Here’s the thing about July—it’s supposed to be the stock market’s golden child. Since 2014, the S&P 500 has basically printed money every single July. It’s like the market’s annual vacation where everything just works out. Except this year, Morgan Stanley is waving a big red flag and saying, “Maybe pump the brakes.”
Andrew Sheets, Morgan Stanley’s global head of fixed income research, just laid out three reasons why the summer rally might be a total dud. And honestly? They’re worth paying attention to.
The Iran Problem (Again)
First up: the Iran situation is getting spicy again. President Trump just declared the ceasefire over, and the U.S. launched fresh strikes this week. The whole thing is centered around the Strait of Hormuz, where commercial ships are basically playing dodge-ball with missiles.
Here’s why this matters for your portfolio: Morgan Stanley’s entire bull case for stocks this year assumes that oil supply eventually normalizes and Brent crude falls back to $75 a barrel. But if the conflict escalates? That assumption gets torched. The U.S. has already drained its Strategic Petroleum Reserve to historic lows, which means there’s less of a safety net if things go sideways. 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. That’s the kind of thing that makes investors nervous.
The Fed Might Actually Do Something
Second problem: interest rates. The entire bull market is basically betting that the Federal Reserve will sit on its hands through the end of the year. But markets are now pricing in an 82% chance the Fed will hike rates at least once before December.
Why? Because inflation is still a thing, and the Fed might decide that waiting around isn’t the move. If they start raising rates, that’s a game-changer for stocks. Higher rates make bonds more attractive and make growth stocks less valuable. It’s not complicated—it’s just not what the market is currently pricing in.
The AI Spending Question
Here’s the third one, and it’s the big one: AI capex might be slowing down. The entire stock market rally has basically been fueled by Big Tech companies throwing billions at AI infrastructure. Every quarter, analysts have revised those spending estimates higher, which has kept the party going.
But what if that changes? What if companies start pumping the brakes because their stock prices have been getting hammered? Morgan Stanley’s base case is that AI spending goes from $800 billion in 2026 to $1.2 trillion in 2027. But if second-quarter earnings show hesitation—if companies start acting like maybe they’ve been spending too much—that could unwind the entire trade.
The Magnificent Seven stocks already dropped 13% from their May peak through June. The ETF tracking them is basically flat for the year. That’s not exactly screaming confidence.
The Bottom Line
So yeah, July is supposed to be great for stocks. But Morgan Stanley is basically saying: don’t count on it. Between geopolitical chaos, potential rate hikes, and questions about whether Big Tech is actually getting a return on its AI bets, there’s plenty that could go wrong. The bull market isn’t dead—but it’s definitely looking over its shoulder.
