S&P 500 Second‑Half Outlook: Earnings Revisions, Fed Cuts & Key Risks

Morgan Stanley strategist Michael Wilson sees the S&P 500’s rally extending into the back half of the year, underpinned by fundamentally driven earnings improvements and line of sight to Federal Reserve rate cuts. 

Fundamentals Driving the Rally

Earnings Revision Breadth Is Improving

• Current Level: Revision breadth has climbed to -5% from April’s low of -25%.

• Why It Matters: Breadth typically leads actual EPS surprises—when revisions turn, analysts raise forecasts, and stocks follow.

• Historical Context: Similar inflection points in 2016 and 2020 preceded multi‑month rallies.

Monetary Easing on the Horizon

Markets Price In Aggressive Fed Cuts

• Morgan Stanley View: Seven rate cuts forecast for 2026.

• Market Reaction: Front‑running easing, long‑duration assets have outperformed.

• Valuation Impact: Lower discount rates boost present values of future earnings—especially for growth‑oriented sectors.

Diminished Geopolitical & Policy Risks

• Oil Prices: Down 14% since June 19, reducing inflation and recessionary concerns.

• Legislative Wins: Removal of Section 899 eases a major hurdle to foreign investment.

• Leadership Broadening: With rate‑risk muted, expect large‑cap quality names to outperform first, then expanded leadership across sectors.