- S&P 500 forecast to gain 9.5% to 6,500 by mid-2026, but path will be uneven.
- Fed rate cuts, deregulation, and dollar weakness seen as key late-2025 catalysts.
- Firm upgrades U.S. stocks to Overweight despite near-term economic headwinds.
A Patient Path to 6,500
Morgan Stanley's equity strategists maintain their 6,500 price target for the S&P 500 by mid-2026, representing a 9.5% upside from current levels. However, the journey to this target won't be straightforward, with the firm characterizing 2025 as likely to be a "pause" year for the benchmark index.
"We see the gains coming, but investors will need to be patient," said one analyst familiar with the firm's thinking. "The first real momentum likely won't arrive until late this year when we expect Fed cuts to begin taking effect."
Economic Crosscurrents
The forecast comes amid a mixed economic backdrop. While U.S. growth remains resilient compared to other developed markets, Morgan Stanley expects it to cool to just 1% by year-end. Global growth is projected to hover around 3% through 2026, with new tariff policies potentially creating additional headwinds.
Market participants are particularly focused on the timing of Fed easing, with Morgan Stanley now anticipating the first cut won't come until September. "The Fed's delayed reaction function is pushing more of the market's upside into 2026," the analyst added.
Positioning for the Climb
Despite the near-term challenges, the firm upgraded U.S. stocks to Overweight, citing the market's defensive qualities in an uncertain global environment. Their recommendations include:
- Focusing on quality companies with strong balance sheets
- Considering currency hedges for international investors
- Maintaining exposure to U.S. large caps as a core holding
Morgan Stanley sees 10-year Treasury yields falling to 3.45% by mid-2026, which could provide additional support for equity valuations. The forecast assumes inflation continues to moderate while avoiding a recession scenario.