Barbara Kollmeyer

Wed, May 21, 2025, 6:09 AM6 min read

Wednesday’s setup is looking weaker for equities as surging bond yields start to rattle some nerves ahead of an important auction later.

Flying in the face of this fear is Morgan Stanley and a bullish call of the day that sees the bank shift to an overweight on U.S. stocks and bonds. “Slow-but-not-dire growth makes us neutral on global stocks and constructive on fixed income, but with a strong regional preference for the U.S. across assets,” said a team of strategists including Mike Wilson.

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The team previously saw the S&P 500 SPX reaching 6,500 by the end of 2025, and now see that as a base case for the second quarter of 2026 — rolling it forward in their words. Their bull case calls for a 21% jump to 7,200 by June 2026 and a drop to 4,900 in a bear case (all from a May 19 level of 5,964).

Why the bullish turn? “We’ve already experienced rolling earnings recessions across the equity market for the last [approximately] three years,” they said, adding that this should make comparisons “less onerous” and set up for a earnings recovery happening simultaneously for many companies over their forecast period.

“The earnings path should be aided by Fed rate cuts in 2026, dollar
weakness, as well as a broader realization of AI-driven efficiency gains,” they said.

And Morgan Stanley thinks the worst is over for stocks. “From our perspective, the level of tariffs announced on ‘Liberation Day’ was so dramatic, it led to what can only be described as capitulatory price action. As a result, we think that the price lows are in assuming we don’t experience a deep recession,” they said.

For the next six to 12 months, they see stock markets looking ahead to a “more accommodative policy agenda,” including incentivizing infrastructure investment, tax breaks, deregulation and rate cuts.

The recent U.S.-China tariff pause has “significantly” cut the risk of recession, with their economists now forecasting seven rate cuts in 2026 that will be “supportive of higher-than-average valuations.”