Despite significant market volatility in early 2026, with sharp swings from Japanese government bonds to technology stocks, a rare synchronization is occurring beneath the surface. Nearly all indicators related to the global cyclical outlook are strengthening in unison, a convergence that warrants close market attention.

In a February 8th report titled "What's Next in Global Macro – Noisy Markets, Aligned Indicators," Morgan Stanley highlighted several key developments. Copper prices have surged 36% over the past six months, South Korean equities have led global markets with a 68% rally, financial stocks have outperformed benchmarks simultaneously in the US, Europe, China, and Japan, while small-cap stocks, cyclical shares, and emerging market currencies have all shown strength.

A confluence of synchronized fiscal, monetary, and regulatory easing worldwide, combined with expanding AI investment and a surge in M&A activity, is increasing the likelihood that "the cycle burns hotter before it burns out." Critical signs of overheating have not yet materialized. Investors are advised to monitor five key indicators closely: inflation, bond volatility, the US dollar, credit performance, and whether stocks and credit decline amid ostensibly "good" economic data.

Morgan Stanley maintains a positive outlook on the global cycle and advocates for a strategy focused on broadening market participation. Specifically, the firm favors Japanese equities, US small-caps over large-caps, US high-yield bonds over investment-grade debt, and high-yield mezzanine financing. It also anticipates continued outperformance from emerging markets, particularly in Latin America.

Unprecedented Indicator Alignment: Strong Signals from Market Depths

Morgan Stanley emphasizes that any single indicator can be misleading, but when numerous metrics simultaneously point in the same direction, it becomes highly significant. Examining these economically sensitive indicators reveals a clear pattern: copper, a barometer for economic activity, has risen 36% over six months; South Korean stocks, which have above-average cyclical and global trade sensitivity, have surged 68% in the same period, making it the top-performing major market; and financial sectors, central to credit creation, have outperformed in the US, Europe, China, and Japan over both six and twelve-month horizons.

Year-to-date data further reinforces this trend: cyclical and transportation stocks have excelled, small-caps have led gains, market breadth has improved, yield curves have experienced a bear steepening, and emerging market currencies have strengthened. All these outcomes support the hypothesis that future global growth will exceed current levels.

A Triple Easing Overlay: An Unprecedented Stimulus Mix

What makes this indicator alignment particularly striking is the context. Morgan Stanley notes that fiscal, monetary, and regulatory policies are easing "simultaneously, and globally" – a three-pronged easing combination that is itself a powerful catalyst. Concurrently, AI investment continues to expand significantly, and merger and acquisition activity is surging. These are potent forces that, combined with the optimistic indicators, heighten the probability of the cycle intensifying before it ultimately cools.

Monitoring Five Overheating Signals: No Alarms Triggered Yet

But is this a positive development? Morgan Stanley poses a critical question: are markets currently overheating? The firm has identified five overheating signals requiring vigilant monitoring: Is significant inflation on the horizon? Is bond volatility increasing? Is the US dollar deviating substantially from its fair value? Is credit underperforming? Do stocks and credit fall when economic data is "good"?

Currently, the answer is negative. Long-term inflation expectations in the US and Eurozone remain aligned with central bank targets. Expected volatility in US interest rates has actually decreased since the start of the year. The US dollar's valuation is close to levels suggested by purchasing power parity. Credit spreads are generally stable. Furthermore, better-than-expected US PMI data recently led to stock gains and a credit rebound, while weaker labor data later had the opposite effect – indicating that "good news is still good news."

Investment Strategy: Maintaining Cyclical Bias with Diversified Allocation

Based on this analysis, Morgan Stanley maintains an assertive cyclical bias and a strategy focused on broadening participation. Specifically, it favors Japanese equities, US small-caps over large-caps, US high-yield bonds over investment-grade debt, and high-yield mezzanine financing, and expects emerging markets, especially in Latin America, to continue outperforming.

However, Morgan Stanley also cautions that recent weeks serve as a "painful reminder" that growth is not a panacea, noting significant rotation beneath the surface between winners and losers. Overall, the firm believes this multi-indicator alignment still points to fundamental tailwinds and will maintain a bullish stance unless key indicators reverse.