Morgan Stanley says that corporate earnings are in a “rolling recovery.”
The bank is doubling down on its bullish forecast for the S&P 500 to jump to 7,200 in a year.
Morgan Stanley sees the outlook for corporate earnings boosting stocks to new heights in the coming 12 months.
After markets were battered in April amid Donald Trump’s tariff announcements, earnings are getting a boost from a handful of sources.
The bank said that April’s price action represented the end of a “rolling earnings recession” that began in 2022.
“Now, we appear to be transitioning to a rolling recovery backdrop aided by positive operating leverage, AI adoption, dollar weakness, cash tax savings from the OBBBA, easy growth comparisons, pent up demand for many sectors, and a high probability of Fed cuts by 1Q26,” the bank’s chief investment office Michael Wilson wrote.
The bank sees the S&P 500 rising to 7,200 in its bull case, a 12% jump from Friday’s close. It also said the probability of such an outcome for the broad index is on the rise. Wilson said that high valuations that some observers have been fretting over appear to be justified.
The bank recommends the industrials sector as its top pick, even after it has been the top-performing sector of the S&P 500 year-to-date.
Major market indexes have risen steadily over the past week, with the S&P 500 closing at record highs on July 25. The index is up 9% year-to-date.
Morgan Stanley’s prediction comes as economic uncertainty appears to be easing. With President Donald Trump announcing a new trade agreement with the European Union and the Federal Reserve expected to cut interest rates later this year, investors may be feeling more confident in the market’s strength.
“The historically sharp inflection we’re seeing in earnings revisions breadth confirms this process is underway,” the bank stated, noting that it sees this phenomenon as underappreciated.
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