Summer’s supposed to be the stock market’s best friend. July especially has been basically undefeated since 2014—the S&P 500 hasn’t had a losing July in over a decade. But Morgan Stanley’s Andrew Sheets just threw some cold water on that narrative, and honestly, he’s got a point.
The bank is eyeing three specific landmines that could blow up the summer rally before it even gets started. And given how volatile things have been lately—the Nasdaq 100 is basically flat despite a killer Q2—it’s worth paying attention.
First up: The Iran situation is getting spicy again.
Remember when we thought that ceasefire was actually going to stick? Yeah, about that. Trump just declared it over, and the US launched fresh strikes on Iran this week. The whole thing is centered around the Strait of Hormuz, which is basically the world’s oil chokepoint. 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 gets torched. The kicker? The Strategic Petroleum Reserve is at its lowest levels ever, so there’s less of a cushion if things get really messy. Higher oil prices don’t just mean paying more at the pump—they ripple through the entire economy and crank up inflation. That’s the real problem.
Second: The Fed might actually raise rates.
Here’s the thing nobody wants to admit: the entire bull market is built on the assumption that the Fed stays put on interest rates through the end of the year. But markets are now pricing in an 82% chance of at least one rate hike by December. If inflation keeps being sticky—especially if oil prices spike—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 not exactly a ringing endorsement of the status quo.
Third—and this is the big one—AI spending might be losing steam.
AI investment has been the rocket fuel for this entire rally. Every quarter, capex estimates get revised higher, which keeps the confidence machine humming. Morgan Stanley expects AI spending to jump from $800 billion in 2026 to $1.2 trillion in 2027. But here’s the risk: what if Q2 earnings show that Big Tech is getting cold feet? What if they’re starting to wonder whether all this spending is actually going to pay off?
We’re already seeing signs of this anxiety. The Magnificent Seven stocks—the biggest AI spenders—tanked 13% from their May peak. Investors are starting to ask uncomfortable questions about ROI, and that’s making them nervous. If earnings reports show hesitation on AI capex, it could unravel the entire growth story that’s been holding this market up.
So yeah, summer might still be great for stocks. But Morgan Stanley’s basically saying don’t get too comfortable. There are three very real ways this could go sideways, and they’re all worth watching.
