By Barbara Kollmeyer
The S&P 500 could surge to as high as 7,100 next year, say strategists
Wednesday’s setup is looking weaker for equities as surging bond yields start to rattle some nerves ahead of an important auction later.
Flying in the face of this fear is Morgan Stanley and a bullish call of the day that sees the bank shift to an overweight on U.S. stocks and bonds. “Slow-but-not-dire growth makes us neutral on global stocks and constructive on fixed income, but with a strong regional preference for the U.S. across assets,” said a team of strategists including Mike Wilson.
The team previously saw the S&P 500 SPX reaching 6,500 by the end of 2025, and now see that as a base case for the second quarter of 2026 – rolling it forward in their words. Their bull case calls for a 21% jump to 7,200 by June 2026 and a drop to 4,900 in a bear case (all from a May 19 level of 5,964).
Why the bullish turn? “We’ve already experienced rolling earnings recessions across the equity market for the last [approximately] three years,” they said, adding that this should make comparisons “less onerous” and set up for a earnings recovery happening simultaneously for many companies over their forecast period.
“The earnings path should be aided by Fed rate cuts in 2026, dollarweakness, as well as a broader realization of AI-driven efficiency gains,” they said.
And Morgan Stanley thinks the worst is over for stocks. “From our perspective, the level of tariffs announced on ‘Liberation Day’ was so dramatic, it led to what can only be described as capitulatory price action. As a result, we think that the price lows are in assuming we don’t experience a deep recession,” they said.
For the next six to 12 months, they see stock markets looking ahead to a “more accommodative policy agenda,” including incentivizing infrastructure investment, tax breaks, deregulation and rate cuts.
The recent U.S.-China tariff pause has “significantly” cut the risk of recession, with their economists now forecasting seven rate cuts in 2026 that will be “supportive of higher-than-average valuations.”
As for key risks to equities in the short term, Morgan Stanley points to the 10-year Treasury yield BX:TMUBMUSD10Y. They expect rangebound yields until the last quarter of this year, when the market begins to price in more Fed cuts for 2026, and the yield dropping to 3.45% by the second quarter of next year.
Elevated yields on longer-term bonds in the nearer term will “keep a lid” on equity multiples for now and the S&P 500 within their first-half 2025 range of 5,500-6,100, before it then resumes progress toward their 12-6,500 price target, said Wilson and the team.
The big driver of that 6,500 target is an expectation for a 21.5 price-to-earnings multiple on 12-month forward earnings per share of $302. And that target is more likely by the middle of 2026, owing to “the magnitude of the [first half] drawdown and the lagged impacts of tariff uncertainty on earnings over the next couple of quarters.”
As for what stocks to buy, Wilson and the team continue to recommend higher-quality cyclical stocks – well-managed companies with sustainably high, long-term returns and strong balance sheets – as well stocks with less leverage and cheaper valuations.
The strategists have upgraded industrials XLI from a pre-“Liberation Day” neutral to overweight: “the sector best-positioned to benefit from the administration’s focus on a domestic infrastructure build-out.” Utilities XLU have also been bumped up to overweight owing to a paring back on defensive exposures, and they like large-cap over small-cap, as well as U.S. over international equities, amid expectations for earnings revisions starting to inflect higher for U.S. stocks.
The bank sees the dollar DXY continuing to weaken, and a 9% drop for the ICE Dollar Index in the next 12 months, as U.S. rates and economic growth converge versus peers, and a defensive regime that sees haven currencies outperform, led by the euro, Swiss franc and Japanese yen.
Read: Jamie Dimon warns of stock-market ‘complacency’ as investors keep shaking off bad news. Strategists see evidence he’s right.
The markets
U.S. stock futures (ES00) (YM00) (NQ00) are dropping, as Treasury yields rise, with the 10-year Treasury yield BX:TMUBMUSD10Y at 4.53% and the 30-year BX:TMUBMUSD30Y is at 5.02%. Oil prices (CL00) are up on a report Israel may attack Iran’s nuclear facilities. The dollar DXY is under pressure, gold (GC00) is stronger and bitcoin (BTCUSD) is climbing.
Key asset performance Last 5d 1m YTD 1y S&P 500 5940.46 0.92% 12.34% 1.00% 11.63% Nasdaq Composite 19,142.71 0.70% 17.44% -0.87% 13.72% 10-year Treasury 4.516 -2.20 12.30 -6.00 8.80 Gold 3303.8 1.51% -2.59% 25.18% 36.23% Oil 63.09 0.32% 1.30% -12.22% -18.33% Data: MarketWatch. Treasury yields change expressed in basis points
The buzz
Target (TGT) has slashed earnings guidance after disappointing results, and shares are down. Lowe’s (LOW) reported a beat and shares are up. Results from Best Buy (BBY) and TJX Cos. (TJX) are still to come.
UnitedHealth (UNH) stock is falling. The insurer secretly paid nursing homes to reduce the number of hospital transfers, according to a report in the Guardian newspaper. The company denied preventing hospital transfers.
Investors will be closely watching a $16 billion Treasury auction of 20-year bonds on Wednesday, the first for longer-duration notes since Moody’s U.S. downgrade last week. Results should be out after 1 p.m.
Bidding on a U.K. bond auction was extended after a Bloomberg terminal outage.
Palo Alto Networks shares (PANW) are slipping. The cybersecurity company reported higher revenue, but lower profit and its sales outlook missed forecasts.
Wolfspeed (WOLF) may file for bankruptcy in weeks, according to the Wall Street Journal.
Best of the web
Trump sours on raising the SALT cap, calling it a gift to Democratic governors.
Japan’s agriculture minister resigns after saying he’s “never had to buy rice.”
Elon Musk’s Tesla robotaxi rollout looks like a disaster waiting to happen.
The chart
George Saravelos, head of FX research at Deutsche Bank, offers a chart showing a widening gap between U.S. Treasury yields and the U.S. dollar vs. the Japanese yen (USDJPY) , a setup that he has been warning “would be the single most important market indicator” of rising U.S. fiscal risks. A rising yen alongside U.S. yields is “evidence that foreign participation in the U.S. treasury market is declining.” In a note to clients, he added that the ongoing selloff of Japanese government bonds is a “bigger problem for the U.S. treasury market: by making Japanese assets an attractive alternative for local investors, it encourages further divestment from the U.S.”
Top tickers
These were the most active tickers on MarketWatch as of 6 a.m.:
Ticker Security name TSLA Tesla NVDA Nvidia GME GameStop QBTS D-Wave Quantum UNH UnitedHealth PLTR Palantir Technologies AAPL Apple AMD Advanced Micro Devices MSTR MicroStrategy AMZN Amazon.com
Random reads
Czech hikers stumble onto valuable gold hoard.
Blowing up the internet: Ugandan mud wrestlers.
-Barbara Kollmeyer
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
05-21-25 0909ET
Copyright (c) 2025 Dow Jones & Company, Inc.