Here’s the thing about Wall Street predictions: they’re usually wrong, but that doesn’t stop anyone from making them. This week, Morgan Stanley’s chief U.S. equity strategist Michael Wilson decided to raise his S&P 500 target from 7,200 to 7,800 by the end of 2026—basically saying “yeah, we’re going higher.” If he’s right, that’s an 18% return from current levels. If he’s wrong, well, at least he’s committed.
Wilson’s thesis is that we’re in a new bull market. Not the old one from 2023-2024 (that crashed spectacularly in April), but a fresh, shiny one that started in late April and is supposedly built on solid ground. The Morgan Stanley team reckons we’re in an “early-cycle environment,” which is fancy speak for “things are just getting started.”
Here’s where it gets interesting. Wilson isn’t just throwing darts at a board. He’s banking on corporate earnings growth to do the heavy lifting. The team expects S&P 500 earnings to finish 2025 at $272 per share (up 12% for the year), then jump to $317 in 2026 (another 17% gain), and keep climbing to $356 in 2027. That’s the kind of growth that actually justifies higher stock prices—novel concept, right?
What’s driving this earnings bonanza? Wilson points to positive operating leverage, AI-driven efficiency gains, accommodating tax and regulatory policies, and companies’ newfound pricing power. Basically, companies are getting smarter, tech is making them faster, and they can charge more without customers completely losing it.
Here’s where skeptics might raise an eyebrow. Even with all this growth, Wilson sees the S&P 500 trading at a P/E ratio of 22—still pretty pricey by historical standards. But his argument is that when you factor in the earnings growth, “many stocks are not as expensive as they appear.” Translation: yeah, they look expensive now, but wait until those earnings materialize.
Wilson also thinks small-cap stocks are about to have their moment. The Russell 2000 has been lagging the S&P 500 (up just 5.8% year-to-date), but Morgan Stanley expects small caps to outperform large caps going forward. They’re also bullish on consumer cyclicals over staples, and they see financials, industrials, and healthcare as the real winners.
Healthcare gets special attention—lower rates, M&A activity, and “undemanding valuations” make it attractive. Biotech, in particular, tends to pop 6-12 months after the Fed starts cutting rates.
Is Morgan Stanley right? Maybe. The earnings growth story is compelling, and if companies actually deliver those numbers, the math works. But that’s a big “if.” Markets are forward-looking machines that price in expectations, and expectations can change faster than a Fed policy shift. Still, if you’re looking for a reason to stay bullish, “strong earnings growth” beats “vibes” any day of the week.
