Morgan Stanley is bullish on the stock market for next year but remains focused on three key surprises: a 'jobless productivity boom' could suppress inflation, creating room for the Federal Reserve to cut interest rates; the end of simultaneous gains in stocks and bonds; and a 'surge' in commodity prices…
Forecasters generally expect the stock market to continue its upward trend next year, but unforeseen events and risks could always emerge, disrupting the current outlook.
Strategists at Morgan Stanley have identified three unexpected factors that could potentially impact markets next year, detailing events they believe might become significant surprises in 2026.
The bank is one of several Wall Street institutions bullish on the stock market for next year. In its annual outlook report, the firm projected that the S&P 500 Index (SPX) would rise by another 13% in 2026, driven by robust corporate earnings and a 'rolling recovery' sweeping through the U.S. economy.
'A year without surprises, in itself, would be a surprise,' wrote a team led by Matthew Hornbach in a note to clients last week.
Below are the three core potential surprises for 2026 that the bank is monitoring:
1. 'Jobless Productivity Boom'
The U.S. economy could experience a 'jobless productivity boom'—an intensified version of a 'jobless recovery'—that suppresses inflation and opens the door for more rate cuts by the Federal Reserve.
Hornbach wrote that in this scenario, weakness in the U.S. labor market would help contain wage growth and inflation, while an acceleration in productivity would support steady economic growth. He expects that under such conditions, core inflation could fall below 2%.
'This supply-driven disinflation provides the Fed with room to lower policy rates into accommodative territory without worrying that investors will fear a policy-induced inflation rebound,' he stated, adding that it could also alleviate investor concerns about the widening U.S. deficit.
Labor productivity growth appears to have begun to rebound. Data from the U.S. Department of Labor shows that output per hour for all nonfarm workers rose 3.3% year-over-year in the second quarter, a significant improvement from the 1.8% year-over-year decline in the previous quarter.
Investor expectations for the pace of Federal Reserve rate cuts next year are more aggressive than official forecasts. According to the CME FedWatch Tool, while Federal Reserve officials anticipate only one rate cut in 2026, investors believe there is a 72% probability that interest rates will fall by the end of the year.
2. The reversal of the stock-bond paradigm
Stock prices typically move inversely to bond prices — when risky assets decline, investors seek the safety of bonds.
This dynamic reversed in 2025, with both the stock and bond markets experiencing steady gains throughout the year. Morgan Stanley noted that part of the reason was that the stock market had recently fallen into a “bad news is good news” pattern — weak economic data benefited equities because it fueled investor optimism about potential Federal Reserve rate cuts.
However, the bank stated that if inflation falls back to the Federal Reserve’s target next year, this dynamic may reverse again. U.S. Treasury bonds are considered both a safe-haven asset and a tool for hedging against inflation.
“As inflation expectations meet the target — or even risk falling below it, risky assets will revert to a 'bad news is bad news' pattern, and the hedging role of Treasury bonds will restart, making them a portfolio cornerstone once again, much like during the two decades of low inflation before the pandemic,” wrote the bank’s strategists Martin Tobias and Eli Carter.
3. Surge in commodity and energy prices
Commodities, including precious metals, experienced a significant rally in 2025, and this trend may repeat itself in 2026. Strategists speculate that a series of events could lead to a “burst” in commodity prices:
The Federal Reserve continues to cut interest rates while other central banks raise rates. This would reduce the attractiveness of the U.S. dollar relative to other global currencies, leading to dollar depreciation.
A weakening US dollar combined with stimulus policies will boost China's economic recovery — China is one of the largest producers and consumers of rare earths and precious metals globally, as well as one of the largest energy consumers.
"A weaker US dollar and strong consumer momentum in China will push energy prices — including gasoline prices currently at a five-year low — to new highs," the bank stated.
Forecasters widely anticipate a positive performance for energy prices and commodities overall in 2026, driven by factors such as tight supply, demand growth spurred by AI-related transactions, and rising demand for safe-haven assets.
Gold, considered a safe-haven asset, surpassed $4,400 per ounce for the first time on Monday, hitting a record high. The metal has risen nearly 70% this year and is on track for its best annual performance since 1979.
Silver and copper, which are central to AI-related transactions, also hit all-time highs this week.
Editor/Doris