Global markets could see risk assets regain momentum as strong economic growth, rising corporate earnings and AI-led productivity support returns despite higher bond yields, according to a Morgan Stanley report.The firm now favours global stocks over bonds, saying rising bond yields reflect a strong economy rather than a worsening economic situation.“As the forces driving yields higher begin to fade, we expect the bull market in risk assets to reassert itself,” the report said.Morgan Stanley said stronger economic growth continues to underpin corporate earnings, cash flows, employment, consumption and credit quality. Meanwhile, the adoption of and investment in artificial intelligence (AI) remain key drivers of productivity gains and business expansion.Global economic activity has remained firm despite higher energy prices and interest rates, with services and manufacturing activity showing signs of acceleration, the report noted.Productivity gains could also help wages and output grow without a corresponding increase in labour costs, potentially helping contain inflationary pressures.
Oil supply shock remains a key risk
Despite its constructive outlook, Morgan Stanley cautioned that geopolitical tensions, energy supply disruptions and persistent inflation could threaten the market’s momentum.The report identified an oil supply shock that forces central banks to tighten monetary policy excessively as a key risk to its positive outlook for risk assets.“If inflation becomes uncontained, central banks must move from removing accommodation to actively destroying demand,” the report said.It also warned that refined oil products, particularly diesel, remain vulnerable to supply disruptions. Any such disruption could push energy costs higher and feed into inflation.While the firm expects economic growth to remain supportive of risk assets, a sustained energy shock could change its outlook.
US equities preferred, India faces challenges
Within equities, Morgan Stanley maintained its overweight position on US markets, citing resilient economic growth, strong corporate earnings and continued AI adoption.The firm remained cautious on European equities because of energy-related headwinds, although it identified opportunities in the banking and utilities sectors.Indian equities, meanwhile, face challenges from comparatively weaker forward earnings growth expectations, limited exposure to AI and elevated energy prices, the report said.Morgan Stanley said the balance of risks remained constructive for now. However, the outlook will depend on whether economic resilience and productivity gains can continue to offset the effects of higher energy prices and inflation.
