Stocks May Already Be Pricing In More Fed Rate Cuts

The S&P 500 is heading into the second half of 2025 near record highs—up nearly 24% from its mid-April low. But with summer often bringing volatility, many investors are wondering: is this rally justified?

Morgan Stanley’s chief equity strategist Mike Wilson says yes. In a note Monday, he laid out three reasons why he remains bullish over the next 6 to 12 months.

1. Stronger Earnings Momentum

Wilson highlights a major shift in earnings sentiment. Forecasts for S&P 500 company profits have improved sharply as concerns over the Trump-era trade war fade. More importantly, optimism is expanding beyond just Big Tech.

A key metric, earnings revision breadth (ERB), has risen from -25% in mid-April to -5%. Historically, such turnarounds have preceded strong market gains. Wilson notes that this earnings growth is expected to outpace economic growth, thanks to a weaker dollar and pro-business tax incentives in the Trump administration’s proposed “Big, Beautiful Bill.”

2. The Market Is Getting Ahead of the Fed

Wilson believes the Fed could cut interest rates seven times in 2026, as unemployment becomes more pressing than inflation. And he says the market is already moving in anticipation of that pivot.

“Stocks won’t wait for a clear signal from the Fed—they’re already pricing in easier policy,” he writes.

That said, the biggest threat to this outlook would be a sharp rise in unemployment and weak jobs data—though that’s not Morgan Stanley’s base-case scenario.

3. Resilience in the Face of Risks

Stocks are also showing their usual ability to absorb geopolitical shocks. As tensions between Israel and Iran cool, oil prices have eased, reducing fears of an energy-driven slowdown.

Wilson adds that the proposed ‘revenge tax’—which had threatened to slow investment—is likely to be dropped from the final version of the “Big, Beautiful Bill.”

Lastly, the term premium on U.S. Treasurys has declined in recent weeks, signaling reduced investor anxiety about the government’s fiscal position. With 10-year yields holding below 4.5%, Wilson sees diminished interest rate risk for now.

He maintains a 12-month S&P 500 target of 6,500.