Morgan Stanley Forecasts 2026 Bull Market Extension Driven by AI and Fed Policy

2026-01-22 economy

New York, Friday, 23 January 2026.
With global AI spending projected to reach $2 trillion, Morgan Stanley sees the bull market running through 2026, fueled by productivity gains and supportive central bank policies.

The Investment Landscape for 2026

As the bull market enters its fourth year, Morgan Stanley Investment Management remains optimistic about its longevity, projecting that the rally has room to extend throughout 2026 [1][6]. According to Andrew Slimmon, a key voice in the firm’s 2026 Stock Market Outlook, the convergence of supportive monetary policy and productivity gains driven by artificial intelligence serves as the primary engine for this continued performance [1][6]. While the market has matured, the investment bank suggests that we are witnessing a transition rather than a conclusion, with leadership potentially broadening beyond the technology heavyweights that dominated previous cycles [6]. This shift comes as the broader economy demonstrates resilience, with Morgan Stanley maintaining a forecast that avoids recession scenarios for the United States in the near term [5].

AI Capital Expenditure and Earnings Growth

The financial commitment to artificial intelligence infrastructure is accelerating rapidly, acting as a massive tailwind for the global economy. Global AI spending is projected to reach $2 trillion in 2026, a significant escalation in capital deployment [7]. Of this total, the five largest U.S. technology companies alone are expected to contribute $600 billion, underscoring the concentration of investment at the top of the market [7]. This follows a pivotal year in 2025, where AI spending accounted for approximately one-third of GDP growth [7]. However, the earnings landscape is evolving; while S&P 500 companies saw a 17% earnings growth rate in the previous year, Morgan Stanley forecasts a moderation to 12% for 2026 [7]. This represents a decrease of 5 percentage points in headline growth, yet the firm anticipates these gains will be more broadly distributed across sectors rather than confined to the tech sector [7].

Macroeconomic Resilience and Policy Shifts

On the macroeconomic front, the U.S. economy is expected to maintain a steady trajectory. Michael Gapen, Chief U.S. Economist at Morgan Stanley, forecasts U.S. growth of approximately 2.4% for 2026, mirroring the performance seen at the conclusion of 2025 [5]. This ‘above trend’ growth suggests that consumer consumption may be outpacing fundamentals, which presents a challenge for further acceleration but supports a soft-landing thesis [5]. Regarding monetary policy, the Federal Reserve’s path appears contingent on inflation data. If inflationary pressures diminish as anticipated after the first quarter, the Fed may execute one or two rate cuts in the second half of 2026 [5]. Meanwhile, international divergences are emerging; the Bank of Japan faces pressure to potentially hike rates earlier than its January 2027 target to manage currency depreciation and imported inflation risks [5].

A Resurgence in Deal Making

Corporate activity is poised to become a significant market driver this year, with Morgan Stanley identifying five forces shaping a surge in mergers and acquisitions (M&A) [3]. Financial sponsors are expected to be a major catalyst, holding a massive $4.3 trillion in ‘dry powder’ that needs to be deployed [3]. Additionally, there is immense pressure to monetize aging portfolio companies; approximately 13,000 sponsor-backed businesses are currently in private hands, with over half held for five years or more [3]. We also anticipate a structural shift in corporate strategy, with the volume of separations in 2026 expected to be 50% greater than any year in the last decade as large companies move to optimize their portfolios [3]. Cross-border activity is also accelerating, particularly with Japanese companies emerging as influential forces in global deal-making [3].

Navigating the High-Wire Act

Despite the constructive outlook, investors are advised to remain vigilant regarding potential volatility. Morgan Stanley describes the 2026 market environment as a ‘high-wire act,’ where optimism is high but expectations are stretched [2]. Political risks, particularly those stemming from the U.S. midterm election cycle, are likely to create patches of volatility throughout the year, though these may offer selective entry points for discerning investors [6]. furthermore, while the AI narrative is strong, risks remain regarding capacity constraints in data center buildouts—specifically power and zoning issues—which could delay adoption timelines [7]. The firm also notes that the ‘established’ AI players offer a greater margin for error compared to emerging companies, where execution risk is higher [7].

Sources

Artificial Intelligence Market Outlook