Morgan Stanley Slashes Circle's Target to $38, Then the Stock Rebounded 16%: Real Breakdown or Buy-the-Dip?

Morgan Stanley's downgrade sparked a sharp selloff, but buyers stepped in

Morgan Stanley cut Circle from Equal Weight to Underweight and slashed its price target from $106 to $38, sending shares down 5.2% in premarket trading. A call that aggressive usually forces a quick repricing.

Instead, the stock reversed course. Circle finished 16% higher by the close after rising 13% by midday. That kind of move usually signals a tug-of-war between downgrade-driven fear and buy-the-dip demand.

The immediate question is whether this bounce is just short covering before earnings, or the start of a broader willingness to buy weakness. Either way, the market is treating the episode as a live debate over sentiment, not proof of an immediate break in the business.

Morgan Stanley's bear case rests on slower USDC growth

The disagreement is not really about one price target. It is about how investors should value Circle: primarily through near-term USDC circulation, or through a wider payments and infrastructure model.

Bears are focused on circulation. Morgan Stanley cut its 2027 and 2028 USDC circulation forecasts by 33% and 44%. The firm also said USDC had effectively not grown since the third quarter of last year and questioned whether stablecoin utility beyond remittances and card-linked spending has gained real traction. If that is the right framework, slower circulation growth directly pressures near-term revenue visibility.

Circle's latest quarter complicates a simple slowdown story

Bulls, however, do not need to defend a perfect growth narrative. They only need to show that demand is not broken. Circle reported USDC in circulation of $77.0 billion at quarter end grew 28%.

Usage activity also expanded quickly. Circle said USDC onchain transaction volume in Q1'26 of $21.5 trillion grew 263%, suggesting that transaction activity is accelerating even if bears focus more on the stock of circulation than the flow of payments.

Why buyers think the bull case still has room

One reason bulls stayed constructive is the revenue mix. Circle posted higher margin on its stablecoin reserves, which can signal less reliance on third-party platforms such as Coinbase. If more of the economics remain with Circle, the business is not quite as dependent on a single distribution path.

There is also evidence Circle is still trying to broaden the ecosystem around its infrastructure. The company said the ARC Token presale raised $222M, which does not settle the valuation debate by itself, but it does suggest institutional interest in the broader Circle ecosystem.

For the buy-the-dip case to hold, though, Circle still has to turn that activity, margin improvement, and ecosystem development into stronger USDC circulation. Bears can reasonably argue that a better revenue mix matters less if the core circulating float stops growing.

Earnings on August 5 are the next real test

After the $106 to $38 target cut and the 16% rebound by the close, Circle is no longer an easy upside story. It is now a catalyst trade into August 5 earnings.

The key issue is whether investors think the recent miss was temporary or the start of a trend. Circle reported $694 million in revenue, below the $721 million in total revenue analysts expected. The company still delivered 20% year-over-year revenue growth and $151 million in adjusted EBITDA, which grew 24%, so the quarter was imperfect rather than clearly broken.

Policy can still influence the tape

Sentiment may also hinge on legislation. Earlier this month, draft language changed to restrict savings account-like interest or yield on passive stablecoin deposits. Lawmakers later preserved stablecoin reward programs under certain conditions, and Circle closed 19.9% higher after that compromise.

For now, Circle sits in a tight space: the downgrade changed the narrative, but the stock's rebound showed investors still want proof that the business can widen its model beyond a simple USDC-growth story.