In its latest positioning report, the investment bank described valuations as “reasonable,” given corporate earnings prospects and nominal GDP growth.
According to the firm, corporate earnings remain the primary driver of the equity rally, a variable they expect to continue trending upward.
Morgan Stanley holds a particularly bullish view on the U.S., which is the only equity market they currently recommend overweighting.
Despite a global economic environment marked by inflation, uncertainty, and geopolitical tension, global equity markets have been on a run. With varying results across geographies and sectors, global equity benchmarks have risen strongly, driven primarily by the excitement surrounding the artificial intelligence boom, which has had Wall Street, in particular, as one of its epicenters. And while this positive momentum has raised several questions—and anxieties—around equity valuation levels, prices are supported by fundamentals. That is Morgan Stanley’s stance on the matter.
According to the bank’s latest global positioning report, BEAT (an acronym for Bonds, Equities, Alternatives, and Transition) for the third quarter of the year, economic fundamentals support valuations.
“While headline valuations appear elevated, they remain reasonable relative to earnings growth prospects and a structurally stronger nominal economy,” the investment bank noted in its recent report.
Along those lines, they added that they expect “the market to broaden out as geopolitical tensions ease, with many sectors still trading at lower valuations, leaving room for a rebound.”
Regarding the recent upside in equity markets, Morgan Stanley emphasized that it has been driven by corporate results rather than higher multiples. Current multiples, they noted, “are not extreme when viewed relative to the last five to ten years.”
Tailwinds for Stock Markets
One of the drivers Morgan Stanley sees for equities is related to economic dynamics. “Stronger nominal GDP growth supports corporate revenue expansion, earnings growth, and cash flow generation, creating a favorable environment for equities,” they commented in their report.
Added to this is the public policy component, given that the investment bank anticipates that fiscal policies, deregulation, and tax-driven growth “are likely to reinforce this.”
For the firm, corporate earnings remain the primary driver of the equity rally. Looking ahead, they anticipate this variable will continue to trend upward, supported by “resilient demand, productivity gains, and expanding capex cycles.” This trajectory, they predicted, will run its course as long as the capital expenditure cycle continues to rise.
Currently, an expanding capex cycle is closely tied to the rapid adoption of artificial intelligence models across all levels of the economy, in what many describe as a new industrial revolution. This deployment of corporate muscle has helped keep investor optimism alive amid uncertainties.
An Interesting Dynamic in the U.S.
Stock markets overall have posted relatively solid performance. The MSCI All Country World Index, which tracks global equities broadly, has gained 18.2% over the last 12 months. The United States as a whole has performed on par with the rest of the world—with one-year gains of 16.6% for the MSCI USA Index and 16.7% for the MSCI World ex USA Index—but its technology sector has stood out in particular.
Reflecting this, while the S&P 500 has appreciated 16.7% over 12 months and the Dow Jones Industrial Average 11.8%, the Nasdaq Composite has surged 20.4%.
Echoing its positive view on the fundamentals behind equity valuations, Morgan Stanley sees room for Wall Street to run further. In fact, in its positioning recommendations, the U.S. stock market is the only one rated Overweight.
This recommendation is backed by a “constructively positive view on overall growth and earnings in 2026.” In that regard, they highlighted that fiscal stimulus from the country’s One Big Beautiful Bill, deregulation efforts, and ongoing AI adoption “continue to support growth.”
In contrast, the firm holds a Neutral view on Japanese and Emerging Market equities, and an Underweight recommendation on European equities.
