Morgan Stanley's Wilson: US stocks don't need a Fed rate cut, raises S&P 500 target to 8,000 points.

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After a continuous recovery since March, the S&P 500 index has rebounded 17% from its low. Morgan Stanley believes the major risks have largely been priced in, thus raising the year-end target price.

Mike Wilson, Morgan Stanley's Chief Equity Strategist, in the latest outlook report, has raised the S&P 500 index's year-end 2026 target from 7,800 points to 8,000 points, and sets a mid-2027 target of 8,300 points. Wilson's team notes that the current market is not ignoring risks, but has made substantial adjustments in valuation and breadth.

The report believes that with Walsh taking over the Federal Reserve, the U.S. stock market’s rise does not depend on rate cuts. Historical backtesting shows that in an environment where the Fed remains on hold and earnings grow strongly, stock price returns are stable, with a median increase of up to 14%. Meanwhile, the Trump administration’s "rebalancing" policy is structurally supporting U.S. stocks—by narrowing the trade deficit, expanding domestic investment, and raising real incomes of low-income groups, it is alleviating structural economic weaknesses and reducing the systemic risk premium.

Internal Market Adjustment Complete, Sufficient Risk Pricing

At present, there is a misinterpretation of the S&P 500 index’s less-than-10% drop in March, ignoring the deeper internal adjustments. About half of the stocks in the Russell 3000 index have retreated by at least 20%, and the S&P 500’s forward P/E ratio has compressed 18% from its peak. This is not complacency, but rather the market has already priced in multiple risks in advance over the past six months—including the Iran war and oil price shocks, AI disruptions, and private credit hidden dangers.

Since major risks are now priced in, what is driving the market further upward? The report believes that after Walsh takes over as Fed chair, the stock market’s rise will not rely on monetary easing. Historical data shows that when the Fed pauses and earnings grow robustly, the median stock price return reaches 14%, mainly driven by earnings growth.

Beyond earnings growth, the nature of inflation is also crucial. Income growth is positively correlated with goods inflation, and stronger demand-driven pricing power provides positive support for stocks, provided this trend does not trigger a Fed rate hike cycle. As for concerns about economic recession or growth slowdown risks, the triggering conditions are quite strict: oil prices must continuously exceed $130-$150 per barrel, and the earnings trend must significantly deteriorate. Both must occur simultaneously to trigger a recession, which is not the expected scenario.

From Rebalancing to Divergence in U.S. Stocks

Facing mounting debt pressure, the Trump administration is seeking a new solution—not relying on austerity, but on growth. Policy is centered around trade, investment, and income inequality to promote economic rebalancing. Currently, rebalancing has shown several positive signs: the trade deficit as a percentage of GDP has narrowed, fixed investment has surged, real wages in the lower-end service and manual labor sectors are stabilizing or improving, and private sector job growth is rising alongside reduced government employment.

Where will this policy path lead U.S. stocks?

If the optimistic scenario materializes, the S&P 500 index could rise to 9,400 points, with earnings expansion surpassing expectations, driven by factors such as productivity increases from AI, or companies cutting back on hiring ahead of full-scale technological implementation.

In a pessimistic scenario, the index could fall to 5,900 points, triggered by overheated inflation forcing the Fed to raise rates, and Walsh moving forward with balance sheet reduction, leading to increased bond market volatility and rising financing pressures that suppress valuations and drag down earnings growth. The probability of this scenario before year-end is very low, but if the bull market materializes first in the second half of the year while inflation shocks lag historic demand recovery, its probability could rise.

Risk Warning and DisclaimerThe market has risks, investment needs caution. This article does not constitute personal investment advice and does not consider the unique investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article suit their specific circumstances. Investments made accordingly are at your own risk. ```