Recently, concerns about the U.S. economy have intensified following Moody's downgrade of the U.S. sovereign credit rating and uncertainties surrounding a new spending bill's impact on the federal deficit. This has led to a decline in U.S. assets, with the S&P 500 Index dropping about 1% over the past two days and the 10-year U.S. Treasury yield rising by 10 basis points in just four days.
Despite the sell-off, Morgan Stanley's strategists anticipate a rebound in U.S. assets over the next year, outperforming global peers. They argue that there are no better investment alternatives, supporting their optimistic outlook.
For stocks, Morgan Stanley predicts that the S&P 500 will reach 6500 points by the second quarter of 2026, an 11% increase from current levels. They believe factors like anticipated Federal Reserve rate cuts in 2026, a weaker dollar, and efficiency gains driven by artificial intelligence will bolster profitability.
Regarding bonds, while the 10-year U.S. Treasury yield has climbed, Morgan Stanley expects this trend to be temporary. They foresee yields decreasing to 3.45% by mid-2026 as investors begin to factor in potential rate cuts.
Overall, Morgan Stanley does not see a sustained retreat from U.S. assets by investors, noting that foreign holdings of dollar-denominated bonds have reached historic highs.
