U.S. stocks face a 'bullish set-up', Morgan Stanley's Wilson says

Investing.com -- U.S. equities are entering 2026 with a “bullish set-up” as leadership broadens, earnings strengthen and the labor market weakens only moderately, according to Morgan Stanley strategist Michael Wilson.

In a note on Monday, Wilson said the firm continues to see its most out-of-consensus upgrades, Consumer Discretionary Goods and Small Caps, leading the market higher.

Wilson reiterated that both groups have already “shown relative strength” since Morgan Stanley upgraded them to overweight on Nov. 17, and he expects that outperformance to persist into next year.

For Consumer Discretionary Goods, the upgrade was driven by “stabilizing pricing, signs of wallet share shift from services to goods, improving earnings revisions, the return of an early cycle environment … lower rates, strong aggregate household balance sheets and still muted sentiment/positioning.”

He added that “better than expected Black Friday results” and a “strong top line beat rate in 3Q … support our view.”

Small Caps, meanwhile, stand to benefit from “an early cycle backdrop,” “stabilizing earnings revisions,” “positive operating leverage,” and “lower rates,” Wilson wrote.

The Fed remains central to the market’s next move, he said.

A more hawkish tone at the October FOMC meeting coincided with local market tops, but indexes began to rebound on Nov. 21 when New York Fed President John Williams signaled that a December rate cut was still possible.

Even as monetary-policy volatility persists, Wilson emphasized that “Nasdaq 100 earnings revisions breadth and revenue expectations have accelerated consistently since the end of October.”

Ahead of this week’s FOMC decision, Wilson acknowledged that many investors expect a “hawkish cut.”

"From our conversations, many investors expect a ’hawkish cut’ at the December FOMC meeting this week," stated Wilson. "While we’re respectful of this view, we think it is becoming consensus. Further, we continue to observe signs that the labor market is weakening directionally."

"As we’ve discussed in detail over the past couple of months, we think the odds of moderately weaker, lagging labor data over the next several months are high, but believe the odds of acutely weaker jobs data (i.e., a non-linear unemployment rate rise) are low," he added. "This is a bullish set-up for stocks."

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