Why Morgan Stanley's Mike Wilson is doubling down on his buy-the-dip advice for stock investors

By Jules Rimmer

Recent equity weakness and tightness in liquidity make a Fed cut in December more likely, says Wilson

Last week, Morgan Stanley set a 7800 target for the S&P 500 index twelve months out.

The Fed's dovish turn and tighter liquidity have destabilized equity markets of late and inflicted real damage on returns.

For Morgan Stanley's chief equity strategist Mike Wilson, though, this weakness actually reinforces his positive call on stocks with a 12-month view, giving him the chance to buy the dip and double-down on his "rolling recovery thesis."

Wilson and his team outlined a non-consensus outlook for 2026 in their strategy note last week and added more substance to the argument in their weekly report published Monday. The 7,800 S&P 500 SPX index target is predicated on more optimistic expectations for earnings per share growth (EPS) of 17%, compared with the 14% projected by analysts on Wall Street and fund managers.

The rolling-recovery thesis reinforcing his constructive approach on stocks is firstly based on Morgan Stanley's observations that EPS revisions breadth rose again last week. It's also backed up by the bank's view that the U.S. is in the early stages of a growth cycle (as opposed to many investment houses who think it's late in the cycle) and that forecasts for net income over the next year are broadly positive across major indexes.

Forward 12-month net income estimates continue to rise with small caps exhibiting the strongest trend, says Morgan Stanley.

Wilson gives two reasons for recent softness in markets: the incrementally hawkish tone struck by the Fed since its last cut in October; and liquidity constraints imposed by the government shutdown, when cash built up rapidly in the Treasury General Account that would normally be dispersed through the economy.

Wilson observes that while the pain wrought on the S&P 500 so far has been negligible - the index is down just 5% or so from the all-time highs - the damage inflicted "under the hood" has been far more severe with two thirds of the 1,000 largest stocks by market capitalization conceding more than 10%.

Two-thirds of stocks have seen a more than 10% drawdown, with damage under the surface notable, says Morgan Stanley.

Counterintuitively, Wilson reckons this weakness in risk assets and liquidity tightness, when combined with generally anemic labor markets, probably enhances the probability of the Fed deciding it must get ahead of the curve with rate cuts. This strengthens Wilson's conviction in the medium-term direction of shares.

The stocks recommended by Morgan Stanley are notable for the absence of megacap tech. Some of this may be owing to the potential for the Mag7 MAGS to "catch down" to falls in the rest of the market, but also because of the underlying trends in the U.S. economy that Wilson detects: namely EPS revisions, pricing stabilizing, wallet share shifting from services to goods, falling rates and pent-up demand.

These trends weigh in favor of investments in sectors like consumer discretionary goods XLY, small cap, healthcare XLV, financials XLF and industrials.

The consumer discretionary goods recommendation is especially off-consensus having been an underweight for Morgan Stanley (and many others) for the last three years or so. Wilson adds that in terms of higher earnings projections, small-caps have demonstrated the greatest upside inflection recently.

-Jules Rimmer

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11-24-25 0523ET