. Industrial and tech sectors also look expensive pretty much everywhere. Rich markets don’t have to fall, but they do become punchier.
Positioning is crowded. Investors haven’t trimmed much of their AI exposure. Funds are still loaded up on stocks from the US, South Korea, and Taiwan. And when everyone owns the same thing, even a small stumble can turn into a major fall.
Debt is piling up fast. Corporate bond issuance is already running 27% above last year’s pace and has reached $1.5 trillion this year. A lot of that borrowing is aimed at financing AI infrastructure. And the massive spending and debt binge are raising serious concerns among investors, with no clear sign that all those expenses will ever pay off.
Geopolitics. Hostilities between the US and Iran rattled oil prices earlier this year and again more recently. A genuine oil shock could tip the global economy toward recession or stagflation – the tricky combination of weak growth and hot inflation.
Despite all that, the analysts at Morgan Stanley aren’t terribly gloomy. They argue that the concerns are more about risk-adjusted returns than total returns. And they say the rally could keep broadening from here.
Why Morgan Stanley is still constructive
In a word: AI. The technology’s investment cycle has been driving growth and earnings, and likely will continue to do so for a while.
The big cloud companies (Amazon, Microsoft, Alphabet, and Meta) are planning to spend around $800 billion building AI infrastructure this year, and more than $1 trillion next.
Morgan Stanley estimates that AI added roughly 0.8 percentage points to US economic growth in 2025 and sees it kicking in more than a full point this year. And considering the American economy tends to grow at just 2% to 2.5% a year, that’s a hefty contribution.
The bank’s investing view
Morgan Stanley has just increased its weighting in developed market shares. It says it sees global stocks returning 9% to 13% over the next 12 months, with the US as its top pick.
It expects the S&P 500 to gain about 11% from its current levels, reaching 8,300 by the second quarter of 2027, partly because of the index’s ability to shake off an escalation in geopolitical tensions.
The bank increased its MSCI Europe index target to 2,810, for a 14% rise from the current level. The analysts see the region’s companies benefiting from inflation, AI, and money flowing in from investors diversifying away from the US.
Morgan Stanley sees Japan’s Topix index hitting 4,300, around 9% higher than it sits now.
The bank is still positive on South Korea and Taiwan shares, both as AI plays – but it’s cautious because of the geopolitical and concentration risk.
Emerging market stocks are among the least-loved by the bank. Flows into those markets have been close to non-existent lately, except for the ones related to AI.
Morgan Stanley’s holding an equal weight across both commodities and cash. But it’s especially bullish on gold.
Its base case is a rosy $4,900 an ounce, up from around $4,040 now. The caveat is important, though: it notes that gold only really works if the Federal Reserve doesn’t raise interest rates.
The analysts expect oil to swing back into surplus next year, dragging Brent crude down to around $75 a barrel, from roughly $89 now.
Unlike the consensus, Morgan Stanley expects central banks in the US and UK to hold rates steady for the rest of the year, but sees the European Central Bank and the Bank of Japan hiking theirs.
The bank likes bonds but prefers government bonds over corporate ones. The reason is simple: with so much company issuance expected, supply could weigh on corporate bond performance.
Last up, my take
Morgan Stanley’s recommendations add up to a well-diversified portfolio: overweight in US shares, chunky exposure to AI, European and Japanese stocks, and a mix of commodities and bonds.
The worries it highlights are useful, but I would add one more because the whole thesis leans heavily on it: those giant “hyperscaler” cloud providers that are central to the AI build-out need to keep spending. Their spending plans are the engine behind much of this investment story.
We should get more clarity on that during this quarterly results season. Ideally, the answer is reassuring, and this becomes just another brick in the wall of worry that investors manage to climb.
The recent sharp selloff in tech and momentum stocks is a great reminder that overcrowded and concentrated positioning cuts both ways. A lot of good news has been priced into these AI-linked companies. In fact, many would say they’ve been priced for (or above) perfection. That means that the future has to go very right just for the current valuations to hold, never mind for prices to move even higher. So even if the long-term AI thesis stays solid, there’s still lots of room for pullbacks along the way.
That said, most of the tech stocks hit hardest over the past month are still among the year’s best performers. Morgan Stanley believes the AI spending outlook will remain intact. And if that happens, the recent pullback could be an opportunity, rather than the start of something darker.
The risk is clear. Any sign that AI capital spending (capex) is slowing would raise uncomfortable questions about future growth. And that could make the wall of worry too steep to climb.