Morgan Stanley stays bullish on US stocks despite Middle East tensions, sees healthcare as best defensive bet

• Analysis of 22 geopolitical events since 1950 shows the S&P 500 returned an average of 2%, 6%, and 8% over one, six, and twelve months following such episodes
• AI-disrupted service companies represent only 13% of S&P 500 market cap; 30% of AI adopters reported quantifiable benefits in Q4, up from 16% a year earlier
• Healthcare sector trades at bottom 20% of historical valuations with weight near all-time lows in S&P 500, while institutional investors added more healthcare exposure than any other sector in Q4

Summary

Morgan Stanley Maintains Bullish US Equities Outlook Despite Geopolitical Risks

Morgan Stanley has reaffirmed its positive stance on US stocks despite escalating Middle East tensions, citing historical data showing geopolitical events rarely cause sustained market downturns. Analysis of 22 geopolitical events since 1950 revealed the S&P 500 returned an average of 2%, 6%, and 8% over one, six, and twelve months following such episodes.

Oil Price Threshold

The bank identifies oil prices as the primary risk, estimating a 75-100% year-over-year increase would be needed to threaten the current economic expansion. With crude prices only modestly positive year-over-year and the US economy in an early business cycle stage, Morgan Stanley's 6-12 month positive outlook remains unchanged.

AI Adoption and Impact

Addressing AI concerns, Morgan Stanley notes affected service-focused companies represent just 13% of S&P 500 market capitalization. Analysis of over 10,000 earnings transcripts showed 30% of AI-adopting companies reported quantifiable benefits in Q4, up from 16% a year earlier. The bank views banks, consumer finance firms, and payment networks as AI beneficiaries, while defending software incumbents' ability to adapt.

Healthcare Sector Preference

For defensive positioning, Morgan Stanley favors healthcare over consumer staples. Healthcare's relative valuation sits in the bottom 20% historically, with S&P 500 weighting near all-time lows despite improving earnings revisions, particularly for large-cap pharmaceuticals and biotechnology. Institutional investors added more healthcare exposure than any other sector in Q4, according to 13F filings.

The bank's forecast of two rate cuts in June and September should further support healthcare and biotech valuations while reducing M&A capital costs.