A recession may not spell doom for the stock market—in fact, it could set the stage for significant growth opportunities. According to Mike Wilson, Morgan Stanley’s Chief U.S. Equity Strategist and Chief Investment Officer, a mild economic downturn could catalyze a bullish run for U.S. equities, particularly if it prompts the Federal Reserve to reduce interest rates and resets corporate earnings expectations.
Recession as a Strategic Reset
Wilson’s perspective challenges traditional views on recessions, which often conjure images of declining corporate profits, reduced consumer spending, and shaken investor confidence. Yet Morgan Stanley’s outlook suggests that any forthcoming recession may defy these typical patterns, offering wealth advisors a unique lens to consider potential opportunities for clients.
Morgan Stanley’s base-case scenario projects the S&P 500 reaching 6,500 over the next 12 months, a roughly 10% gain. The bank’s bull-case scenario is even more optimistic, with the index climbing to 7,200, a 22% rise from current levels. Notably, an alternative bull case includes a mild recession that could set the stage for this upward trajectory.
The Shape of a Mild Recession
Morgan Stanley posits that if a recession does occur, it is likely to be mild, resembling past economic pullbacks such as the April sell-off. Wilson’s analysis highlights a scenario where a brief drawdown this summer or fall could pave the way for the S&P 500 to reach the high 6000s within the next year.
“Given the rolling recessions already experienced in various sectors and the muted growth across much of the private economy, we anticipate that earnings-per-share (EPS) declines would be less severe than in previous recessions,” Wilson stated. This environment could offer opportunities for advisors to position clients strategically.
Navigating the Recession-Rebound Dynamic
The potential downturn’s drivers include persistent tariff uncertainties and cost pressures, which might push companies to reduce labor expenses through layoffs. This scenario could be exacerbated if the Fed delays rate cuts while tackling inflation. However, a recession-induced rate cut would aim to curb unemployment and revitalize the economy.
Morgan Stanley’s economists foresee the Fed implementing up to seven rate cuts in 2026. These actions would likely buoy the equity markets, creating a rebound that could begin as early as the start of the year. Wealth advisors should consider how such monetary policy shifts might influence portfolio strategies, particularly in interest-sensitive sectors.
“EPS growth is expected to bottom out in modestly negative territory early in 2026, followed by a significant reacceleration,” Wilson explained. “The recovery will likely be led by cyclical, interest-sensitive sectors, which have suffered the most from elevated rates and constrained government spending.” This insight provides an actionable framework for advising clients on positioning for a potential market upswing.
Opportunities in Small Caps and Cyclicals
Morgan Stanley’s research identifies small-cap and lower-quality stocks as key beneficiaries in a low-interest-rate environment. These companies, often more vulnerable during periods of high rates, could experience substantial relief, offering outsized gains as the economy rebounds. Advisors might consider increasing allocations to small-cap equities, particularly in the second half of 2025, when the rate-cut trajectory becomes clearer.
Additionally, the post-recession environment may test valuation highs comparable to the 23x earnings multiples observed in the post-pandemic recovery. For wealth advisors, this presents an opportunity to reassess equity exposure and potentially capitalize on sectors poised for a cyclical rebound.
Positioning Clients for the Next Phase
While the prospect of a mild recession may sound counterintuitive as a growth catalyst, it underscores the importance of adaptability in investment strategy. For registered investment advisors (RIAs) and wealth managers, the anticipated market dynamics present an opportunity to align client portfolios with emerging trends. Key considerations include:
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Diversification into Small Caps: Historically, small-cap stocks have outperformed during periods of economic recovery and rate cuts. Advisors should evaluate potential opportunities in this segment, particularly in sectors aligned with interest-rate sensitivity.
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Sector Rotation: Cyclical sectors such as financials, consumer discretionary, and industrials may benefit disproportionately during a rebound. Strategic reallocations could help clients maximize exposure to these areas.
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Fixed Income Adjustments: Lower interest rates could shift the appeal of fixed-income investments. Reviewing bond portfolios and incorporating assets poised to benefit from rate cuts can help optimize income generation.
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Long-Term Focus: Recession-driven volatility may unsettle some clients. Reinforcing a long-term perspective and highlighting the rebound potential—underpinned by Morgan Stanley’s outlook—can help maintain investor confidence.
Monitoring the Macro Environment
Wealth advisors should closely monitor macroeconomic indicators and policy signals in the coming months. The interplay between Federal Reserve actions, corporate earnings trends, and sector-specific performance will likely shape the trajectory of the markets. Staying attuned to these dynamics enables proactive adjustments that align with evolving opportunities and risks.
A Balanced Perspective
While no one can predict the future with certainty, Morgan Stanley’s analysis offers a nuanced perspective that wealth advisors can use to inform client strategies. The potential for a mild recession to act as a springboard for growth—driven by lower rates and earnings recovery—underscores the importance of maintaining a balanced, forward-looking approach.
For RIAs navigating today’s complex economic landscape, the key lies in blending resilience with agility. By leveraging insights such as those from Morgan Stanley, advisors can help clients not only weather economic challenges but also capitalize on the opportunities that follow.
