The ASX sectors and stocks Morgan Stanley prefers - and where it likes even more

Morgan Stanley recently dropped a research update titled “A Whole New Set of Arrangements”, which talks to the widening chasm between US and global macro conditions and those likely to be experienced here in Australia.

The note argues that while geopolitical volatility and energy market disruption remain elevated, the global investment backdrop remains supportive for risk assets. The firm’s overarching stance is “constructive, not complacent,” underpinned by resilient earnings, a powerful AI-driven capex cycle, and fiscal spending tied to energy security and defence.

“Strong macro and micro fundamentals, reinforced by a powerful AI-driven capex cycle, support risk assets despite energy-led volatility widening return dispersion,” the team wrote.

From an asset allocation perspective, Morgan Stanley remains overweight developed market equities, underweight core fixed income, and neutral on commodities and broader credit markets. The preference is particularly skewed towards US equities, where AI-related investment and robust earnings continue to support valuations.

One of the most striking observations in the report is the explosion in expected AI infrastructure spending. Morgan Stanley notes that anticipated hyperscaler capex has surged from roughly US$450 billion a year ago to approximately US$800 billion in 2026 and more than US$1 trillion in 2027.

Australia: a very different macro story

While the global backdrop remains relatively constructive, Morgan Stanley believes Australia faces a much tougher setup.

“The Australian investment case has changed,” the strategists wrote, pointing to tightening policy settings, an energy supply shock, and mounting pressure on domestic demand.

The firm expects GDP growth to slow sharply to 1.2% in 2026 as higher rates, weaker fiscal support, and rising energy costs weigh on households and businesses alike.

Importantly, Morgan Stanley argues the slowdown is not accidental, but necessary.

“The slowdown ahead requires consumers to spend less, house prices to adjust lower and labour markets to loosen,” the report states.

Housing and consumption are expected to bear the brunt of the adjustment. Higher mortgage costs, softer wealth effects, rising living expenses, and changes to tax settings around property investment are all expected to pressure discretionary spending and housing activity.

At the same time, the softer labour market should help contain inflation pressures, allowing the RBA to remain on hold before eventually cutting rates in 2027.

“In our view, evidence of a weaker demand backdrop is required for the RBA to remain on hold,” Morgan Stanley wrote.

Capex over consumption

Despite the weaker economic outlook, Morgan Stanley remains constructive on one major area of the Australian economy - structural capex.

The report argues that a durable investment cycle is now underway, driven by six key pillars: defence spending, energy transition, mining investment, housing construction, data centres, and Brisbane Olympics infrastructure.

Together, Morgan Stanley estimates these areas could generate approximately A$1.5 trillion in spending through to 2030.

This distinction is central to the firm’s investment framework.

“We strongly believe that current settings will continue to favour a bias for capex over consumption,” the team wrote.

That translates into an overweight stance on resources, energy, infrastructure and selected industrials, while remaining underweight banks, housing-linked businesses and consumer cyclicals.

Morgan Stanley recently added Ampol (ASX: ALD), Paladin Energy (ASX: PDN), Infratil (ASX: IFT) and SGH (ASX: SGH) to preferred exposures, while reducing exposure to REA Group (ASX: REA), Stockland (ASX: SGP) and Seek (ASX: SEK).

Resources and energy doing the heavy lifting

Morgan Stanley continues to believe the resources and energy trade has further to run. The report notes that materials and energy are increasingly driving earnings momentum across the ASX, while domestically exposed sectors face growing pressure.

“Resources now account for roughly 10 percentage points of the market’s total FY26 earnings growth expectation,” the report noted.

Meanwhile, banks, consumer discretionary, staples and housing-linked sectors are expected to face growing earnings pressure as tighter policy settings flow through the economy.

Morgan Stanley’s core positioning thesis remains clear: overweight resources, underweight banks, and avoid domestic cyclicals.

ASX 200 target retained at 9,250 but pushed out

Morgan Stanley has retained its ASX 200 target of 9,250, though importantly, the target has now been rolled forward to mid-2027 rather than the next 12 months.

The reason is that while valuations have moderated, earnings expectations still appear too optimistic.

“We see current multiples being ultimately held but reduce expected aggregate EPS growth from low-double-digit rates seen in consensus to leveling out at mid-single-digit run rates,” the team wrote.

Morgan Stanley expects further earnings pressure across domestic cyclicals as policy settings continue to deliberately slow the economy.

In practical terms, the market may still grind higher over time, but leadership is likely to narrow further toward resources, energy and structural capex beneficiaries, while large parts of the domestic economy face a much tougher adjustment period.

Global opportunity still looks stronger

While Morgan Stanley still sees selective opportunities in Australia - particularly across resources, energy and infrastructure - the firm is ultimately more constructive on the global opportunity set, especially the US.

“A robust earnings outlook favours developed market equities, with a preference for the US,” the strategists wrote.