U.S. firms are preparing to raise prices again in 2026 as they continue to recover the impact of higher tariffs, according to Morgan Stanley.

Analyst Michael Gapen stated in a note this week that the latest GDP data shows companies have already taken "a significant step towards recovering the costs of tariffs by pushing output prices higher," helping restore profitability and easing recession risks.

The analyst noted that "tariffs pushed nonlabor costs sharply higher over the past two quarters," with firms initially responding by hiring less and seeing a hit to profits.

However, in the third quarter, companies were able to pass on more of those costs. The bank said "per unit price rose by more than nonlabor costs, helping to restore profitability."

Survey data is now said to indicate that firms "plan to increase prices further in 2026."

If successful, Morgan Stanley believes inflation will firm but "layoffs should be avoided."

Gapen added that some companies may opt for "greater cost control, weakening the labor market," while others could benefit from higher productivity that "could rebuild firm profits without much inflation."

Morgan Stanley reiterated its framework that tariffs can be absorbed by exporters, U.S. corporates, or consumers.

With supply-chain adjustments largely complete and exporters unlikely to absorb much more, it expects companies to continue passing through a sizable portion of tariff costs.

The bank highlighted that the developments "support our outlook for a return to modest growth in 2026," with risks increasingly tilted to the upside as the year progresses.

Source: Investing.com