Core Viewpoint - Forecasters expect a positive outlook for the stock market in 2026, with Morgan Stanley predicting a 13% increase in the S&P 500 due to strong corporate earnings and a "rolling recovery" in the US economy [2] Group 1: Major Surprises - Morgan Stanley identifies three potential surprises that could impact the market in 2026: a jobless productivity boom, a shift in stock-bond dynamics, and a commodities rally [4] - The bank emphasizes that a year without surprises would itself be surprising [2] Group 2: Jobless Productivity Boom - A "jobless productivity boost" could occur, characterized by a weakening job market that suppresses wage growth and inflation while enhancing productivity [5] - This scenario may lead to core inflation falling below 2%, providing the Federal Reserve with the opportunity to cut rates without concerns of inflation reacceleration [6] - Labor productivity growth is already showing signs of improvement, with output per hour among nonfarm business workers increasing to 3.3% year-over-year in Q2, up from a 1.8% annual decrease in the previous quarter [6] Group 3: Stock-Bond Dynamics - The traditional inverse relationship between stock and bond prices may shift again, as both asset classes gained in 2025, driven by a "bad-news-is-good-news" sentiment where weak economic data boosts stock prices due to expectations of Fed rate cuts [8] - Investors are anticipating a more aggressive pace of rate cuts than the Federal Reserve has projected, with a 72% chance that rates will be lower by the end of 2026 [7]