While many investors are bracing for more turbulence after the latest slide in U.S. equities, Morgan Stanley is mapping out a completely different trajectory for the stock market.
Key Takeaways:
Morgan Stanley expects the S&P 500 to hit 7,800 by end-2026.
The recent dip is viewed as a correction, not a downturn.
AI, earnings growth, and future Fed rate cuts are seen as the engines of the next rally.
The bank believes the current volatility is disguising the early stages of a major comeback rather than signalling the beginning of a downturn.
Instead of treating the recent dip as a warning sign, the firm suggests it may be the final shakeout before the next leg higher.
A 7,800 S&P 500 Target That Defies the Market Mood
Morgan Stanley expects the S&P 500 to rally sharply over the next 12 months and reach 7,800 by the end of 2026. With the index trading around 6,658, that target represents a roughly 17% climb — one of the boldest projections circulating on Wall Street today.
The forecast arrives at a moment when investor confidence has been dented: the S&P 500 is trading about 4% below its October peak, technology stocks have been under pressure and sentiment has weakened across several sectors. Yet the bank is treating the selloff as a constructive development rather than a red flag.
Why the Pullback Might Be the Setup
Morgan Stanley argues that the broad scope of the decline — spanning more than just the megacap tech names — is evidence that the market is flushing out excess positioning before it can push higher. Tactical weakness, in the bank’s view, is laying the foundation for the next rally rather than reflecting deteriorating fundamentals.
If the trend plays out the way the bank expects, the most favorable window for investors may not be after the rebound begins, but during the uncertainty that precedes it.
AI, the Fed, and Earnings — Three Forces Behind the Bullish Case
Several strategic catalysts shape the bank’s optimism:
Artificial intelligence is expected to unlock productivity and efficiency gains that boost corporate profits well into 2026.
Earnings growth is projected to accelerate next year after a period of stagnation.
Federal Reserve rate cuts, once they arrive, would loosen financial conditions and reinforce risk appetite.
Taken together, Morgan Stanley believes these drivers could fuel a positive feedback loop for equities.
Where the Bank Is Placing Its Confidence
In anticipation of the next bull phase, Morgan Stanley has stronger weightings in:
Small-cap stocks
Healthcare
Consumer discretionary
Financials
Industrials
These pockets of the market have historically shown the sharpest performance snapbacks when corrections fade and liquidity improves.
Not everyone is convinced. While some analysts also expect the S&P 500 to end the year near 7,000, others continue to warn that parts of the market — especially the AI-heavy tech segment — may be overvalued. Speculation of an AI-driven valuation bubble has become one of this cycle’s biggest arguments against sustained upside.
In Summary
Morgan Stanley is not waiting for reassurance from the market. The bank considers the downturn a necessary pause rather than a danger sign — and believes the bigger risk for investors is being underexposed if the next rally begins from a moment of pessimism rather than optimism.
