Why Markets Should Keep Running Hot

Summary

Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley, argues that easier fiscal, monetary, and regulatory policy in 2026 will support risk-taking, corporate activity, and animal spirits. He notes that although valuations are high, key market-based stability signposts—anchored inflation expectations, lower expected US rate volatility, a fairly valued US dollar, and well-behaved credit markets with tight spreads—are still holding. A positive view on earnings growth can continue to support markets, though major shifts in these signposts would change the outlook.

• Morgan Stanley sees easier fiscal, monetary, and regulatory policy in 2026 supporting risk-taking and corporate activity.
• High valuations may stay higher for longer because stimulative forces are aligned across many geographies.
• The Fed, BoE, ECB, and BoJ are expected to cut rates more or raise less than markets price.
• Fiscal policy is expected to remain stimulative in the US, Germany, China, and Japan.
• Inflation expectations are anchored near 2.4%, US rate volatility is lower, the USD is near fair value, and credit spreads are tight.
• A positive earnings-growth view can support markets while these stability signposts hold.
• Major shifts in these market-based measures could change the constructive outlook.