Morgan Stanley Outlook for H2 2025: Three Reasons Why the S&P 500 Can Keep Rising to New Highs

TradingKey - Amid ongoing trade uncertainty and worsening fiscal deficit concerns, the S&P 500 still managed to close the first half of 2025 at a record high. Looking ahead to the second half of the year, Morgan Stanley analysts believe this rally can continue, supported by three key factors.

1. Earnings Momentum Is Improving

Morgan Stanley’s Chief U.S. Equity Strategist Mike Wilson noted that investor concerns over corporate profit damage from Trump’s trade war have started to fade — and analyst sentiment is improving accordingly.

A key indicator of earnings expectations — the Earnings Revisions Breadth (ERB) — has improved from -25% in mid-April to -5%, signaling a shift toward more positive revisions.

Although Trump’s tax and spending bill remains controversial, the likelihood of significant tax cuts will likely provide a net positive impact on U.S. corporations.

Wilson added that corporate earnings growth may outpace GDP growth — a reversal from the trend seen between 2022 and 2024.

2. Fed Rate Cuts Are Gaining Traction

Morgan Stanley economists believe that rising unemployment could soon take precedence over inflation concerns, giving the Federal Reserve room to cut rates — potentially as many as seven times in 2026.

According to Wilson, equity investors don’t wait for the Fed to officially turn dovish — they act in advance. And indeed, markets are already pricing in future easing.

3. Market Resilience to Geopolitical Shocks

As Wilson has previously pointed out, equities tend to recover quickly after short-term geopolitical shocks. This historical pattern was reaffirmed recently as both the S&P 500 and Nasdaq hit new highs, despite tensions in the Middle East and trade policy uncertainty.

Morgan Stanley also noted that concerns over the controversial Section 899 asset tax — which would target foreign capital investing in U.S. assets — now appear to be overblown or likely to be revised.

Moreover, the recent decline in term premiums in the U.S. Treasury market suggests that investor worries over U.S. fiscal sustainability have eased — at least temporarily.