Morgan Stanley: "Buy America" but not the dollar

by Winnie Hsu and Abhishek Vishnoi

Morgan Stanley has raised its call on US stocks and Treasuries on expectations that a slew of future interest-rate cuts by the Federal Reserve will support bonds and boost company earnings.

The Wall Street bank has turned overweight on American stocks and sovereign bonds from a neutral stance, according to a note from strategists including Serena Tang, global head of cross-asset strategy research. The S&P 500 Index will reach 6,500 by the second quarter of 2026, they wrote. 

The strategists see range-bound Treasury yields until the final quarter of this year, when it expects investors to price in more US rate cuts for 2026. That’s likely to push the 10-year yield down to 3.45% by the second quarter of next year, according to their note dated May 20. 

Meanwhile, they see the dollar continuing to weaken as the US’s economic growth premium relative to peers fades and the yield gap between it and other countries narrows.

Morgan Stanley’s latest outlook comes as US markets recover from the losses brought on by President Donald Trump’s global trade war in April. Investors now have to navigate the fading appeal of US exceptionalism, wait on tariffs negotiations and fractious budget talks on Capitol Hill, while weighing the potential for rate cuts. 

“We think that stocks won’t revisit the lows of April in the near term, especially since the large drawdowns experienced year to date have mainly been reactions to tariff shock-and-awe,” the strategists wrote. “Our equity strategists see the future US policy agenda to be more accommodating, and expect the seven Fed cuts our economists anticipate for 2026 to be supportive of higher-than-average valuations.”

The S&P 500 has recouped losses brought on by Trump’s Liberation Day after he clawed back most tariff increases while trade talks start. It closed at 5,940 on Tuesday. Yields on Treasuries though have continued to gain, with the 10-year trading at 4.51%, on concern that proposed tax cuts will widen the US budget deficit. 

“Despite unprecedented policy uncertainty, the global economy is still in expansion mode, albeit with slowing growth,” the strategists wrote in the note. “Substantial monetary easing is ahead along with the benefits of deregulation.”

Morgan Stanley’s target for S&P 500 is in line with the aggregate of sell-side analyst estimates compiled by Bloomberg. Goldman Sachs Group Inc. also sees the US gauge reach the same level over the next 12 months.

To be sure, the so-called “Sell America” trade remains popular among many investors, with their weakening confidence in American assets reinforced by the recent downgrade of the US’s credit score by Moody’s Ratings. That has prompted growing interest in riskier assets such as emerging-market equities and Asian assets.

Read More: ‘Sell America’ to Boost Asia Fund Flows If Trade Tensions Ease

Regarding the US currency, the strategists said that over the next 12 months, they expect the key factors behind the dollar’s strength, such as positive growth and yield differentials relative to other Group-of-10 economies, to “fade substantially.” 

Currency hedging matters, they wrote, adding that “a significant portion” of exposure to the US currency among global investors, businesses and central banks over the past decade or so has been without an overlay of foreign exchange hedges.

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