The stock market’s moving impressively, but Morgan Stanley feels investors shouldn’t assume the rally is done.
In a recent note, strategist Michael Wilson argues that much of the bad news has been priced in, with earnings holding up much better than expected and estimates still rising.
Early earnings-season results point to an aggregate surprise of 10%, which is nearly 2x the long-term average.
That offers the rally a more robust foundation than simply momentum.
Morgan Stanley underscored improving earnings revisions, AI-driven operating leverage, and relentless capital spending as major reasons for the snapback.
Additionally, the bank said the pullbacks are likely to be shallow, with passive investors remaining under-risked.
Consequently, the bank’s stance on the S&P 500 remains bullish.
Wilson’s team stuck with its base-case target of 7,800 for the index, an almost 9% increase from its current level.
Major stock indexes keep climbing
The major U.S. indices snapped back over the past month, with tech spearheading things, culminating in the S&P 500’s fresh record close at 7,173.91 on April 27.
Fund manager buys and sells
- Cathie Wood buys $2.5 million of tumbling megacap stock
- Warren Buffett dumped 77% of Amazon to buy surging media stock
- Cathie Wood buys $11 million of tumbling megacap tech stock
The tremendous rally was driven by robust earnings, AI optimism, semiconductor strength, and easing concerns about geopolitical risk.
Nevertheless, elevated oil prices and Fed uncertainty continue to remain overhangs.
- S&P 500: The index is up 12.6% over the past month and 4.8% year to date, closing at a record 7,173.91 on April 27. Better-than-feared earnings, along with renewed AI enthusiasm, injected fresh fuel, sending the index surging to record highs.
- Nasdaq Composite: The tech-heavy index has jumped to 18.8% over the past month and is up 7.1% year to date, closing at a record 24,887.10. The Nasdaq has also benefitted immensely from the renewed enthusiasm in the AI trade, led by Nvidia‘s strength, chip stock momentum, and megacap earnings, keeping investors engaged.
- Dow Jones Industrial Average: The blue-chip index has gained 8.86% over the past month and 2.3% year to date, closing at 49,167.79. Compared to the two, the gain is considerably lower and points to pressures from consumer-facing names and oil-related worries.
Wall Street price targets for the S&P 500
- JPMorgan: 7,600.
- UBS Global Wealth Management: 7,500.
- Morgan Stanley: 7,800.
- Barclays: 7,650.
- Goldman Sachs: 7,600.
- Citigroup: 7,700.
Source: Reuters.
Morgan Stanley sees earnings driving stocks higher
Apart from investor exuberance, Morgan Stanley believes that healthy earnings are supporting the recent stock market rally.
The firm argues that resilient earnings results and upward revisions back up its call for high-teens EPS growth this year, with early earnings-season numbers coming in hotter than usual.
At present, the aggregate earnings surprise is running at an impressive 10%, which, as mentioned earlier, is 2 times the long-term average.
Moreover, the bank says that Q2 2026 EPS estimates are up 2% month-to-date, while EPS estimates for the next 12 months are up 3%.
Consequently, it’s backing a familiar investing strategy, including a barbell of cyclicals, including Financials, Industrials, and Discretionary Goods, along with quality growth, along with hyperscalers and Mag 7 names.
On top of that, capex and pricing power remain impressive, too.
Median stock capex expansion is running at near 10%, led by superb earnings growth, tax incentives, AI spending, and reshowing.
Similarly, S&P revenue surprise is also close to 2%.
Additionally, Morgan Stanley argued that AI-driven margin gains accounted for 57% of S&P 500 earnings growth and 42% of small-cap earnings growth over the past year.
Also, close to 25% of S&P 500 companies said that they experienced quantifiable AI benefits in Q1, up substantially from just 13% a year earlier.
Morgan Stanley sees policy risk taking a back seat
Morgan Stanley believes the hotly anticipated midterm elections are unlikely to drive markets for now.
The bank argues that policy impact is most important for markets near the end of President Trump’s presidency, and that critical areas like foreign policy, tariffs, and deregulation will remain largely under his control.
Hence, Morgan Stanley’s view is that earnings and the stronger business cycle are doing a lot more of the heavy lifting.
The bank argues that current earnings growth is running at a remarkable 10 percentage points above historical precedent for the second year of a presidential cycle.
It shows that the strength of the business cycle could effectively outweigh the policy agenda.
Morgan Stanley feels U.S. stocks have rebounded at a tremendous pace from its preferred S&P 500 entry point of 6,300 to 6,500.
Passive investors remain underweight, and the bank expects pullbacks to be shallow, though Fed-related transition risks and inflation uncertainty could result in short, manageable spikes in funding stress.
