Morgan Stanley Sees S&P 500 Climbing to 7,100 as Market Outlook Brightens

Stocks faced pressure on Wednesday as rising bond yields stirred investor nerves ahead of a key Treasury auction. But Morgan Stanley took a bullish stance, upgrading its outlook on U.S. equities and bonds.

The firm now favors U.S. assets across the board, citing “slow-but-not-dire” global growth. “We’re neutral on global equities but more optimistic on fixed income, with a strong regional preference for the U.S.,” said a team of strategists led by Mike Wilson.

Previously targeting 6,500 for the S&P 500 by the end of 2025, the bank now sees that as a baseline for Q2 2026. Their bull case points to a 21% rally to 7,200, while the bear case sees a dip to 4,900—all based on the index’s May 19 level of 5,964.

Why the Optimism?

Morgan Stanley argues that much of the equity market has already endured “rolling earnings recessions” over the last three years, setting up easier comparisons and a broad-based earnings rebound.

They expect EPS growth to be supported by expected Fed rate cuts in 2026, a weaker dollar, and greater productivity driven by AI adoption.

The strategists also believe the worst is behind us. The sharp market reaction to the recent “Liberation Day” tariff announcements marked what they call a capitulation phase. “Assuming no deep recession, we believe the lows are in,” they said.

Over the next 6 to 12 months, they foresee a shift toward more market-friendly policies — infrastructure spending, tax incentives, deregulation, and rate cuts — that could further lift equities.

Additionally, a pause in U.S.-China tariffs has helped reduce recession risks. Their economic team now expects seven Fed rate cuts in 2026, which they say will support higher valuations.

Near-Term Risks, Long-Term Drivers

The 10-year Treasury yield — recently at 4.55% — remains a short-term concern. Morgan Stanley sees yields staying rangebound through year-end before dropping to 3.45% by Q2 2026 as expectations for Fed easing build.

These elevated yields may keep equity valuations in check near term, with the S&P 500 expected to remain between 5,500 and 6,100 through the first half of 2025. After that, the path toward 6,500 becomes more likely.

That 6,500 forecast is built on a 21.5x P/E multiple and 12-month forward earnings of $302. The strategists see this as more realistic by mid-2026, considering recent market weakness and delayed effects from trade uncertainty.

Where to Invest

Morgan Stanley continues to recommend high-quality cyclical stocks — companies with strong balance sheets, consistent returns, and lower leverage. They’ve upgraded industrials from neutral to overweight, citing benefits from increased infrastructure investment.

Utilities have also been moved to overweight, reflecting a reduced focus on defensive sectors. The strategists favor large-caps over small-caps and U.S. stocks over international names, as earnings momentum builds domestically.

They also forecast a 9% drop in the U.S. dollar (ICE Dollar Index) over the next year, driven by easing U.S. rates and a shift toward defensive currencies like the euro, Swiss franc, and Japanese yen.