The S&P 500 could surge to as high as 7,100 next year, say strategists
Morgan Stanley believes U.S. stocks are headed higher, helped by a more “acommodative” policy agenda.
Wednesday’s setup is looking weaker for equities as surging bond yields start to rattle some nerves ahead of an important auction later.
Flying in the face of this fear is Morgan Stanley and a bullish call of the day that sees the bank shift to an overweight on U.S. stocks and bonds. “Slow-but-not-dire growth makes us neutral on global stocks and constructive on fixed income, but with a strong regional preference for the U.S. across assets,” said a team of strategists including Mike Wilson.
The team previously saw the S&P 500 reaching 6,500 by the end of 2025, and now see that as a base case for the second quarter of 2026 — rolling it forward in their words. Their bull case calls for a 21% jump to 7,200 by June 2026 and a drop to 4,900 in a bear case (all from a May 19 level of 5,964).
Why the bullish turn? “We’ve already experienced rolling earnings recessions across the equity market for the last [approximately] three years. This makes comparisons less onerous and sets the stage for a more synchronous EPS [earnings per share] recovery over the course of our forecast horizon,” said Morgan Stanley’s team.
“The earnings path should be aided by Fed rate cuts in 2026, dollar
weakness, as well as a broader realization of AI-driven efficiency gains,” they said.
And Morgan Stanley thinks the worst is over for stocks. “From our perspective, the level of tariffs announced on ‘Liberation Day’ was so dramatic, it led to what can only be described as capitulatory price action. As a result, we think that the price lows are in assuming we don’t experience a deep recession,” they said.
For the next six to 12 months, they see stock markets looking ahead to a “more accommodative policy agenda,” including incentivizing infrastructure investment, tax breaks, deregulation and rate cuts.
The recent U.S.-China tariff pause has “significantly” cut the risk of recession, with their economists now forecasting seven rate cuts in 2026 that will be “supportive of higher-than-average valuations.”
As for key risks to equities in the short term, Morgan Stanley points to the 10-year Treasury yield. They expect rangebound yields until the last quarter of this year, when the market begins to price in more Fed cuts for 2026, and the yield dropping to 3.45% by the second quarter of next year.
Elevated yields on longer-term bonds in the nearer term will “keep a lid” on equity multiples for now and the S&P 500 within their first-half 2025 range of 5,500-6,100, before it then resumes progress toward their 12-6,500 price target, said Wilson and the team.
The big driver of that 6,500 target is an expectation for a 21.5 price-to-earnings multiple on 12-month forward earnings per share of $302. And that target is more likely by the middle of 2026, owing to “the magnitude of the [first half] drawdown and the lagged impacts of tariff uncertainty on earnings over the next couple of quarters.”
As for what stocks to buy, Wilson and the team continue to recommend higher-quality cyclical stocks — well-managed companies with sustainably high, long-term returns and strong balance sheets — as well stocks with less leverage and cheaper valuations.
The strategists have upgraded industrials from a pre-“Liberation Day” neutral to overweight: “the sector best-positioned to benefit from the administration’s focus on a domestic infrastructure build-out.” Utilities have also been bumped up to overweight owing to a paring back on defensive exposures, and they like large-cap over small-cap, as well as U.S. over international equities, amid expectations for earnings revisions starting to inflect higher for U.S. stocks.
The bank sees the dollar continuing to weaken, and a 9% drop for the ICE Dollar Index in the next 12 months, as U.S. rates and economic growth converge versus peers, and a defensive regime that sees haven currencies outperform, led by the euro, Swiss franc and Japanese yen.