Morgan Stanley Wilson: US stocks do not require rate cuts, raise S&P 500 target to 8,000 points

After the S&P 500 rebounded 17% from its March low, Morgan Stanley believes that the market has largely digested the main risks and it's time to raise the target.

Morgan Stanley's Chief U.S. Equity Strategist Mike Wilson, in his latest outlook report, raised the S&P 500 index target for the end of 2026 from 7,800 points to 8,000 points, and set a target of 8,300 points for mid-2027. In a bull market scenario, the index could rise to 9,400 points; in a bearish scenario, it could fall to 5,900 points.

No Need for Rate Cuts, Earnings Growth is Sufficient

The core logic behind this increase is that the rise in U.S. stocks does not depend on monetary easing. Wilson pointed out that, with Volcker taking over the Fed, historical data shows that in a scenario where the Fed stands pat and earnings grow strongly, the median return on stocks is 14%, driven mainly by earnings growth rather than valuation expansion.

The nature of inflation is also crucial. Income growth is positively correlated with commodity inflation, and pricing power driven by strong demand provides positive support for the stock market, provided that it does not trigger a Fed rate hike cycle. As for the market's concerns about the risk of recession, the conditions to trigger it are quite strict: oil prices would need to consistently surpass $130 to $150 per barrel, and earnings trends would need to significantly deteriorate, both occurring together would trigger a recession, which is not the expected scenario.

Market Internal Adjustment is Deeper than it Seems

The general focus is on the less than 10% superficial decline of the S&P 500 in March, but Wilson believes that the internal adjustments in the market are far more profound than that. About half of the stocks in the Russell 3000 index have retreated by at least 20%, and the S&P 500 forward price-to-earnings ratio has compressed by 18% from its peak. The main risks such as the Iran war and oil price shock, AI technology disruption, and private credit risks have been front-loaded over the past six months. This is not market complacency, but rather full digestion.

Trump's "Rebalancing" Policy Provides Structural Support

The report also points out that the Trump administration's economic rebalancing policy is providing structural support for U.S. stocks from a fundamental level. The policy focuses on three dimensions: reducing the trade deficit, expanding domestic fixed investment, and raising the real wages of low-income groups. Positive signals have already emerged: the trade deficit as a percentage of GDP has narrowed, fixed investment has increased significantly, real wages in low-end service industries have gradually improved, and private sector job growth is accompanied by the reduction of government employment. This path helps to reduce systemic risk premiums, thus providing bottom support for valuations.

Two Extreme Scenarios are Also Worth Noting

The core driver of the optimistic scenario is that AI-driven productivity gains exceed expectations, or companies may significantly reduce hiring ahead of the full deployment of technology, thereby driving earnings expansion beyond market expectations.

The trigger path for the bearish scenario is that inflation overheating forces the Fed to raise interest rates, while Volcker proceeds with quantitative tightening, causing bond market fluctuations and increased financing pressures, which in turn suppress valuations and drag down earnings. Wilson believes that the probability of this scenario occurring before the end of the year is very low, but if the bull market scenario unfolds first in the second half of the year, and the inflation shock follows thereafter, its probability would actually increase.