Thoughts on the Market: 2026 Global Outlook – A Strong Year for Risk Assets
Date: November 18, 2025 | Host: Seth Carpenter (Global Chief Economist) | Guest: Serena Tang (Chief Global Cross Asset Strategist)

Episode Overview

In this episode, Morgan Stanley’s Seth Carpenter and Serena Tang provide a deep dive into their 2026 global market outlook. The conversation centers on why 2026 is shaping up as a strong year for risk assets, the shift in market narratives, key asset class preferences, highest conviction investment views, and core risks and uncertainties—including policy dynamics, the AI investment cycle, and currency expectations.

Key Discussion Points & Insights

1. 2026 Macro Backdrop and Investment Strategy

• Volatility in 2025 Sets the Stage: Tariffs and policy uncertainty led to market volatility. Equities ultimately outperformed bonds as rate cuts began, but cross-asset strategies required “identifying correlations and opportunities” in a changing geopolitical landscape. (00:09–01:00)
• Pro-cyclical Policy and Focus Shift:
  • Serena Tang identifies 2026 as a “strong year for risk assets” aided by “unusually pro-cyclical policy mix supportive of earnings.”
  • Markets expected to shift focus from global macro concerns to “micro asset specific narratives,” namely AI CapEx investment.
  • Strong recommendation: “risk on tilt; equities over credit and government bonds, with a preference for U.S. assets.” (01:00–01:35)
  • Quote:

    “We think 2026 will be a strong year for risk assets as you have unusually pro cyclical policy mix... really calls for a risk on tilt. We recommend equities over credit and government bonds with a preference for U.S. assets.” — Serena Tang (01:00)

2. Rotations and Asset Class Preferences

• Asset Class Rotation:
  • Ongoing preference for US equities as in 2025, but more emphasis on asset-specific drivers as macro uncertainties (like tariffs) narrow.
  • S&P 500 favored; Mike Wilson’s price target at 7,800 reflects clear bullishness vs. non-U.S. equities.
  • Increasing bullishness on U.S. high yield corporate credit, especially as investment-grade issuance crowds out that space—high yield could outperform IG due to technicals and exposure to AI-driven CapEx. (01:35–03:26)
  • Quote:

    “We believe that U.S. equities can generally do better than rest of world… also turned more bullish on high yield corporate credit… the asset class can benefit from the combination of monetary deregulation policy.” — Serena Tang (01:45–03:09)

3. Highest Conviction Calls for 2026

• Strongest views:
  • U.S. Equities: “Remains a very high conviction call for us.” (03:55)
  • U.S. Treasury Curve Steepening:
    • Material steepening expected, especially led by movements at the two-year point, as markets underprice future Fed easing and growth slowdown tail risks.
    • “This steepening will be very much driven by what happens in the two year point.” (03:55–04:34)
  • Quote:

    “We see pretty material U.S. treasury curve steepening over the next year… even as a macro strategist actually expect yields at least in the back end to be mostly range bound.” — Serena Tang (03:59–04:15)

4. Risks and Downside Scenarios

• Key Risks Identified:
  • Abrupt end to the AI investment cycle:
    • Could trigger cascading effects, including pressure on U.S. equities due to large “hyperscalers” index weights; could benefit IG credit via reduced issuance.
  • Overheating “animal spirits” (speculative behavior):
    • If sentiment overheats, their tilt toward cyclicals and beta would “be wrong;” late cycle expansions historically favor IG and bonds over equities and high yield.
  • Unexpected Fed policy shifts:
    • Either no further easing, or a changed “reaction function” (e.g., new chair with different approach), could disrupt yield curves and market expectations.
    • Quote:

      “The last risk I think to our asset allocation is really the Fed—either the FOMC not easing further… or if it changes its reaction function.” — Serena Tang (04:56–06:30)

• Probability of Reversal in Rate Cuts:
  • Seth Carpenter sees ~20% risk of stronger spending causing a need for fewer rate cuts—“You can't rule it out. I'd say 20% or something like that, maybe a little bit more.” (07:32)
  • He downplays the risk of a “truly unorthodox” Fed change in the second half of next year, citing committee process and gradual turnover. (07:56–08:36)

5. Outlook for the Dollar

• 2025 Dollar Depreciation Played Out:
  • Team’s prior bullish call on dollar weakness came true.
• Continued Downtrend Expected into Mid-2026:
  • “We do think the dollar will continue its trend downwards from here to the middle of next year... we’re once again more bearish than consensus on the dollar by the middle of next year.” — Serena Tang (09:22–09:59)
  • Fed easing and softer U.S. economic data to drive further depreciation.

Memorable Quotes

• “We think 2026 will be a strong year for risk assets as you have unusually pro cyclical policy mix… We recommend equities over credit and government bonds with a preference for U.S. assets.” – Serena Tang (01:00)
• “This time around… it’s very much more about asset-specific stories… U.S. equities can generally do better than rest of world…[and] very much like US equities, we believe that [high yield corporate credit] can benefit from the combination of monetary deregulation policy.” – Serena Tang (01:45–03:09)
• “We see pretty material U.S. treasury curve steepening over the next year... driven by what happens in the two year point.” – Serena Tang (03:59–04:13)
• “The last risk… to our asset allocation is really the Fed… not easing further… or if it changes its reaction function.” – Serena Tang (06:22–06:37)
• “You can't rule it out. I'd say 20% or something like that, maybe a little bit more [for a reversal in Fed rate cuts].” – Seth Carpenter (07:32)

Timestamps of Key Segments

• Macro backdrop & market focus – 00:09–01:00
• 2026 investment strategy outlined – 01:00–01:35
• Asset class rotations & preferences – 01:35–03:26
• High conviction views: US equities, yield curves – 03:55–04:34
• Major risks & downside scenarios – 04:56–07:32
• Fed policy & leadership uncertainty – 07:51–08:36
• US Dollar outlook – 08:37–09:59

Final Takeaways

• Morgan Stanley recommends a "risk on" tilt for 2026 — US equities and high yield credit are seen as the standout opportunities, underpinned by pro-cyclical policies and AI CapEx tailwinds.
• Rates and currency views: Expect U.S. treasury curve steepening and a continued trend of dollar depreciation into mid-2026.
• Watch the AI cycle, animal spirits, and Fed dynamics for risks that could upend core views.
• The team remains vigilant about uncertainty and ready to adapt as new data on growth, inflation, and policy emerges.

This episode offers concise and actionable insights for global investors considering cross-asset strategy in a rapidly evolving macro environment.