So you thought summer was gonna be smooth sailing for your portfolio? Morgan Stanley’s got some bad news for you. While July is historically the market’s favorite month—the S&P 500 has literally gained every single July since 2014—this year might be different. Andrew Sheets, Morgan Stanley’s global head of fixed income research, just dropped three reasons why the summer rally could get derailed faster than a meme stock on earnings day.
First up: The Iran situation is getting spicy again. Remember that ceasefire? Yeah, it’s over. Trump just declared it dead, and the US launched fresh strikes on Iran this week in retaliation for attacks on commercial ships in the Strait of Hormuz. Here’s the problem: Morgan Stanley’s entire bull case for stocks this year assumes oil supply eventually normalizes and Brent crude falls back to $75 a barrel. But if this conflict keeps escalating, that assumption goes out the window. The US has already drained its Strategic Petroleum Reserve to historic lows, which means there’s less of a cushion if things get worse. Higher oil prices don’t just mean paying more at the pump—they ripple through the entire economy, cranking up inflation and making everything more expensive.
Second: The Fed might actually raise rates. Wild concept, right? But here’s the thing—the entire bull market is built on the assumption that the Fed will keep rates steady through the end of the year. Markets are currently pricing in an 82% chance of at least one rate hike by year-end. If inflation keeps creeping up (thanks, Iran war), the Fed might decide it can’t wait around. Sheets put it bluntly: ‘If the Fed is worried about inflation, it shouldn’t wait to act.’ That’s the kind of curveball that sends stocks tumbling.
Third, and maybe most important: AI spending might be losing steam. This is the real wildcard. AI investment has been the rocket fuel for the entire market rally. Capex estimates keep getting revised higher every quarter, which has kept investors confident the AI boom is real. Morgan Stanley’s base case? AI spending jumps from $800 billion in 2026 to $1.2 trillion in 2027. But what if Big Tech starts pumping the brakes? If second-quarter earnings show hesitation—maybe because some of these mega-spenders’ stock prices have been getting hammered—that could shake investor confidence. The Magnificent Seven stocks already dropped 13% from their May peak, and some investors are starting to ask the uncomfortable question: Is all this AI spending actually worth it?
The bottom line? Summer might still be great for stocks, but Morgan Stanley’s watching these three risks like a hawk. One wrong move on any of them, and that July rally could turn into a July rout.
