Morgan Stanley hikes S&P 500 target for next year. Here are the plays to make.

By Jamie Chisholm

Earnings growth and an accommodative Fed will support market multiples, says Mike Wilson

Morgan Stanley analysts say the door will remain open for stock-market gains next year.

The dips are still being bought: S&P 500 futures at the start of the week are 1.5% above Friday's intraday low.

And our call for the day captures this underlying bullish mood. In a note published Monday, Morgan Stanley's chief U.S. equity strategist Mike Wilson, and team, say they are raising their 12-month target for the S&P 500 to 7,800. Wilson had forecast the stock barometer to be 7,200 around the middle of next year.

At current levels, 7,800 would represent a 16% rise. The S&P 500 SPX could surpass 7,000 this year and the Morgan Stanley target would still represent a double-digit gain for 2026.

They say economic conditions next year will see the benefit from growth-positive factors like tax cuts and deregulation, as opposed to growth-negative policies currently weighing on activity like tariffs and government job cuts.

"In short, we believe a new bull market and rolling recovery began in April which means it's still early days, and not obvious, especially for many lagging parts of the economy and market," says Wilson.

That's a good background for corporate earnings, which will also benefit from a return of positive operating leverage, greater pricing power, and AI-driven efficiency gains, according to Morgan Stanley.

"Our forecasts reflect this upside to earnings which is another reason why many stocks are not as expensive as they appear despite our acknowledgement that some areas of the market may appear somewhat frothy-i.e., certain unprofitable, speculative growth areas," Wilson says.

Indeed, supporting evidence of an earnings recovery can be seen in the recent third-quarter results, which Wilson calculates produced a 2.2% S&P 500 revenue beat rate, which was twice the average, and 8% earnings per share growth for the median stock in the Russell 3000, the strongest expansion in four years.

Morgan Stanley sees S&P 500 earnings per share of $272 for this year, which is 12% growth, 2026 EPS of $317 (17% growth), and 2027 EPS of $356 (12% growth).

Another tailwind for stocks is monetary policy. "While there's uncertainty around this dynamic in the short term, over the next 6-12 months, we think that moderate weakness in lagging labor data and the administration's desire to 'run it hot' will lead to an accommodative monetary policy backdrop involving both rates and the balance sheet," says Wilson.

Crucially, Wilson thinks the market currently is underestimating how accommodative the Federal Reserve will be and this also will support valuations.

Nevertheless, Wilson does think the market's price to EPS multiple will contract from current levels of about 22.3 - though his forecast of 22 times remains historically high. "Our work shows that it's rare to see meaningful multiple compression in periods of above-median EPS growth (7-8%) and accommodative monetary policy," he says. The Russell 2000 ETF IWM has underperformed the S&P 500 by about 7 percentage points this year.

Given all this, Wilson sees "a broadening in [market] leadership amid a healthy EPS environment," and consequently he is upgrading small caps relative to large caps. "Importantly, small cap earnings revisions are now starting to turn higher against large caps, a key development we were waiting for before upgrading the group to overweight," he adds.

And now Wilson prefers the struggling consumer discretionary goods sector - it names companies including Amazon.com (AMZN), Dick's Sporting Goods (DKS), AutoNation (AN) and Wayfair (W) - over services, double upgrading the former from underweight to overweight. Earnings revisions of consumer discretionary goods relative to services is picking up, Wilson says. "The long term performance ratio of this pair is also near historical lows and just starting to turn higher."

Morgan Stanley also reiterates its overweight stance for financials XLF, while healthcare XLV "remains our preferred exposure to quality growth, and we upgrade the sector to overweight as well."

The markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are mixed as benchmark Treasury yields BX:TMUBMUSD10Y dip. The dollar index DXY is up, while oil prices (CL.1) lower and gold futures (GC00) are trading around $4,083 an ounce.

   Key asset performance                                                Last       5d      1m      YTD      1y 
   S&P 500                                                              6734.11    0.08%   1.05%   14.49%   14.71% 
   Nasdaq Composite                                                     22,900.59  -0.45%  0.97%   18.59%   22.59% 
   10-year Treasury                                                     4.13       0.90    14.70   -44.60   -29.10 
   Gold                                                                 4082.1     -1.00%  -6.68%  54.67%   56.04% 
   Oil                                                                  59.94      -0.18%  5.29%   -16.60%  -13.23% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

Alphabet shares (GOOGL) are up sharply after Warren Buffett's Berkshire Hathaway (BRK.B) bought a $4 billion stake in the Google parent.

U.S. economic data due Monday include the Empire State manufacturing survey for November, released at 8:30 a.m. Eastern. Now the U.S. government has re-opened investors can expect a bunch of economic news, notably the official U.S. jobs report for September, which will come out on Thursday, more than a month after its original Oct. 3 release date.

Federal Reserve officials speaking on Monday include Federal Reserve Vice Chair Philip Jefferson at 9 a.m.; Minneapolis Fed President Neel Kashkari at 1 p.m.; and Federal Reserve Governor Christopher Waller at 3:35 p.m.

The third-quarter earnings season is mostly done, but this week still sees a bevy of retailers presenting their numbers, including Home Depot (HD) on Tuesday, Target (TGT) on Wednesday, and Walmart (WMT) on Thursday.

But the earnings highlight will be Nvidia (NVDA), whose numbers are released after Wednesday's closing bell.

However, Peter Thiel, founder of PayPal (PYPL), has followed SoftBank (JP:9984) and dumped his Nvidia holding, according to a regulatory filing.

Morgan Stanley double-downgraded Dell Technologies (DELL) to underweight and also lowered its rating on HP (HPQ) to underweight, in a note warning of margin pressure.

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The chart

One oft-cited cause of the stock market's recent wobbles is that investors have become more wary of the AI narrative. But a note published on Sunday by Julian Emanuel and team at Evercore ISI contained this chart showing investors have a pretty high conviction that AI capital expenditure won't peak until the second half of 2027, or beyond.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GNS     Genius 
   PLTR    Palantir Technologies 
   GME     GameStop 
   TSM     Taiwan Semiconductor Manufacturing 
   AMD     Advanced Micro Devices 
   BYND    Beyond Meat 
   AAPL    Apple 
   GOOGL   Alphabet 

Random reads

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-Jamie Chisholm

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