Morgan Stanley, MS, said today it expects the Fed to deliver seven rate cuts in 2026

The S&P 500 appears poised to continue its upward momentum into the second half of the year, fueled by stronger earnings and growing expectations for aggressive Federal Reserve rate cuts, Morgan Stanley strategist Michael Wilson said in a recent note.

“Equity markets have been resilient since bottoming in April, and the rally has been more fundamentally driven than many appreciate,” Wilson wrote.

While he acknowledged the possibility of some short-term consolidation during Q3, Wilson remains optimistic over the 6- to 12-month horizon, citing expanding EPS tailwinds and clearer visibility on Fed easing.

Morgan Stanley identifies three key drivers behind the market rally. First, the breadth of earnings revisions has improved sharply—from a trough of -25% in April to around -5%—offering what Wilson calls “fundamental justification” for continued equity strength.

“This series leads EPS surprise,” he noted, adding that past turning points of this nature have historically produced strong equity returns.

Second, markets are increasingly pricing in monetary easing. “Stocks will get in front of it,” Wilson said, referring to the Fed’s anticipated pivot. Morgan Stanley’s economic team projects seven interest rate cuts in 2026.

This setup, Wilson argued, should act as a tailwind for longer-term rates and valuation metrics in the second half of 2025.

Third, broader policy and geopolitical risks appear to be easing. Brent crude has dropped 14% since June 19, helping to lower recession risk, while the removal of Section 899 from the "Big, Beautiful Bill" eliminates a potential barrier to foreign capital inflows.

Overall, Wilson sees an environment more favorable to broader market leadership, beginning with high-quality large-cap names and potentially widening out over time.

With rate-related headwinds temporarily reduced, Morgan Stanley believes equities remain in a strong position.

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