing needs. Of the estimated $3 trillion in data center-related capex that Morgan Stanley expects to see, less than 20% has been deployed to date.
The significant spike in debt issuance by the tech sector should result in wider U.S. investment grade spreads.
Meanwhile, high-yield corporate bonds are likely to outperform investment grade debt given that high-yield is relatively insulated from a spike in AI-related issuance.
“While credit fundamentals should hold up, with defaults remaining around current levels, spreads in investment grade as well as data center asset-backed securities (ABS) will likely widen given the magnitude of issuance to come,” Tang says.
Credit will also play a key role in the resurgence of M&A activity, with projected volume growth of 32% in 2025, followed by 20% in 2026 and 15% in 2027.
“Greater animal spirits in the U.S., compared to more tempered corporate activity in Europe, means that European credit should outperform U.S. credit over the next 12 months,” Tang adds.
Commodities: Favoring Metals Over Energy
Gold is expected to remain strong in 2026 after repeatedly hitting record highs this year. Continued physical demand and rate cuts should support prices.
Among base metals, copper and aluminum are Morgan Stanley’s top picks, with both facing supply constraints. In contrast, Brent crude is likely to hover around $60 per barrel, with risks stemming from weak demand and rising supply from OPEC and non-OPEC producers. Geopolitical and logistical factors may offer some price support.
In agriculture, soy and corn prices could rise due to adverse weather and tighter credit conditions in Brazil, a leading global producer.
