Investors can expect gains in equities and high-quality fixed income for 2025, despite a slowdown in global economic growth.
In their Midyear Investment Outlook, Morgan Stanley Research strategists outline why U.S. assets — equities, government bonds and corporate credit — are likely to outperform their non-U.S. counterparts. In their base-case scenario, the S&P 500 is forecast to climb to 6,500 by the middle of next year, helped by improved earnings. While U.S. stocks are unlikely to revisit their April lows in the near future, strategists think Treasuries will rise as the Fed gets back to cutting rates early next year, pushing yields on the 10-year down to 3.45% by mid-2026.
“It’s not going to be a straight path,” says Serena Tang, Morgan Stanley’s Chief Global Cross-Asset Strategist. “Markets may remain choppy for the next two quarters, as the Federal Reserve reacts to tariff-induced inflation, but there should be substantial monetary easing ahead. Further deregulation in the U.S. could also bolster U.S. assets.”
U.S. Dollar to Feel the Brunt of Tariff Uncertainty
For at least the past decade, U.S. assets have attracted foreign investors, with capital flowing into the U.S. during periods of stability and periods of stress. Despite slowing economic growth and uncertainty due to U.S. trade policy, U.S. assets are still widely seen as safe havens. Global equity funds have not shifted away from U.S. stocks, once changes in index weightings are considered; and the amount of high-quality dollar-denominated bonds held by foreign investors is at the highest-ever level.
“It’s worth remembering that the economy is not the market. During slowdowns and low inflation periods, U.S. and emerging market equities perform better than average, and yields go down modestly,” Tang says. “No two cycles are the same, but equities and credit can do well in a challenging macro environment.”
It also helps that U.S. earnings are relatively more secure than what’s expected for the rest of the world, with forecasts of 7% earnings per share growth for the S&P 500 this year, and 9% growth in 2026. Multinationals will get more profit from overseas operations due to the weaker dollar, and there may be fundamental growth related to the artificial intelligence supply chain and the benefits of new AI capabilities.
The dollar may be the aberration to the U.S. growth narrative: As most U.S. assets outperform, the dollar is forecast to depreciate significantly compared to most G10 currencies. The key factors that have driven the dollar’s strength, including better growth and yield differentials compared with other developed economies, may be eroding.
Mixed Performance for Global Assets
The MSCI Europe could advance 3% by June 2026, with strong volatility as tariff-related uncertainty limits a recovery in business and consumer confidence, investment and hiring. In this scenario, the most resilient pockets of the equity market include defense, banks, software, telecoms, and diversified financials.
Japanese stocks could gain 6% by June 2026, with companies exposed to domestic growth, defense and corporate reform outperforming exporters as the yen is poised to appreciate against the U.S. dollar though the end of next year.
Emerging market stocks could face more turbulence in the near term, given the prospect of slower GDP growth. Morgan Stanley strategists think the MSCI EM could gain 3% by June of 2026. Domestic-focused businesses are better positioned than exporters, semiconductors and hardware stocks, also because of the expectation of currency gains against the U.S. dollar. Higher growth rates in Taiwan and India are likely to put assets of those markets in favor.
How to Invest
The outlook justifies an overweight in global investment-grade fixed income, and U.S. government bonds in particular. But investors should underweight non-core credit such as high-yield bonds and leveraged loans.
“In these assets, spreads are tight, with yields low relative to the risks: Investors are unduly optimistic for a period of slowing growth,” says Morgan Stanley’s Head of Corporate Credit Research Andrew Sheets. “There is potential for rising defaults, especially in lower-quality credits.”
The dollar’s expected weakness suggests that investors might go long other developed market currencies, such as the euro, the Japanese yen, or the Swiss franc. The rate differentials and the superior growth in the U.S. that have supported the dollar seem likely to erode further. And increased currency hedging by global investors is only likely to strengthen the trend.
Risks are building around commodities, particularly oil and copper, prompting an underweight recommendation for the asset class. The oil market was recently balanced but may tip into a meaningful oversupply by the fourth quarter of this year, prompting the benchmark Brent crude oil to fall to $55 a barrel by mid-2026.
