By Jamie Chisholm
Equities may have already started to price in more Fed interest rate cuts
Stocks are on course to enter the second half of 2025 in record territory. The rebound from the mid-April trough has been sharp, with the S&P 500 SPX up nearly 24%
Inevitably, as we enter the often treacherous summer months, investors and analysts alike are questioning whether the market’s strength can be justified.
Mike Wilson, Morgan Stanley’s top equity analyst, thinks it can. In a new note on Monday, he lays out three reasons why he remains bullish on a six to 12 month horizon.
The first point is earnings. Wilson observes that analyst forecasts for S&P 500 earnings have improved markedly in recent weeks as fears subside about the possible damage done to corporate profits from the Trump trade war.
Importantly, the more optimistic view of company profits is widening, beyond the already popular big tech names, for example. Indeed, earnings revision breadth (ERB), a measure of how widespread positive or negative earnings estimate changes are, has risen from minus 25% in mid April to the current minus 5%.
Wilson says that similar inflections in ERB have pointed to “strong returns ahead,” though he accepts that “such a broadening is likely to take hold in large cap quality before it involves small caps/low quality stocks.”
He also notes that earnings growth will outperform economic growth – a reversal of what was seen in 2022 to 2024 – because of a weaker dollar and favorable tax incentives from the Trump administration’s ‘Big, Beautiful Bill’.
The second factor is shifting expectations of Federal Reserve policy. Wilson says Morgan Stanley economists think the Fed will cut interest rates seven times in 2026, as unemployment becomes more of an issue than inflation. Such an easing of policy should be a tailwind for stocks.
“[T]he equity market isn’t going to wait for the obvious signal in terms of a more dovish shift in monetary policy from the Fed – i.e., stocks will get in front of it,” he says. In fact, he reckons that has already started to happen.
The danger to this positive impact on equities would be if data showed an acceleration in the unemployment rate and multiple negative payroll numbers – though that is not the Morgan Stanley economists’ baseline forecast.
The third factor is stocks’ traditional ability to shrug off exogenous shocks. “The equity market seems to be following the historical playbook around prior geopolitical risk events that we highlighted last week – stability in performance after a few days,” says Wilson.
Linked to this – as the Israel-Iran conflict abates – is the pullback in oil prices (CL.1) from the recent spike, which has reduced the risk of higher energy costs threatening the business cycle.
In addition, Wilson notes that the proposed ‘revenge tax’ that was seen damaging investment into the U.S. now looks likely to be dropped from the ‘Big, Beautiful Bill’.
Finally, Wilson observes that the Treasury market’s term premium – the extra return that investors demand to take the risk of lending to the U.S. over longer periods – has fallen back over the last month as investors stress less about the U.S.’s fiscal position.
“With this dynamic taking place, and the 10-year yield BX:TMUBMUSD10Y staying contained below 4.50%, we believe interest rate risk has been reduced for the time being,” Wilson says.
He maintains his base case S&P 500 target over the next 12 months at 6,500.
Markets
U.S. stock-index futures (ES00) (YM00) (NQ00) are higher as benchmark Treasury yields BX:TMUBMUSD10Y fall. The dollar index DXY is down, while oil prices (CL.1) rise and gold (GC00) is trading around $3,283 an ounce.
Key asset performance Last 5d 1m YTD 1y S&P 500 6173.07 2.45% 3.99% 4.96% 12.75% Nasdaq Composite 20,273.46 4.25% 6.07% 4.99% 14.33% 10-year Treasury 4.259 -9.00 -19.10 -31.70 -20.80 Gold 3295.6 -2.62% -3.25% 24.87% 40.73% Oil 65.41 -2.69% 3.76% -8.99% -21.55% Data: MarketWatch. Treasury yields change expressed in basis points
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The buzz
U.S. economic data due Monday include the Chicago business barometer for June, due at 9:45 a.m. eastern.
Atlanta Fed President Raphael Bostic will speak on the economic outlook at 9:00 a.m., and Chicago Fed President Austan Goolsbee speaks at 1:00 p.m.
Trade talks between Canada and the U.S. are back on after Ottawa did a U-turn on imposing a digital services tax on U.S. companies.
The Senate is expected to vote on Republican’s tax bill on Monday.
Big U.S. banks passed the Federal Reserve’s stress tests, it was revealed late Friday.
China’s manufacturing sector shrank for the third month in a row.
Moderna shares (MRNA) are up 5% after the company announced positive phase 3 results for its seasonal influenza vaccine.
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The chart
“So far, the current bull market looks like a normal one, with the potential to match the returns of some of the best bull markets since the mid-1960s.” That’s Ed Yardeni, of Yardeni Research, writing in his latest note. He’s still targeting 6500 for S&P 500 by the end of this year and 10,000 by the end of what he calls the “Roaring 2020s” decade. “It’s a bit hard to believe, but the main risk at this time may be a stock market meltup, i.e., a speculative bubble. That’s where we were only four and a half months ago when the latest correction started!,” Yardeni says. Read more here.
Top tickers
Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.
Ticker Security name TSLA Tesla NVDA Nvidia PLTR Palantir Technologies GME GameStop AMD Advanced Micro Devices AMZN Amazon.com AAPL Apple TSM Taiwan Semiconductor Manufacturing META Meta Platforms GNS Genius
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-Jamie Chisholm
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06-30-25 0741ET
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