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Global financial markets could see the bull market in risk assets regain momentum as strong economic growth, corporate earnings and artificial intelligence-driven productivity support returns despite rising bond yields, according to a report by Morgan Stanley.
The report said higher yields largely reflect resilient nominal economic growth rather than deteriorating economic conditions, supporting its decision to turn overweight on global equities relative to fixed income. As the forces driving yields higher begin to fade, we expect the bull market in risk assets to reassert itself, the report said. Morgan Stanley said stronger growth continues to support corporate earnings, cash flows, employment, consumption and credit quality, while artificial intelligence (AI) adoption and investment remain important drivers of productivity and business expansion. The report noted that global economic activity has remained firm despite higher energy prices and interest rates, with services and manufacturing activity showing signs of acceleration. It also said productivity gains could allow wages and output to grow without triggering a corresponding rise in labour costs, helping contain inflationary pressures. However, the outlook remains vulnerable to geopolitical tensions, energy supply disruptions and persistent inflation. The report identified an oil supply shock that forces central banks to tighten monetary policy excessively as a key risk to its constructive market outlook. If inflation becomes uncontained, central banks must move from removing accommodation to actively destroying demand, the report said. The report also cautioned that refined oil products, particularly diesel, remain vulnerable to supply disruptions, which could transmit higher energy costs into inflation. While it expects growth to remain supportive of risk assets, a sustained energy shock could alter the outlook. Within equities, the firm maintained an overweight position on US markets, citing resilient growth, strong earnings and continued AI adoption. However, it remained cautious on European equities because of energy-related headwinds, while identifying opportunities in banks and utilities. It also flagged challenges for Indian equities, citing comparatively weaker forward earnings growth expectations, limited AI exposure and elevated energy prices. The firm further said the balance of risks remained constructive for now, but the outlook would depend on whether economic resilience and productivity gains continue to offset the impact of higher energy prices and inflation. (ANI)
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