Morgan Stanley strategists indicate that the U.S. economy is entering an ‘early stage of the cycle,’ with interest rate cut expectations not yet fully priced in; any consolidation in the short term ‘will lay the groundwork for a strong finish by the end of the year.’
According to Morgan Stanley strategist Michael Wilson, the current rally in the U.S. stock market, which has risen for four consecutive months, is expected to continue. He believes that the Federal Reserve’s interest rate cut cycle will mutually reinforce strong corporate earnings, providing sustained upward momentum for the stock market.
Wilson accurately predicted the rebound following the market sell-off in April. He stated that the U.S. economy is entering an ‘early cycle phase,’ during which nominal corporate earnings are expected to continue to rise as borrowing costs decline. Additionally, stocks sensitive to interest rates (such as small-cap stocks) have underperformed this year, indicating potential for catch-up gains in the future.
In his report, Wilson noted: ‘We do not agree with the view that rate cut expectations have been fully priced in.’ He indicated that while he will respect the impending seasonal weakness window, he remains inclined to ‘buy on dips’ should a market correction occur.
Since April, the S&P 500 Index has surged to an all-time high, primarily driven by market bets that the impact of U.S. tariff policies on the economy will not be as severe as initially feared. Furthermore, a new wave of optimism surrounding artificial intelligence has also propelled the stock prices of tech giants. Evercore ISI strategists predict that this excitement could lead to an additional 20% gain for the benchmark index by the end of 2026.
This week, market focus is on key labor market data for clues regarding economic growth and the outlook for Federal Reserve policy. Currently, swap market pricing indicates a nearly 90% probability of a rate cut later this month.
Wilson also warned that the rise of U.S. stocks faces risks from the seasonal weakness trend in September and the possibility that inflation data could exceed expectations. However, he stated that any consolidation in the short term “would lay the groundwork for a strong finish at the end of the year.”
Experts in flow at Goldman Sachs indicated that institutional investors are currently cautious after two consecutive months of selling U.S. stocks. However, they noted in the report that institutional positions “remain moderate relative to historical levels, and we expect this to keep any declines shallow in the absence of fundamental shocks.”
