Morgan Stanley: Forget about the "sell America" trade! US stocks and bonds will dominate the global market next year.

After rating agency Moody's downgraded the US credit rating last week, concerns this week about the cold reception of US bond auctions and the Trump administration's tax cuts leading to further expansion of the US budget deficit have accelerated the "sell US" trade. The S&P 500 index has fallen about 1% in the past two days, and the yield on the benchmark 10-year US Treasury bond has surged by 10 basis points in just four days. Despite recent selling of US assets, a team of strategists at Morgan Stanley expects US assets to rebound next year and outperform their global peers. They said, "We disagree with the view that foreign investors will or should significantly sell US assets." One of their reasons is quite simple, there is no better alternative, TINAThere Is No Alternative to owning equitiesremains a theme. For the US stock market, Morgan Stanley strategists believe that although volatility will continue to dominate the next two quarters, the performance of the US stock market next year should be significantly different from the current trend. They predict that by the second quarter of 2026, the S&P 500 index will reach 6500 points, a 10% increase from the current level. The strategists stated, "Interest rate cuts by the Federal Reserve in 2026, a weaker dollar, and the broader implementation of efficiency driven by artificial intelligence should contribute to a profitable path." The Morgan Stanley strategists also added that the easing of trade tensions has eliminated the greatest downside risk for US stocks, meaning the S&P 500 index is unlikely to retest its April lows in the short term. The strategists said that loose policy agendas and the potential for seven interest rate cuts in 2026 should drive valuations above average levels. Regarding US bonds, although the yield on the 10-year US Treasury bond has risen recently, Morgan Stanley strategists believe this is a temporary trend. They expect the US bond yield to remain range-bound until the fourth quarter, when investors will begin to digest the interest rate cuts of 2026 reflected in the US bond yield. The strategists also predict that by the middle of 2026, the yield on the 10-year US Treasury bond will drop to 3.45% (currently around 4.54%). The strategists also do not believe investors are selling US assets in a more sustained "retreat" style, although this seemed possible during the chaotic period sparked by tariffs in April. They said, "In the past quarter, global equity funds have not withdrawn from the US. Foreign holdings of US dollar bonds are at an all-time high. This indicates that there are buyers of US assets in other regions, especially high-quality US assets."