Earnings strength and a more supportive Federal Reserve should help sustain market valuations, says Morgan Stanley strategist Mike Wilson. Investors continue to buy the dips. S&P 500 futures opened the week 1.5% above Friday’s intraday low, reflecting a still-bullish tone. In a Monday note, Wilson and his team raised their 12-month S&P 500 target to 7,800, up from a prior 7,200 forecast for mid-2025. From current levels, that implies roughly 16% upside. Even if the index tops 7,000 this year, Morgan Stanley still expects double-digit gains through 2026. Wilson sees next year’s economy benefiting from growth-positive catalysts such as tax cuts and deregulation, reversing the drag from tariffs and government job reductions. “A new bull market and rolling recovery began in April, which means it’s still early days,” Wilson writes. “It may not look obvious yet, especially in lagging areas of the economy and market.” This backdrop supports a healthier earnings outlook. Morgan Stanley expects companies to gain from positive operating leverage, stronger pricing power, and AI-driven efficiency improvements. Recent data backs that up: third-quarter results showed a 2.2% revenue beat rate for the S&P 500 — double the average — and 8% median EPS growth for Russell 3000 stocks, the fastest in four years. The bank now forecasts S&P 500 EPS of $272 in 2025 (12% growth), $317 in 2026 (17% growth), and $356 in 2027 (12% growth). Monetary policy is another tailwind. Wilson believes markets are underestimating how accommodative the Fed will be over the next 6–12 months. He expects softer labor data and a willingness from policymakers to “run it hot” to result in a looser stance on both rates and the balance sheet. While Wilson anticipates a slight contraction in the market’s P/E multiple — from about 22.3 to 22 — he notes that strong earnings growth and easy monetary policy rarely trigger meaningful valuation compression. Despite underperformance this year — the Russell 2000 ETF has lagged the S&P 500 by roughly 7 percentage points — Wilson expects leadership to broaden. He is upgrading small caps to overweight, citing improving earnings revisions relative to large caps. Wilson is also shifting sector preferences. Morgan Stanley now favors consumer discretionary goods stocks — including Amazon, Dick’s Sporting Goods, AutoNation, and Wayfair — over services. He notes that earnings revisions in goods are improving, and the long-term performance ratio between goods and services is near historic lows and starting to turn higher. The firm also reiterates its overweight view on financials, and upgrades healthcare to overweight as its preferred “quality growth” sector.

Investors Shift Gears: From Tech Titans to Value Plays After years of chasing high-flying tech stocks, investors are now turning to the market’s long-overlooked “old economy” names. Sectors like healthcare and industrials — once laggards — are suddenly back in the spotlight. On Wednesday, the Dow Jones Industrial Average surged past 48,000 for the first time in history, logging a second straight record close. Optimism over a potential end to the longest U.S. government shutdown helped lift the blue-chip index, said Sam Klar, portfolio manager at GMO Domestic Resilience ETF. “The main theme is: Value is back,” said Jamie Cox, managing partner at Harris Financial Group, noting strong performances from healthcare and industrial stocks. While the Dow soared, the Nasdaq Composite slipped 0.26%, extending its recent underperformance. The Dow has now outpaced the Nasdaq by 2.38 percentage points over the past two sessions — its strongest two-day lead since February. The AI Trade Loses Steam After dominating markets for much of the past year, AI-driven tech stocks are showing cracks. Momentum names like Oklo Inc. (OKLO) and Palantir Technologies (PLTR) have stumbled, while value sectors have gained traction. “Earlier this year, it felt like AI stocks could do no wrong,” said Klar. “Now the market’s asking, ‘How good is good enough?’ That uncertainty is healthy — and overdue.” Some of the shift may simply reflect profit-taking, said Cox. “It’s a responsible reallocation of capital,” he added. Shutdown Hopes Buoy Sentiment Markets were also encouraged as Congress neared a deal to reopen the federal government. Historically, shutdowns have had little lasting effect on equities, and stocks often rally once the standoff ends, noted Adam Turnquist, chief technical strategist at LPL Financial. Still, the S&P 500 is off to one of its weakest Novembers in years, raising doubts about whether the usual year-end rally can gain traction. Rotation or Reset Ahead? Some analysts caution against calling this a full-blown trend. Bob Savage, head of markets macro strategy at BNY, said the move looks more like profit-taking than a permanent shift out of tech. Large investors — including pension and foreign funds — haven’t yet changed their allocations in a meaningful way. “This rotation is about surviving year-end without getting hit on valuations,” Savage said. Much depends on the Federal Reserve’s December meeting and whether another rate cut is on the table. “Show me a Fed cut and stronger growth,” Savage added, “and I’ll tell you how 2026 looks.” For now, it’s less of a market correction and more of a rebalancing act — a reminder that even in an AI-driven era, value still has a place at the table.