2 reasons Morgan Stanley sees the S&P 500 spiking 16% next year — and 6 investing tips to capitalize
It’s not time to worry about the end of the bull market just yet, according to one top US bank.
Morgan Stanley’s new outlook puts the S&P 500 at 7,800 by the end of next year. That implies the benchmark index rising 16% from current levels, with investors shrugging off concerns about an AI bubble and years of double-digit gains for stocks.
“We believe that we’re in the midst of a new bull market and earnings cycle, especially for many of the lagging areas of the index,” a team led by Mike Wilson, the bank’s chief US equity strategist, wrote in a note on Monday. “We think that most of the elements of a classic early-cycle environment are with us today,” they added of the outlook for stocks.
Here are two big reasons the bank is bullish:
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The US economy looks to be in the midst of a “rolling recovery,” Morgan Stanley said, a thesis that Wilson and his team have prophesied for months. That contrasts with the bank’s earlier idea that the economy was in a “rolling recession,” where a downturn hits various sectors of the economy one at a time.
A rolling recovery should support corporate earnings and, in turn, continue to boost stock gains.
That recovery already looks to be underway, the strategists added, pointing to results from the latest earnings season. Of the S&P 500 companies that have reported results so far for the third quarter, 82% have beaten analysts’ earnings estimates, and 76% have beaten revenue estimates, according to the latest update from FactSet.
“The capitulation around Liberation Day marked the end of a three-year rolling recession and the start of a rolling recovery,” Morgan Stanley said. “We think that most of the elements of a classic early-cycle environment are with us today,” the bank added, pointing to tailwinds like a rebound in earnings revisions breadth and pent-up demand across the economy.
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The US looks to be in a new inflationary regime — one where price growth could run hotter-than-expected for years or potentially even decades, the bank said.
But policymakers in the US look content to “run it hot” when it comes to inflation, the strategists said, pointing to recent efforts from the administration to deal with higher debt levels and deficit spending.
Over the short to medium term, that could mean good news for stocks, they suggested, as the central bank appears likely to tolerate slightly hotter price growth instead of rushing to raise interest rates again. In the past, the bank has also said that inflation can boost corporate earnings as firms charge higher prices.
“We believe a 2-year up cycle began in April 2025 with firming pricing power/inflation and broadening earnings growth and will likely last until the Fed has to tighten policy again, as it can only tolerate inflation to a point, in our view,” they said. “We think the risk of that is at least 12 months out which is beyond our forecast period.”
Strategists said they had a few ideas about the best places for investors to park their cash in the current macro environment. Here are some of the bank’s top investment ideas:
“To recap, we believe the four key pillars of an early cycle set-up are with us today, a combination of variables that uniquely support small cap outperformance. These four elements are: compressed cost structures that set the stage for positive operating leverage to resume, pent up demand, a historic rebound in EPS revisions breadth and a Fed that is cutting rates,” the bank wrote.
The early-cycle environment should also support cyclical stock sectors, strategists suggested, an area of the market that tends to do well when the economy expands.
The sector has shown some of the strongest earnings revisions breadth since the market bottomed in April of this year, strategists said. Firms also look like they’ll benefit from low rates and rebounding M&A activity, and valuations in the sector also look “attractive,” they wrote.
“We remain overweight Industrials into 2026 as we anticipate market broadening on the back of strong top-line growth and positive operating leverage. The sector benefits from these tailwinds and others,” strategists wrote, later pointing to the recovery in earnings, lower rates, and the sector being the “main beneficiary” of the new capex cycle in the US.
“Healthcare benefits from rate cuts into 2026, supportive earnings momentum, undemanding valuations, lessening policy overhangs and M&A tailwinds. Biotech, in particular, tends to see strong relative performance 6—12 months post the first Fed cut, though the sector overall sees relative outperformance,” the bank wrote.
This sector appears poised to benefit from tailwinds such as the early-cycle macro environment, stabilizing prices for goods, and indications that consumers are shifting their spending from services to goods, the strategists said.
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