MW This driver explains why traders shouldn't fight the S&P 500 rally

By Jules Rimmer

The stock market may be more resilient than tariff headlines and noisy headlines suggest - and Morgan Stanley has the key reason why.

Markets have been pricing in a slowdown in growth since trade war hostilities commenced. For Morgan Stanley's equity strategy team, led by Michael Wilson, this is now discounted and even though macro data and earnings may soften over the summer as a consequence of the uncertainty, they forecast a better second half of 2025.

Morgan Stanley identifies an improving rate of change in earnings-per-share revisions - the net proportion of analysts raising rather than lowering profit estimates across the S&P 500 - as the key catalyst for equities behind a better second half in 2025.

"In our experience, when revisions breadth is accelerating in a V-shaped manner from an extreme low, equity markets typically remain supported and pullbacks remain shallow and unsatisfying (like the past 6 weeks)," the strategists say.

The S&P 500 SPX closed Friday just over 6,000, which is a 24% gain from its April 7 low.

Morgan Stanley's team believe key leading indicators are already suggesting a recovery from what they say is not just tariff uncertainty but also pay-back in demand post the "pre-tariff pull forward." Moreover, their view is that dollar weakness should support earnings per share revisions and provide a strong tailwind for the markets. It's worth noting that the firm recently made headlines with their bearish forecast of 91 for the dollar index DXY by mid 2026.

The firm also anticipates that the AI capex cycle has bottomed after the announcement of China's DeepSeek created much negative sentiment in the sector in January. Nvidia $(NVDA)$ is the crucial stock in terms of AI capital spending, and its gross margins seem on a surer footing at 60.5% than they did in 2024 at 78.4%, say the strategists.

The team also believes one further engine of growth for equities should be provided by the Fed, which has been on hold throughout 2025 but, in the latter half of the year, better visibility on the effect of tariffs may allow a "line of sight" to rate cuts. The Fed may need to inject liquidity and pivot to a more dovish stance to help the Treasury fund its deficits going forward, they say.

Their preference is for cyclicals and higher beta growth areas of the market that have already performed strongly since the April lows. If flows continue to pursue momentum stocks, then capital goods and financial services will continue to attract buyers.

The Financial Select Sector SPDR ETF XLF has gained 6% this year as the Industrial Select Sector SPDR ETF XLI has gained 10%.

-Jules Rimmer

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June 09, 2025 04:42 ET (08:42 GMT)

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