Our CIO and Chief U.S. Equity Strategist Mike Wilson discusses
key catalysts that investors may be missing, but that are likely
to boost U.S. equities in 2026.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan
Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast I’ll be discussing the converging market
forces bolstering our bullish outlook for 2026.
It's Monday, January 5th at 11:30am in New
York.
So, let’s get after it.
The New Year is usually a time to look forward. But today, I want
to take a step back and talk about what the market is missing. A
series of bullish catalysts are lining up at the same time, and
the market is still underestimating their collective
impact.
There’s been a lot of focus on individual positives—solid
earnings growth, further Fed easing—but in our view, the real
story is how these forces are reinforcing one another.
Deregulation, positive operating leverage, accommodative monetary
policy, and increasingly supportive fiscal policy are all working
in the same direction. And as we head into mid-term elections
later this year, these policy levers are likely to stay
supportive.
Importantly, this isn’t a market that’s already priced for the
outcomes I envision.
Positioning in cyclical trades remains relatively light, and
sentiment in economically sensitive areas is far from exuberant.
That combination—of improving fundamentals with cautious
positioning—is exactly what tends to characterize the early
stages of a recovery.
I continue to believe these tailwinds are most underappreciated
in cyclical areas like Consumer Discretionary Goods, Financials,
Industrials, and small- and mid-cap stocks. Many of the
indicators we track are only just beginning to turn higher. This
doesn’t look late-cycle to me—it looks early in what I have
deemed to be a rolling recovery.
One reason investors have been hesitant is the sluggishness of
traditional business-cycle indicators, particularly the ISM
Manufacturing Purchasing Managers Index. There’s been a
reluctance to press cyclical trades until those gauges clearly
re-accelerate; and beneath that hesitation is a lingering anxiety
that the U.S. economy could even slip back into a growth
scare.
My view is different. I believe a three year rolling recession
ended with Liberation Day. If that’s true, then the moderate
softness we’re now witnessing in lagging labor data is
constructive for equities because it keeps the Fed leaning dovish
for longer and more aggressive—a positive for equities.
I see the second half of 2025 as the bottoming process for key
macro indicators; with 2026 shaping up as a year of
re-acceleration. Longer-cycle analysis supports this.
Specifically, the 45-month cycle of the ISM Manufacturing
Purchasing Managers Index points to a rebound. That recovery has
been delayed—but not cancelled.
Another tailwind that doesn’t get nearly enough attention is
energy prices. Gasoline prices in particular are sitting near
five-year lows, which is providing real economic relief for
lower- and middle-income consumers. That cushion matters,
especially as other parts of the economy firm. This past
weekend’s events in Venezuela argue for lower oil prices for
longer.
From a sector standpoint, Financials stand out as the key
beneficiary of deregulation and these stocks have been great
performers over the past year in anticipation of these changes. I
think there is more to go in 2026. Housing could be another
important piece of the recovery. Subdued wage growth and falling
rents may pressure home prices, while some builders are
prioritizing volume over margins. While that may cap
profitability for the builders, it could unlock housing velocity
and feed into a more dovish inflation backdrop.
Of course, there are also risks. Liquidity has been our top
concern since September, and markets have reflected that through
weakness in speculative assets. The good news is that the Fed has
responded by ending quantitative tightening early and restarting
asset purchases through the Reserve Management Program. This
effectively adds liquidity to a system that was showing signs of
stress this past several months.
Another risk is a renewed slowdown in AI CapEx, particularly as
markets demand clearer payback from debt-funded spending. And
geopolitically, the U.S. intervention in Venezuela raises new
questions. Strategically, it reinforces U.S. influence in the
Western Hemisphere and supports our ‘Run It Hot’ thesis—but the
key wildcard remains whether China chooses to react.
Net-net, we think the balance of risks and rewards still favor
leaning into this early-cycle recovery and our bullish outlook
for US equities in 2026.
Thanks for tuning in; I hope you found it informative and useful.
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