Morgan Stanley turns bullish on U.S. stocks, expects S&P500 to hit 6500 by Q2/2026

Morgan Stanley has upgraded U.S. equities to Overweight, forecasting the S&P 500 to reach 6,500 by Q2 2026, driven by resilient earnings, supportive monetary policy, and a weakening dollar. The firm projects steady EPS growth through 2027, favoring U.S. equities over European, Japanese, and emerging market equities due to anticipated margin pressures in those regions from currency strength and tariff exposure. While global growth is expected to slow, Morgan Stanley does not foresee a recession, anticipating continued expansion supported by easing inflation and policy stimulus.

Analysis

Morgan Stanley has upgraded U.S. equities to Overweight, projecting the S&P 500 could reach 6,500 by the second quarter of 2026, driven by a combination of resilient earnings, supportive monetary policy, and an anticipated weakening of the U.S. dollar. The firm forecasts steady earnings per share (EPS) growth for U.S. companies through 2027, with earnings revisions expected to trough in the near term and multinational earnings benefiting from U.S. dollar depreciation; U.S. valuations are anticipated to remain elevated. This represents a distinct regional preference, as Morgan Stanley maintains an Equal Weight rating on global equities overall, but holds Equal Weight ratings for European and Japanese equities and an Underweight position on emerging markets. The caution for non-U.S. regions stems from expected margin pressures due to stronger local currencies and greater exposure to tariff-sensitive sectors. Globally, Morgan Stanley foresees a slowing but still expanding economy, with global real GDP growth forecast to decelerate to 2.5% year-over-year by the end of 2025 from 3.5% at the end of 2024, explicitly stating that a U.S. or global recession is not their base case. Inflation is projected to remain persistent, easing slightly to 2.1% by the end of 2025, with the Federal Reserve expected to hold rates steady through 2025 before initiating cuts in early 2026, while the European Central Bank and Bank of England are anticipated to commence policy easing by the end of the current year.

Key Decisions for Investors

• Investors should consider increasing their allocation to U.S. equities, in line with Morgan Stanley's Overweight rating and optimistic S&P 500 target driven by resilient earnings and a weaker dollar outlook.
• Focus on U.S. multinational corporations poised to benefit from a weakening dollar, and monitor for the anticipated trough in U.S. earnings revisions which could serve as a positive catalyst.
• Exercise caution with investments in non-U.S. equities, particularly emerging markets, as well as European and Japanese markets, given Morgan Stanley's concerns over margin pressures from local currency strength and tariff exposure.
• Prepare for a period of slowing global economic growth, without a full recession, and factor in divergent central bank policies where the Federal Reserve is expected to maintain current rates longer than other major central banks like the ECB and BoE, which may begin easing sooner.