The S&P 500 remains down this year despite its recent rebound, with attractive buying opportunities in cyclical and quality growth stocks, according to Morgan Stanley.
On Monday, the S&P 500 SPX rose a fourth straight day, booking its longest stretch of daily gains since Jan. 27 - the day it closed at a record high, according to FactSet data.
Although the bottom might not be in just yet, it appears the latest stock-market pullback has likely entered its "final innings," said Mike Wilson, an equity strategist at Morgan Stanley, in a research note Monday. "Bottoms are not always V-shaped," and the S&P 500 appears to be "carving out a low" around 6,300 to 6,500, Wilson said.
At this point, "it makes sense to start adding length in cyclical and quality growth trades where earnings remain strong, valuation has compressed, and sentiment is negative," said Wilson. Financials, consumer-discretionary goods and hyperscalers "top our list of targets," he wrote.
Wilson isn't ruling out a "retest of last week's lows" if the Iran conflict escalates or if the 10-year Treasury yield reaccelerates toward 4.5%, but he anticipates the S&P 500 won't see "a meaningful break" below them.
The S&P 500 closed Monday at 6,611.83, up 0.4%, FactSet data show.
In Wilson's view, bank stocks appear particularly attractive.
"The group has seen relative valuation compression as a result of a host of risks, which we think are overstated for this area of the market," he said, citing worries over private credit and disruption from artificial intelligence. AI-related "labor risks are premature given we haven't had a labor cycle in history due to a positive productivity shock (only a demand shock)," Wilson wrote.
Meanwhile, expected earnings growth is accelerating for companies in the S&P 500 despite the Iran war, the Morgan Stanely note showed. The chart below tracks anticipated growth in earnings per share for the S&P 500 over the next 12 months.
Line graph showing S&P 500 Forward 12M EPS Growth accelerating to multi-year highs from 2022 to 2026.
MORGAN STANLEY
"We have contended that the probability of this oil spike ending the business cycle in the U.S. is low given that earnings growth is accelerating and positive today," said Wilson, "whereas it was decelerating and negative in historical periods where a surge in crude prices caused a recession."
Oil prices have surged amid the Iran conflict, with West Texas Intermediate crude trading at more than $112 a barrel on Monday afternoon. WTI oil prices (CL00) have soared around 96% so far this year, according to FactSet data, at last check.
High oil prices have made investors jittery about inflation and risks to growth in the U.S. economy, with the S&P 500 ending Thursday 5.7% below its record close booked Jan. 27, according to Dow Jones Market Data. The U.S. stock market was closed the next day for Good Friday.
The S&P 500 climbed 3.4% last week to snap a five-week losing streak, marking its biggest weekly gain since late November, according to Dow Jones Market Data.
The recent drop in stocks has knocked the S&P 500's forward price-to-earnings ratio down by 18%, according to Wilson.
"This is an extreme outcome" in the absence of a recession or interest-rate hikes by the Federal Reserve, said Wilson. In the bond market, the yield on the 10-year Treasury note BX:TMUBMUSD10Y finished Monday down 1.1 basis points at at 4.333%, according to Dow Jones Market Data.
Wilson also pointed to the drop in megacap stocks in the S&P 500 that heavily influence its trajectory.
"Large weights in the S&P 500 have now reset from a valuation and positioning standpoint to more healthy levels that should facilitate a continuation of this new bull market that started in April of last year," he wrote.
Shares of hyperscalers and the "Magnificent Seven" more broadly look "quite interesting," according to the note. Forward earnings growth for the Magnificent Seven - which includes Nvidia (NVDA), Apple $(AAPL)$, Google parent Alphabet $(GOOGL)$, and Microsoft $(MSFT)$, Amazon.com (AMZN), Facebook parent Meta Platforms (META) and Tesla $(TSLA)$- looks "robust" while the group's valuation has dropped near its "liberation day" lows, he said, referring to the day President Donald Trump rolled out steep tariffs last April.
Line graph showing Mag 7 Forward P/E (left scale) and Mag 7 Forward 12-Month Earnings Growth (right scale) from March 2024 to March 2026.
MORGAN STANLEY
The Roundhill Magnificent Seven ETF, an exchange-traded fund that holds shares of that cohort of Big Tech stocks, rose 0.2% Monday. The ETF is in the red so far in 2026, with a drop of 11.5% year to date.
The U.S. stock market ended higher Monday, with the Dow Jones Industrial Average and technology-heavy Nasdaq Composite rising along with the S&P 500.
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