With less uncertainty around tariffs, no likelihood of a recession, and potential for additional rate reduction, Morgan Stanley upgraded its outlook on stocks and Treasuries to “overweight” and became optimistic on the majority of significant U.S. assets.
In a note published late Tuesday, the Wall Street brokerage stated that “a convergence in U.S. rates and growth to peers” would keep the dollar under pressure, making it the lone exception.
“We expect USD assets to broadly outperform the rest of the world, with the notable exception being the dollar itself … against a backdrop of a slowing but still expanding global economy,” Morgan Stanley said.
Morgan Stanley projects that real GDP growth will slow to 2.5% by the end of this year from 3.5% in 2024, but it does not predict a global or U.S. recession.
This year’s tariff attack by the Trump administration has slowed the global economy and encouraged investors to shift their holdings of U.S. assets abroad. However, following a trade agreement between the United States and China, investor sentiment for U.S. assets has improved.
Morgan Stanley anticipates a weak dollar to boost the revenue of international corporations and a short-term bottom in U.S. corporate profit revisions.
The company also anticipates that future interest rate decreases and a reduction in inflation will help stocks.
Consequently, it now projects that the benchmark S&P 500 index will reach 6,500 points in the second quarter of 2026 rather than 2025’s end.
By the second quarter of 2026, it anticipates that the yield on the 10-year Treasury will be 3.45%. On Thursday, the yield is at 4.592%.
However, Morgan Stanley predicted that the dollar index (.DXY), which is already down 8% to 99.44 this year, will fall even more. “We now forecast the DXY to fall an additional 9% over the next 12 months to 91, with USD weakness most pronounced against its safe-haven peers – EUR, JPY, and CHF,” analysts at Morgan Stanley reported.