Banking giant Morgan Stanley believes the next phase of America’s economic expansion will deliver a jolt of stimulus powerful enough to lift the market’s largest and most AI-exposed names.
In its latest Global Investment Committee (GIC) Weekly report, Lisa Shalett, CIO at Morgan Stanley Wealth Management, says the current rally is one of the strongest in 75 years, with the S&P 500 up 34% from its April low and unprofitable tech stocks soaring more than 70% over the same time frame.
Despite the strength, Shalett says smaller firms remain constrained by weak balance sheets and higher costs of capital. She also notes that small and weaker companies will likely struggle next year after the expected Fed rate-cutting cycle.
“The GIC remains in the camp that sees the US in an extended mid-cycle soft landing, where the 2024 rate-cutting program resumes. In this scenario, we believe that after a first half ‘sugar rush’ of stimulus, 2026 will deliver an economy with non-recessionary real growth around 2%, a weaker labor market, fragile consumption and 100 to 125 basis points of rate cuts, as telegraphed by the Federal Reserve and discounted by the market.”
Shalett calls on investors to consider getting out of small firms and rotating capital into tech giants and potential beneficiaries of the AI trade.
“Consider taking profits in high-beta, small/micro-cap, speculative and unprofitable equities and redeploying to large-cap core and quality stocks, including the ‘Mag 7’ and GenAI beneficiaries in financials, health care and energy.”
Earlier this week, Andrew Slimmon, senior portfolio manager at Morgan Stanley, said that the US stock market can still soar to greater heights, boosted by two major tailwinds.
“The Fed is cutting. That means, you know, monetary policy is friendly. And by the way, the One Big, Beautiful bill, there’s going to be a lot of tax savings next year. Fiscal policy is friendly too. Those are two very powerful things driving the market. Don’t overthink it, right? The one thing that hangs out there is this kind of feeding frenzy and speculative stocks. But other than that, I think it’s a very bullish backdrop.”
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