Morgan Stanley strategists, led by Michael Wilson, believe that US stocks are poised for an additional boost as the rally broadens beyond high-growth technology stocks and into cyclical, economically-sensitive industries. This rotation is supported by signs that negative pressures from interest rates, oil prices, and the strong dollar on equities are easing. The team highlighted increased traffic through the Strait of Hormuz as an indicator of this shift.
This positive outlook follows earlier upgrades from Morgan Stanley. In May, the bank raised its S&P 500 target to 8,300 for the next 12 months, representing a 12% rally from then-current levels, and increased its year-end forecast to 8,000 from 7,800. This was predicated on strong earnings and a robust economy. Previously, in March and April, Wilson noted that accelerating earnings were already shielding the S&P 500 from deeper losses, with an expected 20% rise in earnings over the subsequent 12 months.
Morgan Stanley continues to advocate for exposure to this broadening theme, pointing to improving earnings breadth, falling crude prices, and volatility in the semiconductor sector. Michael Wilson noted that the median S&P 1500 stock is now achieving double-digit earnings growth, the fastest in several years, fueled by revenue growth atop lean cost structures. The bank describes this as a "rolling recovery," with operating leverage and earnings per share growth at their strongest levels since 2021.
The firm suggests investing in Discretionary Goods, Transports, and Regional Banks to capitalize on this trend, as popular momentum trades in semiconductors and hyperscalers face increasing pressure. Wilson indicated that recent semiconductor volatility makes historically high exposure levels challenging to maintain. Furthermore, Morgan Stanley expects falling crude prices to bolster the broadening trade, having held a bearish view on oil compared to consensus for the past one to two months. The primary near-term concern for the bank is tightening liquidity from shrinking Treasury buybacks, which could pose a risk to indices and momentum trades.
