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Investing.com -- The S&P 500 is set to maintain its upward trajectory in the second half of the year, driven by improving earnings and expectations of aggressive interest rate cuts by the Federal Reserve, according to Morgan Stanley (NYSE:MS) strategist Michael Wilson.
“Equity markets have been resilient since bottoming in April, and the rally has been more fundamentally driven than many appreciate,” Wilson wrote in a note.
While some near-term consolidation is possible in the third quarter, the strategist said “we remain bullish on a 6-12 month horizon as EPS tailwinds expand, and the market has line of sight to Fed cuts.”
Morgan Stanley sees three primary drivers for the rally. First, earnings revisions breadth has improved significantly—rising to -5% from a low of -25% in April—providing “fundamental justification” for equity appreciation.
“This series leads EPS surprise,” Wilson wrote, noting that similar historical inflections have yielded strong returns.
Second, the market is increasingly pricing in monetary easing. “Stocks will get in front of it,” Wilson said, referring to the Fed’s expected pivot. Morgan Stanley economists forecast seven rate cuts in 2026.
Morgan Stanley believes this dynamic is likely to be a 2H25 tailwind for back-end rates and valuation.
Third, broader policy and geopolitical risks are diminishing, according to Wilson. Crude oil is down 14% since June 19, reducing recessionary risk. Additionally, the exclusion of Section 899 from the “Big, Beautiful Bill” removes a potential hurdle to foreign investment.
The setup is “much more conducive to a broadening in leadership,” Wilson wrote, beginning with large-cap quality names and eventually expanding beyond.
With interest rate risk “reduced for the time being,” Morgan Stanley believes equities remain well-positioned.