Midyear Global Outlook, Pt 2: Why the U.S. Still Leads Global Markets

Our analysts Serena Tang and Seth Carpenter discuss Morgan Stanley’s out-of-consensus view on U.S. exceptionalism, and how investors should position their portfolios given the current market uncertainty.

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Seth: Welcome to Thoughts on the Market. I'm Seth Carpenter, Morgan Stanley's Global Chief Economist.

Serena: And I'm Serena Tang, Morgan Stanley's, Chief Global Cross-Asset Strategist.

Seth: Today, we're going to pick up the conversation where we left it off, talking about our mid-year outlook; but this time I get to ask Serena the questions.

It's Thursday, May 22nd at 10am in New York.

Serena, we're back for part two of this podcast. Let's jump in where we left off. We've seen a lot of policy surprise in the last six months. We've had a big sell off in the beginning of April, in part inspired by all of this uncertainty.

What are you telling clients? What do you think investors should be doing? How should they be positioning their portfolios in the current circumstances?

Serena: So, we are recommending going overweight in U.S. equities and going overweight in core fixed income like U.S. treasuries and like investment grade corporate credit. And we have a very strong preference for U.S. over rest of the world assets, except the dollar. Now I think for us, the main message is that you have global growth slowing, which is what you talked about yesterday.

But you know, risky assets can look past the low growth and do well, while treasuries can look forward to the many Fed cuts you guys are expecting in 2026 and rally. But if I look at valuations that does suggest equities and credit have completely, almost priced out, growth slowdown odds. Meaning that I think there is still some downside and we'd recommend quality across the board.

Seth: In your judgment then, looking around the world at all the different asset classes, how well, or perhaps how poorly, are those asset classes priced for the sort of macro views that we were just discussing?

Serena: So I think the market that’s probably least priced for the slowing economy that you and your team have been forecasting is really in the government bond space. I think the prospect of a lot more Fed cuts than what is currently priced into the market will lower government bond yields, particularly starting in 2026.

As you know, our rates team has a target of 3.45 percent for U.S. Treasury 10-year yields, and 2.6 percent for U.S. Treasury two-year yields. Meaning that we also get a steeper curve by this time next year. And this translates to more than 10 percent of total returns for U.S. Treasuries – very attractive; in large part because the markets aren't priced for the Fed scenario that you and your team are forecasting.

Seth: Let me, then push a little bit on one of the things that I've been talking to clients about, or at least been asked about, which is the dollar. The role of the dollar? U.S. exceptionalism? Is it real?

Serena: Yeah that's a great question because I think this is where we are the most out of consensus. If you've noticed, all of our views right now really line up as us being pretty constructive on U.S. dollar assets. Like at a time when everyone's still really debating the end of U.S. exceptionalism. And we really push back against the idea that foreign investors would or should abandon U.S. assets significantly.

There are very few alternatives to U.S. dollar assets right now. I mean, like if you look at investible stock market cap, U.S. is ne