So you thought summer was gonna be smooth sailing for your portfolio? Morgan Stanley’s got some bad news for you. Andrew Sheets, the bank’s global head of fixed income research, just dropped a reality check on the “summer rally” narrative that’s been floating around Wall Street.
Here’s the thing: July has been basically undefeated since 2014—the S&P 500 has gained every single July for over a decade. That’s the kind of track record that makes investors salivate. But Sheets is waving a yellow flag, and honestly, he’s got some solid reasons to be worried.
The Iran Problem (Again)
First up: the Middle East is heating up again. Trump just declared the Iran ceasefire dead, and the US launched fresh strikes this week. Now, before your eyes glaze over, here’s why this matters for your stocks: oil prices. Morgan Stanley’s entire bull case for 2026 depends on the assumption that oil will chill out and fall back to $75 a barrel. But if the Iran situation escalates? Brent crude could spike, which means everything from gas to groceries gets more expensive. And that’s the kind of inflation that makes the Fed nervous—which brings us to problem number two.
The Fed Might Actually Do Something
Markets are currently betting that the Federal Reserve will sit tight on interest rates through the end of the year. That’s basically the foundation of the whole bull market right now. But here’s the catch: if inflation starts creeping up (thanks, Iran), the Fed might decide to hike rates sooner rather than later. The CME FedWatch tool is already pricing in an 82% chance of at least one rate hike by year-end. That’s not nothing.
The AI Spending Slowdown
Finally, there’s the elephant in the room: AI capex. The entire stock market rally has basically been riding on the assumption that Big Tech companies will keep throwing billions at AI infrastructure. And they have—estimates keep getting revised higher every quarter. But here’s where it gets dicey: what if companies start pumping the brakes? Some of the biggest AI spenders have already underperformed, and investors are starting to ask uncomfortable questions about ROI. The Magnificent Seven stocks dropped 13% from May to June, and the Roundhill Magnificent Seven ETF is basically flat for the year. If earnings reports start showing hesitation on AI spending, that could unwind the entire narrative that’s been propping up the market.
The Bottom Line
Morgan Stanley’s base case is still bullish—they think AI capex will grow from $800 billion in 2026 to $1.2 trillion in 2027. But the risks are real, and they’re worth paying attention to. Summer might still be strong for stocks, but it’s not a sure thing anymore.
