Morgan Stanley Strategist Sees 20% U.S. Stock Market Gain by 2026

Morgan Stanley's chief U.S. equity strategist, Michael Wilson, has expressed optimism about the U.S. stock market's prospects, citing the anticipated interest rate cuts by the Federal Reserve and strong corporate earnings as key drivers for continued growth. Wilson, who accurately predicted the market's rebound from the April sell-off, believes that the U.S. economy is entering an early stage of the cycle, characterized by sustained nominal earnings growth and decreasing borrowing costs.

Wilson's report refutes the notion that the anticipated rate cuts have already been fully priced into the market. While acknowledging the potential for seasonal weakness in September, he maintains that any market pullback would present buying opportunities. This perspective is supported by the underperformance of small-cap stocks and other rate-sensitive equities, which suggests there is room for these sectors to catch up.

Since April, the S&P 500 index has surged to record highs, driven by market expectations that the impact of U.S. trade tariffs on the economy will be less severe than initially feared. Additionally, optimism surrounding artificial intelligence has boosted the stock prices of major technology companies. This week, market attention is focused on key labor market data, which could provide insights into economic growth and the Federal Reserve's policy outlook. Current market pricing indicates a nearly 90% probability of a rate cut by the Federal Reserve later this month.

Wilson also cautions about potential risks to the market's upward trajectory, including seasonal weakness in September and higher-than-expected inflation data. However, he believes that short-term market consolidation could set the stage for a strong year-end performance. Evercore ISI's chief equity and quantitative strategist, Julian Emanuel, shares a similar optimistic outlook, predicting that the U.S. stock market could rise by 20% by the end of 2026, driven by the AI boom. Emanuel forecasts that the S&P 500 index will reach 7,750 points by the end of next year, representing a 20% increase from its recent close and nearly a 10% gain for the year to date.

Institutional investors, who have been cautious after two consecutive months of selling, are expected to maintain a moderate position. Analysts suggest that without significant fundamental shocks, any market pullback is likely to be limited. This cautious yet optimistic stance reflects the broader market sentiment, which is buoyed by the combination of accommodative monetary policy and robust corporate earnings.