Morgan Stanley strategists say the economy has entered a new cycle resembling the post-World War II era, one marked by higher nominal growth and persistent inflation. The bank expects Treasury yields to stay higher for longer, with the S&P 500 and quality large-cap stocks favored over international markets.
Morgan Stanley strategists led by Mike Wilson argue that the reversal of a multidecade bond bull market is now clear, with implications across capital markets. The bank first flagged the shift in 2021, when it forecast that the disinflationary conditions of 1982 to 2020 were unlikely to persist for another eight to 10 years.
A cycle last seen after World War II
Wilson's team wrote in a note on Monday that the economy is now driven by higher nominal GDP growth and persistent inflation well above 2%, a dynamic the strategists compared to the years right after World War II. According to Morgan Stanley: "higher economic volatility and a more reactive monetary policy environment as inflation ebbs and flows."
The framework rests on the Kondratieff cycle, which describes 40- to 60-year waves of surges followed by declines. Between 1982 and 2020, Treasury yields fell as low as 0.5% during a multidecade bull market for bonds. Morgan Stanley now sees that trend reversing.
Yields climb as Treasury moves to contain them
The 30-year Treasury yield recently rose to its highest level in 19 years, while the 10-year yield climbed to a peak last reached in January 2025. The move came after the U.S. Treasury said last week that it would double its buyback of longer-dated Treasurys to help bring yields down.
The strategists expect the trend in yields to remain higher over the longer term, with occasional cyclical bull markets, much as during the 1945-to-1982 stretch. That earlier period marked a roughly 36-year secular bear market for bonds.
Where Morgan Stanley sees opportunity
The strategists note that inflation tends to be positive for most equities based on the bank's research, particularly cyclical stocks and companies where earnings growth has already priced in a recessionary outcome. They recommend quality, large-cap stocks, adopters of artificial intelligence and the S&P 500 over international markets, and the bank is overweight the financial, industrial and consumer-discretionary-goods sectors.
Semiconductor companies, framed by the strategists as AI enablers, have displayed a pattern similar to silver stocks, but with a four-month lag. That lag, the team said, suggests chipmakers are not likely to retake leadership in the near term after their rotation out of early-cycle AI stocks.
Source: MarketWatch
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