Mike Wilson, chief equity strategist at Morgan Stanley, in his latest outlook report,Raised the S&P 500 price target at the end of 2026 to 8,000 from 7,800 and set a mid-2027 target of 8,300.Wilson's team pointed out that the current market is not turning a blind eye to risks, but has completed substantial adjustments in valuation and market breadth.
The report believes that the rise in U.S. stocks is not dependent on interest rate cuts as Walsh takes over the Fed. Historical backtesting shows that stock price returns remain solid in an environment where the Fed is sitting on hold and earnings growth is strong, with a median gain of up to 14%. At the same time, the Trump administration's "rebalancing" policy is providing support for U.S. stocks from a structural level-by narrowing the trade deficit, expanding local investment, increasing the real income of low-income groups, alleviating the structural fragility of the economy and reducing the systemic risk premium.
Internal market adjustment has been completed and risk pricing is sufficient
Now that the main risks have been priced, where does the momentum for further upside in the market come from? The report believes that after Walsh took over as chairman of the Federal Reserve, the stock market did not rely on monetary easing to rise. Historical data showed a median share price return of 14% on a combination of the Fed's pause and strong earnings growth,and mainly driven by earnings growth.
Beyond earnings growth, the nature of inflation is equally critical. Income growth is positively correlated with commodity inflation, and the improvement in pricing power driven by stronger demand is a positive support for the stock market, provided that this trend does not trigger the Fed's rate hike cycle. As for the risks of recession or slowing growth that the market fears, the trigger conditions are harsh: oil prices need to continue to break through the $130 to $150 per barrel range, and earnings trends need to deteriorate significantly, and both will trigger a recession. This is also an unexpected scenario.
From Rebalancing to Differentiation of U.S. Stocks
In the face of ballooning debt pressures, the Trump administration has tried a different approach — not by austerity, but by growth. The policy focus is on promoting economic rebalancing around the three dimensions of trade, investment and income inequality. At present, rebalancing has shown a number of positive signals: the trade deficit as a percentage of GDP has narrowed, fixed investment has increased significantly, real wages in low-end services and manual labour jobs have gradually stabilized or improved, and private sector employment growth has gone hand in hand with government employment reduction.Where will this policy path lead U.S. stocks?
If the optimistic scenario is realized, the S&P 500 index is expected to rise to 9,400 points, and the profit expansion will exceed expectations. Potential driving forces include AI-driven productivity improvement, or enterprises shrink their recruitment scale ahead of schedule before the technology is fully implemented.
In a pessimistic scenario, the index may fall to 5,900 points, triggered by overheating inflation that forces the Federal Reserve to rate hike, and Walsh's shrinking balance sheet, which triggers increased volatility in the bond market and rising pressure in the financing market, thus suppressing valuations and dragging down earnings growth. The probability of this scenario happening before the end of the year is extremely low, but if the bull market scenario is realized first in the second half of the year, the inflation shock lags behind the historic demand recovery, and its probability will rise instead.
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