Morgan Stanley is leaning into its bullish outlook for equities, projecting a 12% rise in the S&P 500 to 7,200 by mid-2026—driven by what it calls a “rolling recovery” in corporate earnings.
The firm believes the market has exited a rolling earnings recession that began in 2022 and is now entering a broad-based recovery. In a recent note, Chief Investment Officer Michael Wilson cited several catalysts supporting the new phase, including improving operating leverage, growing adoption of AI, a weaker U.S. dollar, and favorable tax benefits tied to the OBBBA. Additional tailwinds include easier year-over-year comps, pent-up demand in key sectors, and a high likelihood of Fed rate cuts by the first quarter of 2026.
Wilson argues that the recent uptick in valuations—while a concern for some investors—appears warranted given the earnings rebound already in motion. He points to the “historically sharp inflection” in earnings revision breadth as evidence that markets are underpricing the strength and breadth of the recovery.
April’s volatility, spurred in part by renewed trade policy rhetoric from Donald Trump, may have masked underlying earnings momentum. But Morgan Stanley views that pullback as a pivot point, marking the bottom of the earnings cycle. Since then, the S&P 500 has rebounded and notched new all-time highs, up roughly 9% year-to-date through July 25.
For advisors evaluating sector positioning, the firm is overweight industrials, which it says remain attractive even after leading all S&P 500 sectors so far this year. Morgan Stanley sees continued upside in cyclical sectors that stand to benefit from infrastructure spending, AI-driven capital investment, and improving global trade dynamics.
The firm also sees recent macro developments easing broader market uncertainty. A new trade agreement between the U.S. and European Union, combined with an anticipated dovish pivot by the Federal Reserve, are boosting investor sentiment. Wilson notes these developments are helping set the stage for sustained earnings expansion over the next 12 months.
For RIAs and portfolio managers, the takeaway is that equity markets may be entering a more constructive phase—one that could favor disciplined reallocation toward cyclical growth sectors and quality names positioned to leverage improving margins. Morgan Stanley’s call suggests that wealth managers should be preparing client portfolios for an extended upcycle, anchored by stronger earnings and easing macro risk.
