Morgan Stanley Warns Bull Market May Face Inflation and Valuation Risks in 2026

The U.S. equity bull market could extend into a fifth year, but Morgan Stanley says investors should be prepared for a more tempered outlook as several risks build beneath the surface, according to Lisa Shalett, the bank’s Chief Investment Officer for Wealth Management.

In a note, Shalett said the S&P 500’s roughly 16% gain this year reflects “unexpected positive surprises” that have helped markets shrug off worries about issues such as immigration reform and tariffs. 

She added that Morgan Stanley’s Global Investment Committee still expects the index to rise about 10% in 2026 to around 7,500, supported by a resilient economy and “double-digit growth in corporate earnings.”

However, Shalett cautioned that “there are reasons for caution,” warning that optimism is already embedded in valuations. 

Forecasts for lower interest rates, stimulus from the One Big Beautiful Bill Act, deregulation and rapid AI adoption “are already largely reflected in current lofty equity valuations,” Morgan Stanley said.

The note flagged three major risks: lingering tariff impacts that could raise business and consumer costs; higher healthcare premiums if Affordable Care Act subsidies lapse; and potential “run it hot” election-year stimulus, such as tariff-linked bonus checks, that could reignite inflation. 

A new Federal Reserve chair aligned with this approach could add further uncertainty.

Despite these challenges, Shalett advised investors to stay invested and prioritise diversification, saying bull markets “are meant to be ridden, not timed.” 

Morgan Stanley continues to favour active management over passive exposure to the concentrated S&P 500 and sees opportunities in real assets, hedge funds and distressed or asset-backed credit.