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Investing.com -- The recent weakness in U.S. stocks tied to cautious Federal Reserve guidance and the ongoing government shutdown should prove short-lived, with the broader earnings recovery gaining traction into 2026, according to Morgan Stanley.
“While overhangs from Fed guidance and the shutdown have weighed on recent price action, these are temporary headwinds on the way to a solid 2026 driven by earnings growth,” the bank’s chief U.S. equity strategist, Michael Wilson, said in a note.
Earnings revision breadth, a key gauge of corporate guidance momentum, has begun to reaccelerate, rising to 11% from 6% in late October. Wilson pointed to improving signals across Software, Transports, Energy, Autos, and Healthcare as evidence that the next leg higher in earnings expectations has started.
Wilson said Fed Chair Jerome Powell’s “less dovish guidance around a December cut” and the lack of official jobs data due to the shutdown have delayed confirmation of a cooling labor market. The bond market now anticipates only two rate cuts through June 2026, reflecting expectations for a slower policy pivot.
Even so, Wilson expects that “ultimately, the Fed is likely to deliver more dovish policy than the market currently expects,” though the timing may not align with equity investors’ hopes. Alternative labor indicators show a gradual slowdown rather than a sharp deterioration, which he views as consistent with the administration’s desire to “run it hot.”
Wilson also noted that the shutdown’s impact on liquidity and consumer spending has been visible but temporary.
“Once the shutdown ends, these payments will resume and we’re likely to see an easing of liquidity conditions,” the strategist wrote. He added that Consumer Discretionary earnings revisions have softened recently but should recover as government payments normalize.
Despite recent volatility, Wilson reiterated that the market remains supported by strengthening corporate fundamentals. The median stock is showing its best earnings growth in four years, and S&P 500 revenue beats are running at twice their historical average.
“These are clear signs that the earnings recovery is underway, and that pricing power is firming,” he said.