As Moody's downgrades the U.S. sovereign credit rating and the federal spending bill raises deficit concerns, the market narrative of "selling America" has heated up again this week, leading to a concentrated sell-off of U.S. stocks and bonds by investors. The S&P 500 Index has cumulatively fallen nearly 1% over the past two days, and the yield on the 10-year U.S. Treasury bonds has risen 10 basis points in just four days, reflecting a shift in investor sentiment towards caution.
However, while market sentiment is cooling, Morgan Stanley has contrarily put forward a bullish view, emphasizing that "there is no alternative" remains the main theme for global capital allocation.
"No Alternative": Morgan Stanley Favors U.S. Assets
Morgan Stanley's team of strategists points out in their latest report that despite the recent increase in volatility, U.S. assets still possess medium- to long-term appeal. "We oppose the notion that foreign investors will massively exit U.S. assets," the report states.
The core argument is the lack of alternative assets worldwide with the same scale, liquidity, and security. The safe-haven nature of dollar assets and the structural advantages of the U.S. economy make it still the "preferred destination" for most global investors.
Stock Market Outlook: Expected Rise to 6,500 Points by 2026
Morgan Stanley predicts that by the second quarter of 2026, the S&P 500 Index will rise to 6,500 points, up about 11% from current levels. The bank lists several favorable factors:
- The Federal Reserve is expected to implement seven rate cuts by 2026, likely creating a loose monetary environment;
- A weaker dollar will increase corporate overseas profits;
- Efficiency gains in AI technology will support corporate earnings expansion;
- Stable trade policies will reduce systemic risks.
The bank expects that U.S. stock market volatility will continue over the next two quarters but is unlikely to retest the April lows.
Bond Market Outlook: Mid-term Yield Retreat Expected
Although the current 10-year U.S. Treasury yield has risen above 4.5%, Morgan Stanley considers this a short-term phenomenon. As the market gradually digests the prospects of future rate cuts, the bank expects the yield on the 10-year Treasury to fall to 3.45% by mid-2026.
The strategy team emphasizes that the amount of U.S. dollar-denominated bonds held by foreign institutions has reached an all-time high, indicating that despite interim adjustments, structural demand for high-quality U.S. dollar assets remains robust globally.
Summary:
Amid the resurgence of the "sell America" trend, Morgan Stanley remains optimistic about the long-term outlook for U.S. assets, highlighting the current market's lack of alternative safe-haven and growth assets. As expectations for rate cuts increase and the dollar weakness persists, U.S. stocks and bonds may present opportunities for a rebound amid the turmoil.
