The “sell America” trade has hit US assets in recent days as investors have gotten jittery over what a new spending bill will mean for the federal deficit.
The S&P 500 has dropped about 1% over the past two days, while the 10-year Treasury yield — which trades inversely to bond prices — has spiked 10 basis points in just four days.
Despite the recent selling of US assets, a team of strategists at Morgan Stanley expect them to rebound and outperform global peers over the next year.
“We push back against the idea that foreign investors would or should abandon US assets significantly,” they wrote.
Part of their reasoning is simply that there aren’t superior options.
“TINA — ‘there is no alternative’ — remains a theme for now,” the strategists said.
Detailed below is the rationale for the firm’s bullish outlooks on both US stocks and bonds.
Stocks
While volatility will continue to dominate over the next two quarters, American indexes should defy current trends through the next year. By the second quarter of 2026, the firm expects the S&P 500 to hit 6,500, which represents 10% upside from current levels.
“The earnings path should be aided by Fed rate cuts in 2026, dollar weakness, as well as a broader realization of AI-driven efficiency gains,” the bank wrote.
Meanwhile, de-escalating trade tensions have removed the largest downside scenarios, meaning that the market is unlikely to retest April lows any time soon, Morgan Stanley wrote. An accommodating policy agenda and seven interest rate cuts in 2026 should boost valuations above average.
Bonds
Even as the yield on 10-year Treasurys climb, Morgan Stanley sees it as a temporary trend. It expects rangebound trading until the fourth quarter, at which point investors will start pricing in rate cuts for 2026.
The bank expects the 10-year yield to fall to 3.45% by the middle of 2026.
Morgan Stanley also pushed against the idea investors are dumping US assets in a more permanent retreat, something that seemed possible during the April’s tariff-induced chaos.
“Global equity funds have not shifted away from the US any more than index weight changes over the last quarter,” analysts wrote. “The amount of USD bonds held by foreigners is the highest ever, suggesting that there are still rest-of-world buyers of USD assets — especially high-quality USD assets.”
