Investing.com -- Morgan Stanley has upgraded U.S. equities to Overweight, citing a combination of resilient earnings, supportive monetary policy, and a weakening dollar.

The Wall Street giant now favors American stocks over other regions, projecting the S&P 500 to reach 6,500 by the second quarter of 2026.

Earnings per share (EPS) is forecast to grow steadily through 2027, supported by a pressured dollar and a backdrop of falling interest rates, with valuations expected to remain elevated.

“We prefer U.S. to non-U.S. equities as we anticipate earnings revisions to trough in the near term and USD weakness to be a positive catalyst for multinational earnings,” Morgan Stanley said in its mid-year global strategy outlook published Tuesday.

“U.S. risky and risk-free assets are attractive versus the Rest of World (RoW) against a backdrop of a slowing but still expanding global economy despite policy uncertainty, along with deregulation and more rate cuts than priced in the markets,” the report notes.

This marks a clear regional preference within a broader neutral stance on global equities. Morgan Stanley holds an Equal Weight rating on global equities but with an Overweight view on U.S. stocks and core fixed income.

Outside the U.S., the firm is more cautious. It maintains an Equal Weight rating on European and Japanese equities and an Underweight rating on emerging markets (EM).

For Europe and Asia ex-India, Morgan Stanley sees margin pressures ahead due to stronger local currencies and greater exposure to tariff-sensitive sectors. “Currency strength and an equity market sector skew to tariffs” are expected to weigh on non-U.S. earnings.

While the dollar is forecast to weaken further, the bank rejects the notion that U.S. assets will lose their global appeal. “We push back against the idea that foreign investors would or should abandon U.S. assets significantly,” the report noted.

Despite sluggish growth, Morgan Stanley maintains that “the global economy is not in a recession.” It sees expansion continuing, albeit at a slower pace, supported by easing inflation, policy stimulus, and a reduction in extreme downside risks.

The firm forecasts global real GDP growth to slow to 2.5% year-over-year by the end of 2025, down from 3.5% at the end of 2024. Inflation is projected to remain persistent, easing slightly to 2.1% by the end of 2025 from 2.3% a year earlier.

Morgan Stanley sees broad-based economic weakness, with the U.S., euro area, and U.K. all expected to grow around 1% or less in 2025, while emerging market growth slows by nearly a full percentage point. China’s GDP is projected to decline more sharply.

Despite the slowdown, inflation remains sticky. The Fed is expected to hold rates steady through 2025 before starting to cut in early 2026, while the central banks in Europe and the U.K. are anticipated to ease policy by year-end. The Bank of Japan is seen pausing its rate hikes.

“Despite uninspiring growth numbers, our economists are not calling for a U.S. or global recession. We have seen in recent weeks that trade tension off-ramps exist, which removes the extreme negative tail risks for growth and extreme upside risks to inflation,” Morgan Stanley said.