Morgan Stanley's 2026 outlook on the ASX 200, Aussie banks and rate cuts
Morgan Stanley gives its ASX 200 target, whether we get rate cuts in 2026 and the big themes for the Australian economy.
2025 has thrown up its fair share of shocks and surprises and yet markets have held up impressively well, and in many cases, performed exceptionally.
But what foundation has it set for markets going forward?
Morgan Stanley has released its 2026 outlook on Australian equities, banks, real estate and economy, and the outlook remains positive. Here are some of the key insights.
The outlook for the ASX
As is often the case, the outlook for Australian equities must be understood against the backdrop of the US outlook.
Chris Nicol, Morgan Stanley Managing Director, expects the US equities market to show solid performance in 2026 off the back of strong earnings growth, and expects Australia to broadly follow suit.
It's why Morgan Stanley has set a 2026 target for the ASX 200 of 9,250 points, for a 10-12% total return, and with 10% earnings growth after three years of flat-to-negative earnings growth.
But below the surface, the key sector driving this return is likely to be Materials.
In its 2026 outlook report, Nicol and his team wrote "we believe the case for a sustained Materials rotation remains intact, supported by an above-consensus metals outlook, a persistently weaker USD, positive earnings momentum, and resilient bulk commodity prices."
The market has slowly come to accept the cyclical uplift in commodities prices as global GDP forecasts support growth in 2026. And that has a knock-on effect for ASX earnings.
"The resources sector is around 19% of the market in terms of market capitalisation is close to 28% of the earnings weight," said Nicol. "So when resource earnings kick up, they have a disproportionate effect on market earnings."
The other big themes Morgan Stanley has identified are a lack of rate cuts early in 2026 meaning domestic cyclicals may be softer, Financials and Healthcare are likely to take the opportunity to reduce costs, and elevated capex is something to watch, but mostly in Materials.
On Australian bank stocks, Nicol says Morgan Stanley's favours resources instead.
"When I look at the barbell within Australia banks versus resources, we remain constructive that resources over banks is still something that you want to consider from a positioning perspective."
Australian banks and real estate
Echoing Nicol, Richard Wiles, Morgan Stanley's Head of Research (Australia) says the Morgan Stanley view is that the banks will underperform the rest of the ASX in 2026.
"We do expect the banks to underperform the broader market."
Strong price performance in 2025 reflected the tailwind of rate cuts for Australian banks, but has left them at high valuations by historical standards.
"When the RBA finished its rate hikes a couple of years ago, the average PE of the bank sector was around 13.5 times," said Wiles. "Today it sits at 19 times and it's been as high as 20."
"In this cycle we've seen a rerating of the bank sector of some like 6-6.5 PE points. In previous cycles, the rerating tended to top out at around 3-3.5 points.
"So we've seen a much larger rerating of the sector in this cycle than we have in previous cycles. What I think it means is that share prices are reflecting all the benefits of this easing cycle."
He attributes that to EPS upgrades across the banks and an emphasis from investors on balance sheet strength and risk profile. But says it also points to the story of equities markets in 2025, where Australian banks represented something of a safe haven during the trade turmoil and global uncertainty earlier in the year.
While underlying numbers are positive for the banks, including a pickup in mortgage growth, business lending, margins and costs, Wiles view is that this has all been priced in.
"All those benefits are now reflected in share prices for 2026. We think the probability of a derating in the sector is higher than the probability of a further re-rating."
He also expects improved revenue growth for the banks in 2026, at around 6% overall, but flags costs as an ongoing area of concern.
But the biggest theme could be a divergence in how the banks perform over the next few years, which has been a development years in the making.
"Between 1995 and 2015, retail and business banking in Australia went through what I've previously called a super cycle," said Wiles. "During that period, growth and returns were high and all banks did well in retail banking."
"But over the last 10 years the operating environment for retail banking in particular has become more challenging and profitability has come under pressure. Not all banks have been winners."
He points to CBA's outperformance and Westpac's relative struggles as the obvious example in recent years.
"We think that not all banks can win. Our view is that CBA will maintain its franchise leadership, but the gap between CBA and peers will narrow. The other major banks will be better competitors for CBA in the next few years than they have been in the last 5-10."
In Morgan Stanley's accompanying outlook report, Wiles and team wrote, "Based on the outlook for returns and current trading multiples, our major bank order of preference on a 1-yr view is ANZ, NAB, WBC, CBA."
Commercial real estate
On the commercial property side of things, Simon Chan, who heads Morgan Stanley's Australian Real Estate equity research, says the picture is also fairly sunny.
The first thing to note is that asset devaluations look to be reversing, thanks to an uptick in transaction volume, the ongoing lack of supply and the fact that the spread between cap rates and costs to borrow is now around the middle of historical ranges.
Notable recent redevelopments in Sydney, as an example, haven't actually increased commercial space and so supply remains capped.
"It's all about doing more with what you've got," says Chan. "What that means is that existing space becomes more valuable, which is going to be supportive of rent, which therefore is supportive of asset valuations going forward."
But the outlook isn't static across the country. "The bulk of the capital flow is all over Australia, but particularly in Sydney and Brisbane, less so to Melbourne," Chan said.
Rate cuts and the economy
After consecutive jumps in inflation, the RBA has been left in an "uncomfortable" situation, says Morgan Stanley's chief Australia economist Chris Read.
But for those worried about potential rate hikes, Morgan Stanley has a different view.
"We don't think you'll see sufficient pressure near term to drive RBA rate hikes."
"We still think the more likely move from the RBA is down from here. We've got two rate cuts in for late next year in August and November."
But he sees the context for those rate cuts is different to the one that saw rates cut this year.
Instead of lowering inflation, it will be "slowing domestic momentum and loosening in labour market capacity" that compels the RBA to cut.
So while the outlook remains fairly positive for 2026, Read sees momentum falling off as government focus turns to revenue reform, unemployment rises and monetary policy becomes less supportive.
"One of the upside surprises this year has been the speed at which the economy has responded to rate cuts. We think into next year you'll see that work in reverse."
On the other side of the scale, he expects capex spending to accelerate as part of wider infrastructure, defence and housing projects, and events like the Brisbane Olympics.
The end result is projected economic growth of 2% for the year, unemployment to 4.6% and two rate cuts.
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Tom is a Content Editor at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance.
He has previously worked at Finder, FourFourTwo and Man Of Many covering everything from film to football.
He has a Masters in Media Production and a Bachelor's in Journalism.
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Tom is a Content Editor at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance. He has previously worked at Finder, FourFourTwo and Man Of Many covering everything from film to...
Expertise
Tom is a Content Editor at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance. He has previously worked at Finder, FourFourTwo and Man Of Many covering everything from film to...
Expertise
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