Morgan Stanley Turns Bullish on U.S. Stocks, Forecasts S&P 500 to Reach 6,500 by Mid-2026

21 May 2025

Morgan Stanley has adopted a bullish outlook on most major U.S. assets, upgrading both stocks and Treasuries to "overweight" amid reduced tariff uncertainty and room for additional interest rate cuts, according to a comprehensive analysis released Tuesday.

In a significant shift, Morgan Stanley has upgraded its outlook on U.S. equities, projecting the S&P 500 to reach 6,500 by mid-2026, a 9.5% increase from current levels. This bullish stance is underpinned by anticipated Federal Reserve rate cuts, a weakening U.S. dollar, and efficiency gains driven by artificial intelligence (AI).

Factors Driving the Optimism

1. Federal Reserve Rate Cuts: Morgan Stanley anticipates multiple rate cuts by the Federal Reserve in 2026, which would lower borrowing costs and stimulate economic growth.

2. Weakening U.S. Dollar: A projected 9% decline in the U.S. dollar over the next year is expected to boost the competitiveness of American exports and enhance corporate earnings.

3. AI-Driven Efficiency Gains: The continued adoption of AI technologies is seen as a catalyst for productivity improvements across various sectors, supporting earnings growth.

Market Outlook Scenarios

Morgan Stanley outlines three potential scenarios for the S&P 500 by mid-2026:

Base Case: 6,500 points, reflecting steady earnings growth and favorable economic conditions.

Bull Case: 7,200 points, assuming accelerated AI adoption and more aggressive rate cuts.

Bear Case: 4,900 points, in the event of persistent inflation and delayed policy responses.

Investment Recommendations

Given the current market dynamics, Morgan Stanley advises investors to focus on:

High-Quality Cyclical Stocks: Companies poised to benefit from economic expansion.

Industrials and Utilities: Sectors expected to gain from infrastructure spending and stable demand.

Large-Cap U.S. Equities: Preferred over small caps and international stocks due to their resilience and growth prospects.

While near-term challenges such as elevated Treasury yields and geopolitical uncertainties persist, Morgan Stanley's revised outlook reflects confidence in the underlying strength of the U.S. economy. Investors are encouraged to consider strategic allocations that align with these projections, keeping in mind the potential for both opportunities and risks in the evolving market landscape.