Morgan Stanley's latest positioning report notes that equity valuations are deemed "reasonable" based on expectations for corporate earnings and nominal GDP growth. The firm emphasizes that corporate earnings are the key drivers of the equity rally, which they believe will continue to rise.
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The investment bank maintains a bullish stance on the U.S. market, recommending it as the only equity market to overweight at this time. Despite challenges in the global economic landscape—such as inflation, uncertainty, and geopolitical tensions—global equity markets have seen significant gains, largely fueled by enthusiasm for the artificial intelligence boom, particularly within Wall Street.
Morgan Stanley addresses concerns about high equity valuations, asserting that while headline valuations appear elevated, they are still justified by earnings growth prospects and a structurally stronger nominal economy. They predict that as geopolitical tensions decrease, the market will broaden, with many sectors still presenting lower valuations that could benefit from a rebound.
The report attributes the recent uptick in equity markets primarily to corporate earnings rather than inflated multiples, which are not excessive when compared to historical averages from the past five to ten years. The firm highlights several positive factors for stock markets: stronger nominal GDP growth, which aids in corporate revenue expansion, earnings growth, and cash flow generation, as well as supportive fiscal policies, deregulation, and tax-led growth.
Looking ahead, Morgan Stanley believes that resilient demand, productivity improvements, and expanding capital expenditure cycles will continue to drive corporate earnings upward. They also link the current rise in capital expenditure to the swift adoption of artificial intelligence technologies across various sectors.
Overall, stock markets have performed well, with the MSCI All Country World Index reporting an 18.2% increase over the past year. In the U.S., the MSCI USA Index has seen a 16.6% gain, while the technology sector stands out; the Nasdaq Composite has surged 20.4% in the same time frame.
Morgan Stanley's positive outlook on U.S. equity fundamentals leads them to predict further growth potential for Wall Street. Their recommendation reflects an optimistic view on overall economic growth and earnings for 2026, bolstered by fiscal stimulus initiatives, deregulation, and ongoing advancements in AI. In contrast, their recommendation is neutral toward Japanese and emerging market equities, while European equities receive an underweight rating.