“We believe the consensus continues to underestimate the cumulative impact of a series of bullish catalysts,” Mike Wilson, the bank's chief U.S. equity strategist, wrote in a note on Monday.
He added: “While individual variables have been discussed separately, we believe their collective impact in driving a gradual recovery remains underappreciated.”
Important: the calculations included in the text are for information purposes only and do not constitute a recommendation or any other form of suggestion for the purchase or sale of financial products. Investment decisions should be preceded by your own analysis of risk and financial situation.
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Six main catalysts
Here are the six main catalystswhich – according to the bank – will increase share prices in 2026:
Profits: The bank forecasts an increase in earnings per share (EPS) of several percent in 2026.
Deregulation: The financial sector in particular should benefit from looser regulations. “According to our banking analysts, the finalization of the eSLR regulations and other upcoming changes should 'initiate a significant unlocking of bank capital productivity,'” Wilson wrote, referring to changes in regulations that dictate how much capital banks must hold to meet regulatory requirements.
Interest rates and Fed policy: Yields on 10-year US Treasury bonds should fall below 3.75%. Wilson said, and the Federal Reserve should cut rates in January and April. Additionally, the Fed resumed its short-term bond purchase program.
AI adoption: Morgan Stanley's analysis shows that the percentage of companies that are seeing improved profit margins thanks to artificial intelligence is growing.
Fall in oil prices and the US dollar: Okay. 30 percent sales of companies from the S&P 500 index come from foreign markets, which means that a weaker dollar should support financial results. Cheaper oil translates into lower fuel prices for consumers.
Valuations should expand: Yes, overall stock market valuations are already high. However, Morgan Stanley points to several statistics that suggest they could remain elevated and rise even further.
“(1) The forward P/E ratio for the S&P 500 expands in approximately 90 percent of cases when EPS growth exceeds the long-term median and monetary policy is accommodative; (2) the median S&P 500 companies are trading at a discount of three 'turns' to the capitalization-weighted index; (3) the forward P/E so-called Magnificent 7 has not expanded since 2023, and revisions sales growth of mega-cap technology companies is accelerating to 20-year highs,” Wilson wrote.
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The expert indicates areas to observe
Wilson added that his main stock recommendations include the financial, healthcare, consumer discretionary, industrial and small-cap sectors.
Examples of funds that offer exposure to these areas include: State Street Financial Select Sector SPDR ETF (XLF), Vanguard Health Care ETF (VHT), iShares US Consumer Discretionary ETF (IYC), Fidelity MSCI Industrials Index ETF (FIDU), and Schwab US Small-Cap ETF (SCHA).
For investors who prefer to stay with the broad market, the target level of the S&P 500 index for 2026, according to Wilson, is 7,800 points, which implies approximately 13%. growth potential relative to current levels.
Note: The information contained in the text is for informational purposes only and does not constitute a recommendation to buy or sell financial products. This text does not constitute an investment recommendation or investment advisory activities within the meaning of §3 of the Regulation of the Minister of Finance of October 19, 2005 on information constituting recommendations regarding financial instruments, their issuers or issuers (Journal of Laws 2005, No. 206, item 1715).
The above text is a translation from American Business Insider
