Equities are at risk of a significant pullback as the global bond selloff threatens to derail the artificial intelligence-driven rally, according to Morgan Stanley strategists.
If the bond market becomes more volatile and long-term interest rates keep rising, "we would expect the first meaningful correction in equity prices since markets bottomed at the end of March," the team led by Mike Wilson wrote in a note.
The S&P 500 retreated from an all-time high late last week, with equity-index futures signaling U.S. stocks are set to extend their decline on Monday. Inflation fears stemming from prolonged elevated energy prices due to the Iran war have pushed down Treasurys across the curve, with the 30-year yield rising to the highest in almost three years. Yields in Japan also surged to the highest levels in several decades.
The jump in Treasury yields and the Federal Reserve's more hawkish tone reflect surging oil prices along with a strong economy, Wilson said. Bond markets need a lasting resolution to the Iran conflict before rates retreat, he added.
Still, the strategists stayed with their longer-term bullish call for equities. They raised their 12-month target for the US benchmark to 8,300 last week on the back of the strongest earnings growth in more than two decades, outside of recoveries from major shocks.
They highlighted that investors have particularly underestimated the extent to which strong profit growth went beyond AI beneficiaries, adding that the appetite to add risk to areas that could benefit from a broadening in earnings growth remained limited.
"While a widespread earnings recovery is gaining momentum, market participants are generally not positioned for it," Wilson said. "The key variables to watch that should accelerate this broadening trade are oil prices and rates coming off recent highs."
Copyright 2026 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.