Morgan Stanley: Forget the "Sell America" trade! U.S. stocks and bonds will dominate the global market next year

According to the Zhitong Finance APP, following Moody's downgrade of the U.S. credit rating last week, this week saw a lukewarm response to U.S. Treasury auctions and concerns that the Trump administration's tax cuts will further widen the U.S. budget deficit, accelerating the "sell America" trade. The S&P 500 index has fallen about 1% over the past two days, and the benchmark 10-year U.S. Treasury yield surged 10 basis points in just four days.

Despite the recent sell-off of U.S. assets, a team of strategists at Morgan Stanley expects U.S. assets to rebound next year, outperforming their global peers. They stated, "We oppose the view that foreign investors would or should significantly sell U.S. assets." Their reasoning is simple: there are no better options, and TINA—There Is No Alternative to owning equities—remains a theme.

Regarding U.S. stocks, Morgan Stanley strategists believe that while volatility will continue to dominate in the next two quarters, the performance of the U.S. stock market next year should be the opposite of the current trend. The strategists expect the S&P 500 index to reach 6,500 points by the second quarter of 2026, a 10% increase from current levels. They stated, "The Fed's interest rate cuts in 2026, a weaker dollar, and the broader realization of efficiency driven by artificial intelligence should help the profit trajectory."

Morgan Stanley strategists also added that, meanwhile, the easing of trade tensions has eliminated the biggest downside risk for U.S. stocks, meaning the S&P 500 index is unlikely to retest the April lows in the short term. The strategists indicated that a loose policy agenda and the potential for seven interest rate cuts in 2026 should drive above-average valuations.

Regarding U.S. Treasuries, although the 10-year Treasury yield has recently risen, Morgan Stanley strategists believe this is only a temporary trend. They expect that before the fourth quarter, Treasury yields will remain range-bound, at which point investors will begin to digest the interest rate cuts expected in 2026 and reflect them in Treasury yields. The strategists also anticipate that by mid-2026, the 10-year Treasury yield will drop to 3.45% (currently about 4.54%).

The strategists do not believe that investors are selling U.S. assets in a more permanent "retreat" manner, even though this seemed possible during the chaos triggered by tariffs in April. They stated, "In the past quarter, global equity funds have not withdrawn from the U.S. The amount of dollar-denominated bonds held by foreigners is at an all-time high. This indicates that there are still buyers of U.S. assets in other parts of the world, especially high-quality U.S. assets."