Morgan Stanley says the new ’bull case’ for stocks is emerging

Investing.com -- Morgan Stanley analysts said in a note Thursday that they believe a "new ’bull case’ is emerging" for stock markets.

It follows a rebound driven by a "near complete reversal on ’reciprocal tariffs’ and a successful de-escalation of trade tensions with China within the last 30 days."

The bank says the recovery has allowed risk markets to fully regain ground from their post-"Liberation Day" drawdown, with year-to-date returns now in the "green."

Morgan Stanley notes that the S&P 500 stands at approximately 6,000, roughly 2.3% off its February 19 all-time highs, while the NASDAQ has "surged more than 25% from its lows."

Market volatility, as measured by the VIX, "has sharply decreased, with readings now below its five-year average," wrote the bank.

According to Morgan Stanley, this emerging "bull case" is premised on several key beliefs.

First, the "belief that tariffs are a non-event, manageable unknown," and secondly, the "belief that 2025 earnings don’t matter," with "earnings revisions for 2026 turning less negative," and a weak U.S. dollar seen as a positive.

Furthermore, there is the "belief that inflation risks are over-estimated; low oil prices a tailwind; Fed will commence rate cutting soon," the "belief in front end loaded corporate tax cuts" driving a "capex and productivity boom," and the conviction that "Gen AI is in the very early innings."

Morgan Stanley notes that "2026 S&P 500 earnings are expected to show accelerating growth from 2025’s 7-8% to 13-14%."

However, they also caution that the recovery of equity valuations has pushed the price-to-forward earnings ratio above "21.5x," and the "equity risk premium sits at a paltry 6bps."

Risks are said to include steepening "Global yield curves" and widening U.S. budget deficits, which Morgan Stanley views as a potential "headwind to American Exceptionalism."

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