Stocks are on course to enter the second half of 2025 in record territory. The rebound from the mid-April trough has been sharp, with the S&P 500 SPX up nearly 24%
Inevitably, as we enter the often treacherous summer months, investors and analysts alike are questioning whether the market's strength can be justified.
Mike Wilson, Morgan Stanley's top equity analyst, thinks it can. In a new note on Monday, he lays out three reasons why he remains bullish on a six to 12 month horizon.
The first point is earnings. Wilson observes that analyst forecasts for S&P 500 earnings have improved markedly in recent weeks as fears subside about the possible damage done to corporate profits from the Trump trade war.
Importantly, the more optimistic view of company profits is widening, beyond the already popular big tech names, for example. Indeed, earnings revision breadth (ERB), a measure of how widespread positive or negative earnings estimate changes are, has risen from minus 25% in mid April to the current minus 5%.
Wilson says that similar inflections in ERB have pointed to "strong returns ahead," though he accepts that "such a broadening is likely to take hold in large cap quality before it involves small caps/low quality stocks."
He also notes that earnings growth will outperform economic growth - a reversal of what was seen in 2022 to 2024 - because of a weaker dollar and favorable tax incentives from the Trump administration's 'Big, Beautiful Bill'.
Source: Morgan Stanley
The second factor is shifting expectations of Federal Reserve policy. Wilson says Morgan Stanley economists think the Fed will cut interest rates seven times in 2026, as unemployment becomes more of an issue than inflation. Such an easing of policy should be a tailwind for stocks.
"[T]he equity market isn't going to wait for the obvious signal in terms of a more dovish shift in monetary policy from the Fed - i.e., stocks will get in front of it," he says. In fact, he reckons that has already started to happen.
The danger to this positive impact on equities would be if data showed an acceleration in the unemployment rate and multiple negative payroll numbers - though that is not the Morgan Stanley economists' baseline forecast.
Source: Morgan Stanley
The third factor is stocks' traditional ability to shrug off exogenous shocks. "The equity market seems to be following the historical playbook around prior geopolitical risk events that we highlighted last week - stability in performance after a few days," says Wilson.
Linked to this - as the Israel-Iran conflict abates - is the pullback in oil prices (CL.1) from the recent spike, which has reduced the risk of higher energy costs threatening the business cycle.
In addition, Wilson notes that the proposed 'revenge tax' that was seen damaging investment into the U.S. now looks likely to be dropped from the 'Big, Beautiful Bill'.
Finally, Wilson observes that the Treasury market's term premium - the extra return that investors demand to take the risk of lending to the U.S. over longer periods - has fallen back over the last month as investors stress less about the U.S.'s fiscal position.
"With this dynamic taking place, and the 10-year yield BX:TMUBMUSD10Y staying contained below 4.50%, we believe interest rate risk has been reduced for the time being," Wilson says.
He maintains his base case S&P 500 target over the next 12 months at 6,500.
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