"The policy bottom" has appeared! Morgan Stanley predicts a rebound in U.S. stocks in the second half of the year, with the S&P 500 aiming for 6,500 next year

According to the Zhitong Finance APP, Morgan Stanley published a research report stating that despite the numerous challenges facing the U.S. stock market in the first half of 2025, they hold a more optimistic outlook for the second half and for 2026, reaffirming their 12-month target for the S&P 500 index at 6,500 points.

Morgan Stanley pointed out that at the beginning of the year, the market was expected to be challenging in the first half due to a "risk-averse" policy tone. Although the growth resistance related to tariffs exceeded expectations, the market price lows may have already appeared, with the average decline of S&P 500 constituent stocks reaching 30% this year. Additionally, the overall tariff rate on Chinese goods has recently dropped significantly from 145% to 30%, which has notably reduced the risk of economic recession. The bank's economists also expect seven interest rate cuts in 2026, providing support for above-average valuations.

However, the main short-term risk for the stock market comes from backend interest rates, with the 10-year U.S. Treasury yield hovering around the critical level of 4.50%. If it remains high, it will suppress price-to-earnings ratio expansion, keeping the S&P 500 index in the range of 5,500 to 6,100 points in the first half, before gradually moving towards the 12-month target price of 6,500 points.

Morgan Stanley's target price is based on a 12-month forward earnings per share of $302 and a price-to-earnings ratio of 21.5 times. Despite the recent market correction, Morgan Stanley has not adjusted its target price. However, given the decline in the first half and the lagging impact of tariffs on earnings, the bank believes that the target price is more likely to be achieved by mid-2026.

In terms of earnings, Morgan Stanley expects EPS of $259 for 2025 (a year-on-year increase of 7%), $283 for 2026 (a 9% increase), and $321 for 2027 (a 13% increase). The bank stated that the U.S. stock market has experienced a "rolling earnings recession" over the past three years, alleviating year-on-year base pressure and laying the foundation for subsequent EPS recovery. Additionally, earnings growth will benefit from Federal Reserve interest rate cuts, a weaker dollar, and efficiency improvements driven by artificial intelligence.

Regarding investment recommendations, Morgan Stanley suggests maintaining a "high-quality curve" in cyclical industries; defensive hedging should remain selective, focusing on low-leverage, low-valuation stocks. At the same time, they upgraded the industrial sector rating from "neutral" to "overweight," believing it will benefit from domestic infrastructure construction; the utilities sector was downgraded from "overweight" to "neutral." Furthermore, they continue to recommend an overweight position in large-cap stocks due to their stronger pricing power and bargaining ability, as well as lower sensitivity to backend interest rates; they are also optimistic about the U.S. stock market outperforming international markets, as the earnings expectation correction for the S&P 500 index has begun to exceed that of the MSCI ACWI excluding the U.S. index