Morgan Stanley reboots stocks forecast after S&P 500 notches new high | Official Website of Louis Velazquez, entrepreneur, finance guy and tech innovator

There’s been considerable debate over what happens to the stock market this year.

Bullish investors believe stocks will look past short-term headwinds like tariffs and focus on an eventually friendly Federal Reserve. Those in the bear camp think stagflation or recession is likely amid sticky inflation and a wobbly jobs market.

So far, the bulls are winning.

The S&P 500 has had a record-breaking run since President Trump paused implementing most reciprocal tariffs on April 9 to negotiate trade deals.

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Optimism that deals would result in lower-than-feared tariffs re-energized the S&P 500, which had tumbled nearly 20% from mid-February to early April.

This spring’s nearly bear market drop set the stage for a major oversold rally. And because so many remained doubters, the stock market’s ascent has mainly gone unchecked, creating a “V-shaped” recovery that’s reignited the FOMO trade.

The S&P 500 has gained about 1,200 points, or roughly 24%, since its low on April 8, closing at a fresh record all-time high of 6,173 on June 27.

The benchmark index’s performance has captured the attention of Morgan Stanley’s Chief Investment Officer, Mike Wilson, who recently updated his stock market outlook.

Since Wilson has been tracking markets professionally since 1989, investors should consider what he thinks may happen next.

Morgan Stanley’s Mike Wilson updated his stock market outlook after the S&P 500 notched an all-time high.

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The S&P 500 climbs a wall of worry

The S&P 500 surged over 20% in 2023 and 2024, including a robust 24% gain last year, leading to worries that it may struggle to deliver another big year of gains in 2025.

Concerns mounted earlier this year when the Federal Reserve shelved its plans to cut interest rates despite reducing them by 1% in the final months of 2024. This removed a key tailwind that had supported stocks’ rally last year.

The worry accelerated in February, when President Trump began implementing his tariff plans. He set tariffs on Canada and Mexico at 25% and China at 20% before announcing broad-based and higher-than-expected tariffs worldwide.

Currently, the tariffs on Canada and Mexico remain at 25%, while China tariffs total 30%. There’s also a 10% baseline tariff and a 25% tariff on autos.

The tariffs have increased the likelihood that inflation will reignite this year as companies struggle to absorb them, potentially crimping GDP and accelerating job losses.

Year-to-date, employers have cut 696,309 jobs through May, up 80% from last year, according to Challenger, Gray, & Christmas. Job losses have increased the unemployment rate to 4.2% from a low of 3.4% in 2023.

Yet the stock market is forward-looking. It has largely digested economic risks and is modeled for a friendlier backdrop as the year progresses.

The Federal Reserve’s monetary policy has remained unchanged so far this year, but most expect a rate cut by September. The June policy meeting revealed that Fed members are modeling for two rate cuts before the end of the year.

Investors have also received reassuring news on the trade front, including a promising initial agreement with China that will likely keep tariffs at current levels rather than increase them. As a result, bulls appear to be assuming that the worst of the shocking tariffs news is behind us, and more likely will be additional deals that keep tariffs where they are now.

The potential for tariffs to stay at more manageable levels and the Fed to re-energize GDP growth with rate cuts in the coming months has increased the likelihood that the next move for earnings revisions is higher.

Morgan Stanley paints bullish picture for stocks

The possibility that the path for stock market gains gets less bumpy has Wall Street veterans, including Wilson, rethinking how the S&P 500 may perform through the end of this year.

Admittedly, there’s still plenty to argue about, including the S&P 500’s valuation. Its forward price-to-earnings ratio is nearly 22, about the same as it was when stocks stalled in February.

Nevertheless, Wilson thinks the pros supporting stocks outweigh the cons, at least for now.

“Equity markets have been resilient since bottoming in April, and the rally has been more fundamentally-driven than many appreciate,” wrote Wilson and his team in a note to clients. “While there could be some consolidation during 3Q, we remain bullish on a 6-12 month horizon as EPS tailwinds expand, and the market has line of sight to Fed cuts.”

Wilson notes that we’ve seen better upward earnings revision breadth than last year, a potential precursor to additional stock market gains.

“Earnings breadth continues to rise (now at -5%, up from a trough of -25% in mid-April). This offers fundamental justification for the appreciation in equity prices since the April lows,” wrote Wilson. “As we have shown previously, this series leads EPS surprise, and our back test of historically similar inflections in revisions breadth points to strong returns ahead.”

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A weaker dollar will likely support upward earnings outlooks, given that converting sales overseas back to US Dollars dings financial results when the Dollar is strong. The US Dollar Index has retreated to 97.04, it’s lowest in over three years.

Future Fed rate cuts may also help propel stocks higher.

“The equity market isn’t going to wait for the obvious signal in terms of a more dovish shift in monetary policy from the Fed—i.e., stocks will get in front of it,” said the analysts. “Our economists see the Fed cutting 7 times next year, a dynamic that’s likely to be a 2H25 tailwind for back-end rates and valuation.”

Morgan Stanley notes that its research shows that stocks are “strong during Fed cutting cycles, even if this tailwind starts to get discounted ahead of time.”

Overall, Morgan Stanley’s base case is for the S&P 500 to trade to 6,500 in the next 12 months.