Morgan Stanley's Top 10 "Navigating" Predictions for 2026: How can investors find direction in the upheaval of AI, energy, and a multipolar world?

Morgan Stanley outlined 10 investment predictions aimed at helping investors navigate the "extreme market volatility" described by the bank. Morgan Stanley stock strategist Stephen C. Bird will focus on four key themes: artificial intelligence/technology diffusion, the future of energy, the "multipolar world," and social change. According to Bird, social change encompasses job disruptions driven by artificial intelligence, aging populations, changing consumer preferences, the pursuit of health and longevity, and the chain reactions brought about by population structure challenges in multiple regions. 1. Progress of Large Language Models (LLM) and the "Two Worlds" of AI Applications: The cutting-edge large language models in the U.S. are expected to achieve a quantum leap in capabilities in the first half of 2026. Despite concerns about the adoption of AI dominating early in the year, Morgan Stanley expects bullish sentiment to emerge in the second half of the year as the nonlinear growth of AI capabilities brings widespread benefits. 2. Demand for Computing Power Exceeds Supply: The proliferation of artificial intelligence applications and increasing complexity of use cases will drive exponential growth in the net demand for computing resources. Despite surging demand, supply growth will still lag behind. However, Morgan Stanley's new "Intelligence Factory" model suggests that LLM developers have highly attractive economic benefits at the level of large data centers. 3. Tough U.S. Policy Agenda: The Trump administration is expected to take stronger actions than expected in several areas, including ensuring domestic supply of key minerals, uranium, and metals. Other priorities include supporting reshoring of manufacturing, increasing emphasis on innovation in military spending, and reducing consumer costs. 4. AI Technology Transfer and National Self-Sufficiency: In response to the progress of the U.S. in AI, policy, and computing capabilities, other countries will pressure the U.S. to allow a wider range of AI technology transfer. Morgan Stanley warns that the inequality of AI capabilities at the national level will significantly impact global trade dynamics and the pursuit of "Gross Domestic Intelligence (GDI)." 5. Energy Geopolitics: Rising global energy costs will trigger a rebound in data center expansion, prompting a shift in policy towards supporting low-cost energy solutions. With businesses and governments seeking alternatives, data center projects are expected to increase the development of "off-grid" power supply strategies. 6. Deep Integration of AI and Energy: Key AI players will take measures to strengthen control over energy infrastructure to quickly obtain the lowest cost and most reliable electricity. This strategy allows them to control their own destiny, shield other electricity customers from the impacts of AI, and use AI to improve energy efficiency. 7. China Expands Market Share in Tech Manufacturing, U.S. Experiences "Reshoring Renaissance": China will leverage its strong capabilities to expand its global market share in key high-tech industries. At the same time, structural technology diffusion will weaken the advantage of low-cost labor, tilting the balance towards domestic production in the U.S., while regions with high costs, strict regulations, and limited AI access will lose ground. 8. Triple Transformation in Latin America: Policy shifts, geopolitical changes, and peak interest rates will drive Latin America into a new investment cycle. Morgan Stanley is optimistic about the region's prospects, with DRIVE being investment in the main economic engines rather than consumption. 9. Retraining Programs and AI Unemployment Policy Interventions: Companies and governments will launch extensive programs to retrain workers facing career transitions due to AI. Due to the high sensitivity of real or perceived unemployment issues caused by AI applications, governments will take various policy interventions to manage labor transformations. 10. "Transformative AI" Driving Deflation and Economic Transformation: Preliminary signs of transformative AI-driven price declines are expected to emerge in the second half of 2026 across a range of economic activities. Morgan Stanley predicts that these deflationary pressures will lead to worsened wage inequality, increased capital expenditure, potential upward pressure on interest rates, and rising valuations of assets that cannot be replicated by AI.