Morgan Stanley Forecasts S&P 500 Rally to 7,800 Driven by Six Key Catalysts

2026-01-06 economy

New York, Tuesday, 6 January 2026.
Strategists identify six overlooked drivers, including deregulation and rate cuts, propelling the S&P 500 to 7,800 in 2026—a projected 13% upside that defies expectations of a market slowdown.

Defying Gravity: The Case for Continued Growth

Despite fears that the equity market is due for a correction following three consecutive years of robust returns, Morgan Stanley’s latest strategy note advises investors to remain bullish. As of January 6, 2026, the investment bank has reaffirmed a price target of 7,800 for the S&P 500, implying an upside of approximately 13% from current levels [1]. Chief U.S. Equity Strategist Mike Wilson argues that the market consensus is currently underestimating the cumulative power of six specific bullish catalysts [1][4]. Central to this thesis is the expectation of mid-teens earnings-per-share (EPS) growth in 2026, supported by a favorable shift in monetary policy [1][4]. Specifically, strategists forecast that the Federal Reserve will enact interest rate cuts in both January and April of this year, while the 10-year U.S. Treasury yield is projected to dip below 3.75% [1][4].

Deregulation and Valuation Expansion

A critical component of this optimistic outlook is the potential for valuation multiples to expand further, a scenario Wilson suggests could be the “big surprise” of 2026 [3]. Historical data indicates that the S&P 500 forward price-to-earnings (P/E) ratio expands approximately 90% of the time when EPS growth exceeds the long-term median and monetary policy remains accommodative [1]. Furthermore, anticipated deregulation is expected to serve as a major tailwind, particularly for the financials sector. The finalization of the supplementary leverage ratio (eSLR) rule and other regulatory adjustments are projected to unlock significant bank capital productivity [1]. Consequently, Morgan Stanley recommends an overweight position in financials, alongside healthcare, consumer discretionary, industrials, and small-cap stocks [1][4].

Macroeconomic Shifts Favoring Global Exposure

Beyond domestic policy, shifting macroeconomic conditions are poised to benefit companies with significant international footprints. With approximately 30% of S&P 500 revenues generated overseas, a forecasted decline in the U.S. dollar, coupled with cheaper oil prices, is expected to boost earnings for multinational corporations [1][4]. This environment of easing currency strength and input costs complements the broader narrative of a “value hunt” as the AI-driven rally matures. As investors look beyond mega-cap technology stocks, small-cap companies—represented by the Russell 2000—are gaining traction, with some analysts forecasting the index could climb to 2,825 points by year-end [5]. This rotation suggests a broadening of market breadth, moving away from the concentration observed in the “Magnificent 7” over previous years [1][5].

Infrastructure Constraints and Commodities

While the equity outlook remains positive, physical infrastructure constraints present both challenges and investment themes. The rapid adoption of artificial intelligence is placing unprecedented demand on the U.S. power grid. Data centers, which accounted for 6% of total U.S. electricity consumption in 2025, are forecast to triple their share to 18% by 2030 [2]. This surge has necessitated approximately 150 gigawatts of new data center capacity, pressuring utilities to manage affordability while funding necessary grid upgrades [2]. In the commodities market, Morgan Stanley projects gold will reach $4,800 per ounce by the fourth quarter of 2026, driven by falling interest rates and central bank buying [6]. Meanwhile, despite the risk-on sentiment in equities, money market funds continue to attract capital, with assets expected to exceed $8.6 trillion by the end of 2026 due to their liquidity and safety profile [7].

Sources

Stock Market Investment Strategy