U.S. Outperformance in Sight? ETFs to Play Morgan Stanley's Forecast

The S&P 500 began November on a volatile note, mirroring its performance in the previous months. Amid growing concerns over an AI bubble and stretched valuations, Morgan Stanley MS still expects U.S. equities to outperform global peers next year and has lifted its 2026 year-end outlook for the broad market index.

According to Reuters, MS favors global stocks over credit and government bonds, bolstered by accelerating AI-related capital spending and supportive policy conditions. The firm expects global financial markets to enter 2026 on a more stable footing, with most trade-related uncertainties having faded.

More Into Forecasts

As quoted in the Reuters article, Morgan Stanley projects the S&P 500 to climb to 7,800 by year-end 2026, marking an increase of about 18% from current levels, supported by strong earnings growth and productivity boosts from AI adoption.

The firm’s optimistic outlook follows a similar upgrade from UBS. According to UBS forecasts, as quoted by Yahoo Finance, the S&P 500 is expected to reach 7,500 by the end of next year, supported by strong corporate earnings and continued strength in the resilient tech sector, further reinforcing confidence in the ongoing AI-driven momentum.

Morgan Stanley also anticipates U.S. small-cap stocks to outperform large caps, aided by the Fed rate cuts. Additionally, a Bank of America survey showed that U.S. small and mid-sized businesses expect a more robust 2026.

Per Reuters, the BofA survey showed that most small and mid-sized business owners in the United States anticipate a stronger year ahead, with 74% forecasting higher revenues and nearly 60% planning to scale up operations. Additionally, roughly half of the business owners surveyed expect economic conditions to improve as tariff policies stabilize and inflation cools, with many also anticipating better supply-chain dynamics in 2026.

ETFs to Explore

Below, we highlight funds tracking the S&P 500 for investors looking to increase exposure and capitalize on the optimistic outlook for U.S. markets. Funds tracking the broad market index could offer attractive opportunities. Such investments also provide investors with essential diversification and help reduce concentration risk in specific sectors.

It may not be advisable for investors to scale back their exposure to defensive ETFs just yet, as underlying volatility risks remain elevated. Investors should maintain a long-term perspective and avoid reacting to short-term market fluctuations.

Investors can consider Vanguard S&P 500 ETF VOO, SPDR S&P 500 ETF Trust SPY, iShares Core S&P 500 ETF IVV and State Street SPDR Portfolio S&P 500 ETF SPYM.

VOO, SPY and IVV are among the largest funds in the United States, with VOO having the biggest asset base of $797.04 billion, followed by IVV and SPY, with an asset base of $715.69 billion and $693.04 billion, respectively.

Regarding annual fees, SPYM is the cheapest option, charging 0.02% each, which makes it more suitable for long-term investing.

With a one-month average trading volume of about 76.88 million shares, SPY is the most liquid option, offering investors easier entry and exit while minimizing the risk of significant price fluctuations, ideal for active trading strategies. However, implementing an active strategy in the current landscape may not be the most effective approach.

Equal-Weighted ETFs

For investors seeking exposure to the upgraded economic forecast with a more balanced portfolio and comparatively lower risk profile, boosting allocations to equal-weighted index funds tracking the broad market may be a suitable approach.

These funds offer sector-level diversification by assigning equal weight to each constituent stock, regardless of market capitalization, reducing concentration risk. This makes them a relevant choice for investors seeking diversified exposure across sectors.

Invesco S&P 500 Equal Weight ETF RSP, ALPS Equal Sector Weight ETF EQL and Invesco S&P 100 Equal Weight ETF EQWL are some good options.

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This article originally published on Zacks Investment Research (zacks.com).

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