Earnings Growth Supports Equities
First-quarter results from S&P 500 companies exceeded expectations by 6%, the strongest beat rate in four years. That resilience is likely to continue supporting U.S. stocks.
Despite ongoing uncertainty, companies have maintained positive operating leverage, improved their pricing power and begun benefiting from AI adoption.
Morgan Stanley Research raised its year-end target for the S&P 500 to 8,000 from 7,800. The mid-2027 forecast is now 8,300, representing a 12% increase from the index’s level of 7,400 on May 12, 2026. Preferred U.S. sectors include industrials, hyperscalers, financials and consumer discretionary.
“The main risk to our constructive view would be an acceleration in inflation to levels the Federal Reserve could not ignore, leading to tighter liquidity conditions,” Tang says.
Improvements in earnings growth are also expected to support equities in Europe and Japan, with the MSCI Europe Index projected to rise 11% and Japan’s TOPIX Index forecast to gain 12% by mid-2027.
Corporate Credit Faces Supply Pressure
The credit market is set to lag other asset classes as companies issue more debt to finance AI-related investments, particularly among high-quality U.S. issuers.
“Even if those companies look financially healthy, investors may demand better terms when they have so many new bonds to choose from,” Tang explains.
A year ago, Morgan Stanley Research projected that combined capital expenditures for the five largest U.S. technology companies would reach $450 billion in both 2026 and 2027. Following first-quarter earnings reports and calls, those estimates have risen sharply—to roughly $800 billion this year and $1.16 trillion in 2027.
“The scale, duration and strategic importance of AI infrastructure investment mean that its financing will remain a defining theme for credit markets and credit investors for years to come,” Tang says.
Government Bonds Reflect Regional Outlooks
The expectation of a steady economy in the U.S.—slowing down but avoiding a recession—should sustain demand for U.S. Treasuries. However, uncertainty surrounding oil prices, as well as greater supply of government bonds, raises questions about how long Treasuries can sustain positive performance.
European government bonds, meanwhile, are expected to outperform U.S. Treasuries as Morgan Stanley economists expect a soft patch of growth and disinflation.
Dollar Weakness Likely to Persist
The U.S. dollar is likely to remain weak relative to its peers in the second half of the year as U.S. core inflation moderates, lower expectations of interest-rate increases and global risk appetite remains strong.
Strategists forecast the U.S. dollar to reach a bottom and start a recovery into 2027. Stronger economic growth should attract more capital to the U.S. in that time frame, while the French presidential election next spring could increase concerns around political risk in Europe, weighing on the euro.
Oil Markets in Fragile Balance
Developments related to the Iran conflict—and their implications for central-bank policy, energy prices and currency markets—remain central to commodity performance.
In Morgan Stanley’s base-case scenario, energy exports through the Strait of Hormuz begin recovering in early June. However, logistical and operational challenges are likely to keep oil markets tight through the fourth quarter, leading to higher prices for oil and natural gas.
Gold, which has underperformed other asset classes since the start of the conflict, could recover as central banks and exchange-traded funds resume physical purchases and as markets price in lower Fed rates.
