Morgan Stanley has warned that although the base-case scenario still anticipates a 13% rise in the S&P 500 Index by 2026, three major 'surprises' could reshape the market: first, the U.S. might experience a 'jobless productivity boom,' with core inflation falling below 2%, creating room for significant rate cuts by the Federal Reserve; second, the stock-bond relationship could revert to 'bad news is bad news,' with U.S. Treasuries regaining their safe-haven status; third, a weaker dollar and recovering demand could trigger a surge in energy and metals prices, driving commodities to new highs.
In their latest outlook report, Morgan Stanley's strategy team noted that despite Wall Street’s widespread expectation of another robust year for the stock market in 2026, three potential “unexpected” shifts could reshape the market landscape.
In this report, led by Matthew Hornbach, the strategists’ primary warning centers on the possibility of a "jobless productivity boom" in the U.S. economy. In this scenario, weakness in the labor market would suppress wage growth and inflation, while accelerating productivity sustains steady economic growth. Morgan Stanley estimates that this trend could push core inflation below 2%, paving the way for the Federal Reserve to significantly cut interest rates without concerns about an inflation rebound—a move consistent with investors’ aggressive pricing of policy easing.
Meanwhile, the bank pointed out that the correlation logic between equity and bond markets may undergo a fundamental shift in 2026. While 2025 saw a simultaneous rise in both equities and bonds, the return of inflation expectations to target levels could end the “bad news is good news” trading pattern. Instead, risk assets may become more sensitive to negative economic data, reestablishing U.S. Treasuries as a traditional safe-haven asset within investment portfolios.
In the commodities sector, Morgan Stanley forecasts that energy and metal prices may experience a new surge driven by a weakening dollar and recovering demand from major consumer nations. Earlier, gold prices hit a record high, breaking through $4,400 on Monday, with silver and copper also reaching historic peaks. The bank maintains its baseline forecast of a 13% rise in the S&P 500 Index in 2026 but emphasizes that the aforementioned variables could cause the market trajectory to deviate from conventional expectations.
"Jobless" Productivity Boom
According to the Morgan Stanley report, the first potential shift is that the U.S. economy may experience an upgraded version of a "jobless recovery," termed "jobless productivity improvement." Matthew Hornbach pointed out that under this scenario, weakness in the U.S. labor market would effectively limit wage growth, thereby reducing inflationary pressures, while an acceleration in productivity gains would ensure stable economic growth.
The strategists estimate that in this scenario, core inflation could fall below 2%. Hornbach stated that this supply-side-driven disinflation trend would give the Federal Reserve room to lower policy rates into accommodative territory without causing investors to worry about a resurgence in inflation. Additionally, this situation would help alleviate market concerns over the growing U.S. deficit.
Early data from the labor market appears to corroborate this trend. According to figures from the U.S. Department of Labor, output per hour for non-farm business employees grew by 3.3% year-on-year in the second quarter, compared to a 1.8% decline in the previous quarter, indicating an uptick in productivity growth. Currently, investor expectations for the pace of rate cuts are even more aggressive than the Fed's official stance. According to the CME FedWatch tool, although Fed officials anticipate only one rate cut in 2026, market pricing suggests a 72% probability of further rate reductions that year.
Paradigm Shift in Equity-Bond Relationship
The second potential surprise involves a reversal in the correlation between stock and bond prices. Traditionally, stock and bond prices move inversely, with investors flocking to bonds as a safe haven when risk assets decline. However, this dynamic was disrupted in 2025, as both stocks and bonds experienced steady gains throughout the year. Morgan Stanley attributed this partly to the market operating under a "bad news is good news" mechanism, where weak economic data boosted stock markets by fueling optimism about Federal Reserve rate cuts.
However, strategists warn that if inflation falls back to the Federal Reserve's target level next year, this dynamic could reverse again. Once inflation expectations stabilize or face downside risks, risk assets will revert to the logic of 'bad news is bad news.' At that point, U.S. Treasuries will regain their role as a safe-haven asset and inflation hedge, resuming their function as the 'ballast' of investment portfolios during the two decades of low inflation prior to the pandemic.
Commodity Price Surge
The third major change lies in the potential surge in commodity and energy prices. Following a strong performance in 2025, Morgan Stanley speculates that a series of macro events could lead to a 'burst' in commodity prices in 2026. The bank’s analysis suggests that if the Federal Reserve continues to cut interest rates while other central banks raise rates, it will reduce the attractiveness of the U.S. dollar relative to other global currencies, thereby depressing the value of the dollar.
A weaker dollar, coupled with stimulus policies, is expected to drive the economic recovery of China, the world’s largest producer of rare earths and precious metals and one of the major energy-consuming countries. Morgan Stanley noted:
“A weak dollar and China’s robust consumption story will push energy prices, including gasoline, to new highs, while current gasoline prices are below their five-year lows.”
In fact, signs of strength have already emerged in the commodities market. Driven by tight supplies, increased demand fueled by artificial intelligence (AI) trading, and rising risk aversion, gold prices surged past $4,400 for the first time on Monday, setting a new record high. So far this year, the increase has been close to 70%, positioning gold for its best annual performance since 1979. Additionally, silver and copper—metals central to AI trading—also hit new highs this week. Market participants widely expect that, supported by these factors, the energy and overall commodities markets will continue to perform positively in 2026.
Editor/jayden