Morgan Stanley mid-year highest-conviction call: AI capex and the industrial cycle support risk assets, with equities preferred over fixed income
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Morgan Stanley mid-year highest-conviction call: AI capex and the industrial cycle support risk assets, with equities preferred over fixed income
Against a backdrop of volatility from energy shocks, the report remains constructive on global growth and risk assets, with core positioning favoring developed-market equities, U.S. equities and selected high-yield credit, while staying cautious on corporate credit, especially U.S. IG.
- The Asia macro outlook remains constructive, with the industrial cycle and a capex supercycle seen as enough to partly offset the energy shock.
- The report expects the U.S. dollar to continue weakening in 2H26, with the DXY potentially reaching 95 before rebounding; risk-sensitive currencies should perform better during the dollar-weakness phase.
- Cross-asset strategy has shifted toward risk appetite: overweight equities versus fixed income, and a preference for U.S. equities relative to other regions.
- Corporate credit is constrained by supply pressure from AI capex financing and M&A; U.S. HY is relatively well positioned, while U.S. IG spreads are expected to widen moderately.
Report interpretation
Overview
This is a Morgan Stanley global macro and cross-asset mid-year outlook that synthesizes the highest-conviction views on Asia, the dollar and emerging-market FX, G10 rates, U.S. credit and global asset allocation. The core message is that strong AI-related capex, improving industrial cycles and resilient corporate fundamentals can continue to support global growth and risk assets, but energy supply shocks, Middle East conflict, expanding credit supply and rising default rates will create wider return dispersion.
Core views
The key views are: first, the Asia macro outlook remains constructive, with the industrial cycle and the capex supercycle as the main support, and energy shocks will weigh on but not end the expansion. Second, the U.S. dollar still has room for cyclical weakness in 2H26, followed by a rebound in 2027 on U.S. growth leadership and European political risk. Third, emerging markets continue to have an edge versus G3, with a regional preference for CEEMEA and Latin America over Asia ex-Japan. Fourth, net G7 bond supply in 2026 and 2027 is expected to be below 2025, and market pricing for the Fed path is seen as too hawkish. Fifth, global equities were upgraded to overweight, and developed-market equities with low-double-digit expected returns are attractive; U.S. equities are favored because of stronger earnings and operating leverage. Sixth, corporate credit lags equities because of supply pressure from AI financing, M&A and capex, with U.S. HY relatively in the sweet spot.
Analysis framework
The report uses a top-down global macro and cross-asset framework that combines growth, inflation, policy rates, energy shocks, fiscal policy and bond supply, corporate capex, credit supply and the earnings cycle to form relative allocation views across equities, rates, FX, emerging markets and credit. The Asia section focuses on high-frequency industrial data, non-tech exports, capital goods imports and fixed asset investment; the FX section compares consensus, forward pricing, dollar cycles and carry trades; the rates section compares market-implied paths with economists' scenario probabilities; and the credit section assesses issuance, spreads, default rates and capex financing demand.
Methodology notes
Use industrial production, manufacturing PMIs, non-tech exports, capital goods imports and fixed asset investment to determine whether Asian and global industrial demand is expanding.
The report argues that AI infrastructure, the energy transition, defense spending and broader industrial capex together are driving Asia into a capex supercycle.
Compare expected returns, risk skew and fundamental support across equities, fixed income, government bonds, credit and FX.
With macro and micro fundamentals still supportive of expansion, the report recommends overweighting equities versus fixed income and preferring U.S. equities over other regions.
Compare market pricing for the fed funds target range with economists' baseline and probability-weighted multi-scenario paths.
The report believes current market pricing is too hawkish relative to Morgan Stanley economists' probability-weighted path, and that recession scenarios are barely priced in.
Combine investment-grade and high-yield issuance, loan and private-credit default rates, AI financing demand and corporate earnings to assess relative value in credit.
The report expects record U.S. IG supply to pressure spreads, higher HY issuance but stronger fundamentals, and rising default pressure in loans and private credit.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Global equitiesUpgraded to overweight, the core preference within risk assets
- Strengths
- Strong macro and micro fundamentals, with the AI capex cycle and resilient corporate earnings supporting low-double-digit expected returns.
- Weaknesses
- Energy shocks and geopolitical conflict will widen return dispersion.
- Comparison
- More favored than fixed income; developed-market equities are preferred over other regions, and U.S. equities are preferred over peers.
- Risks
- Oil-price shocks, earnings misses, policy-path repricing, geopolitical escalation.
- U.S. equitiesMore preferred than other regions
- Strengths
- U.S. growth leadership, AI capex and high-end consumption support earnings, with strong operating leverage.
- Weaknesses
- Valuation and crowded positioning may increase drawdown risk.
- Comparison
- Within developed markets, the report favors the U.S. over other regions.
- Risks
- AI investment returns below expectations, rate rebound, higher energy costs.
- Government bondsBroadly maintained as overweight, with internal adjustments
- Strengths
- Government bonds can still provide portfolio defense, and European government bonds look relatively more attractive.
- Weaknesses
- The U.S. long end is constrained by term premium, supply and oil-price uncertainty, limiting the appeal of simply going long duration.
- Comparison
- Move from U.S. Treasuries to equal weight and increase relative allocation to European government bonds; JGBs offer better risk-adjusted value versus the forward curve.
- Risks
- Reacceleration in inflation, more hawkish central banks, fiscal concerns pushing yields higher.
- U.S. dollar / G10 FXWeak in 2H26, then rebounds
- Strengths
- Cooling core inflation, lower rates and global risk appetite support a temporary dollar weakening.
- Weaknesses
- U.S. growth leadership and European political risk may limit dollar downside and drive a 2027 rebound.
- Comparison
- The report sees near-term dollar weakness versus consensus and forward pricing; risk-sensitive currencies should perform better when the dollar weakens.
- Risks
- Stronger-than-expected U.S. economic data, rising European political risk, greater safe-haven demand.
- Emerging-market FXExpected to continue outperforming G3
- Strengths
- Temporary dollar weakness and improved risk appetite support EM performance.
- Weaknesses
- Regional dispersion is significant, with Asia ex-Japan less favored than CEEMEA and Latin America.
- Comparison
- CEEMEA and Latin America are preferred over AXJ.
- Risks
- Dollar rebound, deterioration in global risk appetite, local policy or fiscal risks.
- U.S. investment-grade creditUnderweight / cautious
- Strengths
- Fundamentals remain healthy, and the higher yield level attracts demand.
- Weaknesses
- AI capex and M&A financing are driving record issuance, and supply pressure may cause spreads to widen moderately.
- Comparison
- Less attractive than equities and some HY; the technology sector is underweight, while banks, utilities and Yankee corporates are overweight.
- Risks
- Supply coming in above expectations, spread widening, higher financing costs.
- U.S. high-yield bondsSelectively bullish, the sweet spot within credit
- Strengths
- Earnings resilience is better, single-B and data-center-related HY debt offer relative opportunities, and total return expectations are healthy.
- Weaknesses
- HY issuance has been raised because of AI financing demand, and some lower-quality issuers still face pressure.
- Comparison
- More attractive than IG; single-B is preferred over BB, and BB loans are suitable for capturing carry.
- Risks
- Rising default rates, liquidity contraction, deteriorating financing quality for AI-related projects.
Key data
- Asia 2026 growth forecast revision4.8% YoYThe report table shows the 2026 Asia growth forecast was raised by 40bp to 4.8%.
- Asia non-tech exportsAbout 19% annualized growth for the April early-report economiesUsed to support the view that the export and industrial recovery is spreading into non-tech sectors.
- Capex growth ex-China3.6% in 2025, 3.8% in 2026, 4.2% in 2027 YoYThe report expects global capex growth excluding China to improve gradually.
- Asia fixed asset investmentAbout $11 trillion in 2025E, about $16 trillion in 2030EThe chart shows total Asian fixed investment is expected to rise from about $11 trillion in 2025 to about $16 trillion in 2030.
- Dollar index viewDXY first to 95, then reboundThe report expects the dollar to keep weakening in 2H26, but then rebound on U.S. growth leadership.
- U.S. IG issuance forecast$2.25 trillion, +25% YoYThe report expects record IG supply, a major factor suppressing credit spreads.
- U.S. HY issuance forecast$440 billion, +34% YoYThe HY issuance forecast was raised because of stronger AI financing demand.
- Default-rate forecastLoans 5.5%, private credit 8%, HY 3.5%The report expects software-related stress to push up loan and private-credit default rates, while HY defaults rise only modestly to 3.5%.
- U.S. yield-curve view2s10s flattens to 40bp in 2Q26, then steepens to 70bp by end-2027Front-end rates drive curve steepening, while term premium, supply and oil-price uncertainty limit the appeal of duration.
Impact & implications
For portfolio implications, the report supports maintaining a risk-asset tilt through 2H26 to 2027, prioritizing developed-market equities and U.S. equities, while remaining selective on corporate credit that faces supply expansion from AI capex financing. In FX, a temporary weakening of the dollar should benefit risk-sensitive currencies and some emerging-market currencies; in rates, the strategy leans more toward curve trades rather than simply extending duration; and in credit, investors should distinguish between opportunity in HY names with earnings resilience and the risks of IG supply pressure plus rising default rates in loans and private credit.
Risks
- Energy supply shocks weigh on growth and increase inflation uncertainty.
- Geopolitical factors such as Middle East conflict widen the dispersion of returns.
- The market underprices recession risk; if growth weakens, repricing may follow.
- AI capex and M&A financing lead to excessive credit supply, pressuring corporate credit spreads.
- Rising default rates in loans and private credit, especially software-related stress.
- A 2027 dollar rebound could weaken performance in emerging markets and risk-sensitive currencies.
What to watch
- Whether Asia manufacturing PMIs, industrial production, non-tech exports and capital goods imports continue to improve.
- Whether AI infrastructure, the energy transition and defense spending continue to translate into actual capex.
- Core inflation and central bank policy paths, especially the pace of rate cuts by the Fed and Asian central banks.
- Whether the DXY declines to 95 as expected, and whether signs of a later rebound emerge.
- The impact of G7 net bond supply, term premium and fiscal concerns on long-end yields.
- U.S. IG and HY issuance pace, AI financing demand, spread moves and default-rate trends.
- Disruptions from Middle East conflict and energy prices to global growth and risk appetite.