Episode Summary:

Podcast: Thoughts on the Market
Title: 2026 U.S. Outlook: The Bull Market’s Underappreciated Narrative
Date: November 19, 2025
Host: Mike Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist

Main Theme & Purpose

In this episode, Mike Wilson discusses Morgan Stanley’s just-published outlook for U.S. equities in 2026. He reflects on his firm’s previously out-of-consensus forecasts, explains the key dynamics shaping the new bull market, and highlights underappreciated narratives driving the market’s performance in the year ahead. Listeners get a candid, high-level view of the economic sequencing, policy impacts, and tactical investment plays for 2026.

Key Discussion Points & Insights

1. Reflecting on 2025 Forecasts and Market Performance

• Prediction vs. Consensus:

  • Morgan Stanley predicted a challenging first half of 2025, contrasting with a majority expecting immediate gains due to President Trump’s second term.
  • Wilson compared Trump’s policy approach to a new CEO “kitchen sinking” early results to reset the baseline for positive growth.
  • Quote:

    “We likened the strategy to a new CEO choosing to kitchen sink the results in an effort to clear the decks for a new, growth positive strategy.” – Mike Wilson [00:47]

• Policy Sequencing:

  • 2025 was less about immediate stimulus and more about setting up for sustainable growth, with the “transition” expected mid-year.
  • Wilson emphasizes that this time the US economy had “much less slack” compared to the start of Trump’s first term.

2. Why Morgan Stanley Remains Out of Consensus

• Questioning Growth Potential:
  • Despite recent policy shifts, skeptics question whether growth will broaden to the average stock.
  • Wilson maintains that policy choices enacted in 2025 set the stage for “growth positive” conditions into 2026.
  • They still see their view as “out of consensus.”
  • Quote:

    “Many industry watchers are questioning whether policies enacted this year will ultimately lead to better growth… From our perspective, the policy choices being made are growth positive for 2026…” – Mike Wilson [02:19]

3. The End of the Rolling Recession and Dawn of the Bull Market

• Identifying Long-Term Market Turns:
  • April 2025 marked the conclusion of the “rolling recession” (starting three years prior), with final waves in government-driven activity and ongoing consumer services slowdown.
  • Wilson asserts the new bull market and recovery began in April.
  • Quote:

    “In short, we believe a new bull market and rolling recovery began in April, which means it’s still early days… That is the opportunity.” – Mike Wilson [02:52]

4. The Fed, Labor Market, and a Delayed Recovery

• Fed’s Role Delayed:
  • Traditionally, the Federal Reserve cuts rates into a weakening labor market to spur early-cycle winners. This cycle has seen delays due to COVID-related imbalances and the 2025 government shutdown stalling labor data releases.
  • This lag presents a near-term risk to bullish forecasts if weak labor data persists or remains unreleased.
  • Wilson expects that the Fed will ultimately shift to a more dovish stance, but timing remains uncertain.
  • Quote:

    “…the government shutdown has weakened the economy further but has also delayed Fed action due to the lack of labor data releases. This is a near term risk to our bullish 12 month forecast…” – Mike Wilson [03:31]

5. Equity Market Positioning and Forecasts for 2026

• Outlook for S&P 500 & Earnings:

  • April lows: S&P declined 20%; average S&P stock dropped over 30%.
  • Wilson is bullish: sees “significant upside in earnings over the next year as the recovery broadens,” with operating leverage improving.
  • Forecasts:
    • S&P 500 12-month target: 7,800
    • Assumes 17% earnings growth and only a “very modest contraction in valuation.”
    • Many stocks “not as expensive as they appear,” even if some segments are “frothy.”
    • Quote:

      “Our 12-month target is now 7,800, which assumes 17% earnings growth next year and a very modest contraction in valuation from today’s levels.” – Mike Wilson [04:15]

• Favorite Sectors and Trades for 2026:

  • Overweights: Financials, Industrials, Healthcare
  • Upgrades: Consumer Discretionary (favoring goods over services for the first time since 2021)
  • Relative Trades: Software over Semiconductors (citing “extreme relative underperformance and positioning”), Small Caps over Large Caps (for the first time since March 2021)

6. Key Takeaway

• The main underappreciated narrative:
  • A broad-based bull market began in April, but many still view conditions through a bearish lens.
  • Near-term risks remain, but the structural turn is in place, and upside surprise potential is strong for companies with leveraged earnings and expanding margins.

Notable Quotes & Memorable Moments

• On the unwinding recession and new opportunities:

  “A new bull market and rolling recovery began in April, which means it’s still early days and not obvious, especially for many lagging parts of the economy and market. That is the opportunity…” – Mike Wilson [02:58]

• On Fed policy as a risk and eventual catalyst:

  “It’s really just a question of timing, but that is a near term risk for equity markets and why many stocks have been weaker recently.” – Mike Wilson [03:57]

• Sector positioning:

  “We’re also upgrading consumer discretionary to overweight and prefer goods over services for the first time since 2021. Another relative trade we like is software over semiconductors… Finally, we like small caps over large for the first time since March of 2021…” – Mike Wilson [04:32]

Important Timestamps

• 00:00 — Episode begins, introduction and outline of 2026 outlook
• 00:50 — Comparing market conditions across Trump’s two terms
• 01:35 — Contrast between 2025 and 2017 market environments
• 02:19 — Market skepticism and Morgan Stanley’s out-of-consensus stance
• 02:52 — The end of the rolling recession, start of bull market
• 03:31 — Impact of delayed Fed action, government shutdown, and ongoing labor market risks
• 04:15 — S&P 500 target, sector calls, and tactical recommendations

Conclusion

Mike Wilson delivers a grounded-yet-optimistic take for 2026, arguing that a new bull market is underway—largely missed by consensus. He believes recovery dynamics are only just beginning to broaden across equities, and that patient investors can capitalize as earnings rebound, the Fed eventually eases, and new leadership sectors emerge.
The central idea: “The bull market’s underappreciated narrative” is here, and the best is yet to come as overlooked cyclical and small-cap opportunities advance.