Summary:
Morgan Stanley sees equity upside extending into 2026
Six combined catalysts viewed as underpriced by markets
Mid-teens EPS growth underpins bullish outlook
Easier policy and deregulation support valuations
S&P 500 target set at 7,800
Equity markets still have meaningful upside heading into 2026, according to strategists at Morgan Stanley, who argue investors are underestimating the combined impact of several powerful tailwinds supporting risk assets. Despite three consecutive years of strong equity returns, the bank believes the broader market is positioned for a continued rolling recovery rather than an imminent downturn.
In a strategy note published Monday, chief US equity strategist Mike Wilson said that while individual bullish factors have been widely discussed, markets have yet to fully price in their cumulative effect. Taken together, these catalysts could extend the current cycle well into 2026, particularly if earnings momentum remains intact and monetary policy turns more supportive.
1. The first and most important pillar is earnings. Morgan Stanley expects mid-teens earnings-per-share growth in 2026, a pace consistent with historically strong equity performance. That outlook underpins the bank’s confidence that valuations can remain elevated without triggering a broad de-rating.
2. Deregulation is another key tailwind, especially for financials. Wilson highlighted upcoming changes to bank capital rules, including the finalisation of the enhanced supplementary leverage ratio, which analysts believe could unlock a significant improvement in bank capital productivity. That, in turn, may support higher returns on equity and increased shareholder distributions across the sector.
3. Monetary policy also features prominently. Morgan Stanley forecasts the 10-year US Treasury yield will fall below 3.75%, with the Federal Reserve expected to cut rates in January and April. The resumption of short-term bond purchases further reinforces an accommodative policy backdrop, historically a positive signal for risk assets.
4. Artificial intelligence adoption remains a structural driver. Internal analysis suggests a growing share of businesses are already reporting improved profit margins from AI deployment, strengthening the case that productivity gains are translating into real earnings growth rather than remaining a long-term promise.
5. Macro factors add further support. The bank expects oil prices and the US dollar to continue easing, which would lower fuel costs for consumers and lift earnings for globally exposed companies. With roughly 30% of S&P 500 revenues generated overseas, currency effects could provide a material boost.
6. Finally, Wilson argues valuations still have room to expand. He points to historically favourable conditions for multiple expansion, a valuation gap between median stocks and index heavyweights, and improving growth revisions among mega-cap technology firms.
Sector-wise, Morgan Stanley favours financials, healthcare, consumer discretionary, industrials and small-cap stocks. For broad exposure, the bank reiterated a 2026 S&P 500 target of 7,800, implying double-digit upside from current levels.
