Despite widespread anxiety around tariffs and noisy headlines predicting a slowdown, Morgan Stanley believes the stock market is showing underlying resilience. According to their equity strategy team, led by Michael Wilson, the market has already priced in much of the anticipated economic drag from the ongoing trade war. While macroeconomic data and corporate earnings may continue to show weakness through the summer of 2025, Morgan Stanley expects a more optimistic rebound in the second half of the year.
Earnings Revisions Improve, Dollar Weakens, Supporting Equities Amid Tariff and Demand Headwinds
A key catalyst for this market optimism, Morgan Stanley highlights, is the improving trend in earnings-per-share (EPS) revisions. Specifically, the increasing number of analysts raising rather than lowering earnings expectations across the S&P 500 is seen as a critical support for equities. Historically, when EPS revisions rebound sharply from a low point, market pullbacks tend to be minor and short-lived, echoing the pattern observed over the past six weeks.
Morgan Stanley points to additional indicators that support their positive market outlook. They note that the current economic slowdown stems not only from tariff-induced uncertainty but also from a temporary lull following demand pulled forward ahead of tariff implementation. A weakening U.S. dollar—projected to hit 91 on the dollar index by mid-2026—is also expected to enhance corporate earnings and serve as a tailwind for equity markets.
AI Stabilization, Fed Pivot, and Sector Momentum Drive Market Confidence and Recovery Forward
The AI investment cycle appears to have stabilized, following earlier pessimism sparked by developments in China’s DeepSeek. Key players like Nvidia are regaining margin stability, with current gross margins at 60.5%, a significant improvement from earlier levels. Additionally, Morgan Stanley anticipates the Federal Reserve may begin easing monetary policy later in 2025. As uncertainty over tariffs diminishes, the Fed could pivot toward rate cuts to boost liquidity and aid in deficit financing, further supporting equities.
In terms of investment strategy, Morgan Stanley favors cyclical and high-beta growth sectors, which have shown strength since the market’s April 2025 lows. They see continued momentum in areas like capital goods and financial services, assuming investor flows remain directed toward outperforming stocks. Supporting this trend, the Financial Select Sector SPDR ETF has risen 6% year-to-date, while the Industrial Select Sector SPDR ETF has climbed 10%, underscoring growing confidence in the market’s broader recovery.