Morgan Stanley is adopting a cautiously constructive stance on U.S. equities, arguing that markets have progressed further in discounting uncertainty than many investors realise, even as geopolitical and monetary policy risks keep sentiment fragile.
Analyst Michael Wilson highlighted that the S&P 500 respected the bottom boundary of Morgan Stanley's targeted correction band of 6,300 to 6,500, and the index has risen roughly 7% from those lows over the past two weeks. That price action underpins the firm's view that the correction may be largely complete.
"The market waits for no one," Wilson wrote, advising that investors should be prepared to add risk on any pullback. He cautioned, however, that near-term developments - including peace talks stalling over the weekend and central banks maintaining vigilance on inflation - could prompt a retest of support levels.
Wilson cites a stronger earnings trajectory as a core reason for the more constructive stance. He notes that S&P 500 trailing earnings growth stands at 15%, while earnings projected over the next twelve months are up by more than 20% year-on-year. In addition, first- and second-quarter 2026 EPS estimates have risen 1% and 4%, respectively, since the end of February. Morgan Stanley also reports that earnings revisions breadth has remained resilient since the war in Iran began.
Given this backdrop, Morgan Stanley prefers a portfolio positioned as a barbell. On one side are cyclicals - specifically Financials, Industrials, and Consumer Discretionary - where the bank sees continuing earnings strength paired with compressed valuations. On the other side are quality growth names, including hyperscalers, where sentiment and valuations have reset and offer defensive-like exposure amid an improving earnings picture.
On the energy complex, Wilson said market signals point to oil and gas prices having peaked, with the relative performance of energy stocks appearing to have already turned lower. He summarized the commodity dynamic with the observation: "The solution for high commodity prices is high commodity prices," arguing that a combination of demand destruction and increased production will ultimately relieve the supply shock.
"Bottom line, our rebalancing thesis is starting to play out and underlies our more bullish view than most on where things will be in 6 months," Wilson commented. "We think the market understands this dynamic as well, which is another reason why this correction is largely over."
What this means for investors
- Be ready to add risk on pullbacks, according to Morgan Stanley, while monitoring geopolitical and inflation policy developments.
- Consider a barbell exposure that combines cyclicals with quality growth names, reflecting the bank's view on earnings and valuation dynamics.
- Watch energy sector leadership for confirmation of the view that commodity-driven pressures are easing.