Wall Street’s outlook for the U.S. market has shifted dramatically, and Morgan Stanley now argues that the equity landscape is entering its most pivotal transition in years.
According to a new outlook from the bank, the conditions forming beneath the surface could ignite a powerful S&P 500 upswing next year—one that may push the index roughly 16% higher, potentially clearing the 7,800 mark.
The firm’s strategists describe the current environment as a “reset phase,” where beaten-down sectors begin to recover one by one, laying the groundwork for a broader earnings expansion.
A Rolling Recovery Across Sectors
Morgan Stanley’s team, led by chief U.S. equity strategist Mike Wilson, believes the U.S. economy has just exited a slow, three-year grinding downturn that hit different industries at different times. The bank calls this process a “rolling recession,” and argues that the reversal is already underway.
As each lagging area stabilizes and rebounds, corporate earnings should strengthen in a staggered but durable way. Wilson’s team notes improving earnings revision trends and pent-up demand across multiple segments of the economy – classic traits of the early phase of a new bull cycle.
The Economy’s ‘Running Hot’ Phase May Cool at the Perfect Time
Another catalyst Morgan Stanley highlights is the current momentum in the real economy. Inflation pressures and strong pricing power have kept activity elevated, even as federal debt and deficit issues continue to complicate fiscal planning.
The analysts estimate that an upswing that began in April 2025 could continue for nearly two years – long enough to fuel profit growth and buoy risk assets before the Federal Reserve is forced to tighten policy again. Crucially, they don’t expect that monetary pushback to arrive until well after their forecast window.
Why This Matters
If both forces play out – a synchronized sector rebound and an extended economic upswing—Morgan Stanley says the backdrop will be ideal for a large-scale S&P rally fueled by AI-driven productivity gains and renewed corporate strength.
The bottom line: after years of uneven market performance, the firm believes a broad and sustainable bull phase is forming, setting up 2026 as a year where the index could chart new territory.
