The S&P 500’s rip-roaring rally has taken it to all-time highs, prompting significant debate over whether stocks could run out of steam soon.
Many bears say the S&P 500’s valuation is near nose-bleed territory. With inflation rising and GDP slowing, the risk of stagflation means stocks are too pricey.
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What ultimately happens is anybody’s guess, but long-time market watcher and Morgan Stanley chief strategist Mike Wilson disagrees.
This week, he delivered a surprising message to investors, suggesting that not only is the market likely to head higher, but it’s only in the early innings.
Morgan Stanley’s Mike Wilson was bearish earlier this year. Now, he has become bullish on the S&P 500 in 2025.
Image source: Bloomberg/Getty Images
Risks to stocks priced in during ‘near’ bear market
The market often finds its footing when everybody panics and presses the sell button. Those oversold conditions can create wonderful buying opportunities for investors who can keep emotions in check.
The stock market drubbing this spring is a great example. The S&P 500 tumbled 19% from all-time highs in February to its April low, nearly reaching 20% bear market territory.
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The near bear market drop pushed most measures of investor sentiment deeply into oversold territory, with most predicting that harsher-than-hoped tariffs would cause stagflation or outright recession.
Morgan Stanley’s Mike Wilson thinks the speed and size of that drop priced in those worst-case scenarios, clearing the way for the start of a new bull market move that could only have just begun.
“We’re transitioning to an early cycle backdrop—the rolling recovery is beginning,” wrote Wilson to clients this week. “The equity market already priced a slowdown in growth in April that’s now coming through in the lagging macro data.”
Last month, the US economy only created 73,000 jobs, far less than the 100,000 Wall Street economists expected. Over the past three months, the US has added only 106,000 jobs, according to the Bureau of Labor Statistics.
That news is discouraging for the economy, but, to Wilson’s point, it may already have been priced into stocks during the drop this spring.
What could happen to the S&P 500 next
The S&P 500’s 20% plus returns in 2023 and 2024 were driven by increasing optimism of a friendly Fed. After the most hawkish rate hikes since the 1980s in 2022 and 2023, the Fed pivoted to neutral before cutting rates by 1% last year.
This year, the Fed has stayed neutral because it fears that tariffs will be passed on to consumers, causing inflation to increase.
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“This inflation risk has kept the Fed less dovish than near-term bond market pricing would suggest,” wrote Wilson. “Ultimately, our house view is for tariff-induced inflation to subside later this year (M/M [month over month] core CPI to peak in August), paving the way for a significant rate cutting cycle.”
If Wilson is correct that inflation peaks this year and retreats, a “significant” pace of rate cuts in 2026 could position equities for a major move higher, given lower rates fuel GDP, revenue, and earnings growth at publicly-traded companies.
“Bottom line, we’re bullish on a 6-12 month time horizon due to a rebounding earnings and cash flow environment,” wrote Wilson. “In terms of trades, we stay long Industrials, Financials, and US over international equities. Consumer Discretionary Goods remains an underweight amid tariff pressures and weaker pricing power.”