S&P 500 to continue rallying on expected Fed rate cuts: Morgan Stanley’s Wilson

Morgan Stanley strategist Michael Wilson forecasts a continued S&P 500 rally through the second half and into the next 6-12 months, despite potential Q3 consolidation. This bullish outlook is underpinned by significantly improving earnings revisions breadth, which rose from -25% to -5%, and aggressive Federal Reserve interest rate cut expectations, with Morgan Stanley economists projecting seven cuts in 2026. Additionally, diminishing policy and geopolitical risks, evidenced by a 14% drop in crude oil prices since June 19, contribute to a market setup conducive to broadening leadership, starting with large-cap quality names.

Analysis

Morgan Stanley strategist Michael Wilson projects a continued upward trajectory for the S&P 500 over a 6-12 month horizon, viewing the recent rally as fundamentally justified despite the potential for near-term consolidation in the third quarter. The bullish stance is supported by three primary drivers. First, a significant improvement in earnings revisions breadth, which has recovered from a low of -25% in April to -5%, is cited as a leading indicator for positive earnings per share (EPS) surprises. Second, the market is beginning to price in aggressive monetary easing, with Morgan Stanley's economists forecasting seven Federal Reserve rate cuts in 2026, a dynamic expected to become a valuation tailwind in the second half of 2025. Third, diminishing macro risks, evidenced by a 14% decline in crude oil prices since June 19 and the removal of a potential foreign investment hurdle (Section 899), are reducing recessionary pressures. This environment is seen as conducive to a broadening of market leadership, initially favoring large-cap quality stocks before expanding further.

Key Decisions for Investors

• Investors with a 6-12 month horizon should consider maintaining a bullish stance on US equities, as the outlook is underpinned by improving earnings fundamentals and expected Fed easing.
• Portfolio positioning could favor an initial focus on large-cap quality names, which are anticipated to lead the next phase of the rally before market leadership potentially broadens.
• While the medium-term outlook is positive, investors should be prepared for potential market consolidation in Q3, which may offer strategic entry points for long-term positions.
• Monitor leading economic indicators, particularly Fed communications and oil prices, as the forecast for aggressive rate cuts and reduced recession risk are central pillars of this thesis.