Podcast Summary: Thoughts on the Market

Episode: Special Encore: 2026 U.S. Outlook: The Bull Market’s Underappreciated Narrative
Host: Morgan Stanley
Featuring: Mike Wilson, Morgan Stanley CIO and Chief U.S. Equity Strategist
Date: December 26, 2025

Episode Overview

This special encore episode revisits Morgan Stanley’s 2026 outlook for U.S. equities and the broader market, focusing on themes of economic recovery, policy shifts under the new Trump administration, and the structural opportunities stemming from a transition out of a "rolling recession." CIO Mike Wilson provides deep insights into market sequencing, risks, and sector opportunities for investors heading into 2026.

Key Discussion Points & Insights

1. 2025 in Review and Setting the Stage for 2026

• Economic Surprise: Despite expectations for slower growth and persistent inflation, the real shock was a pronounced disconnect between the broader economy and resilient financial markets—which were buoyed by an AI-driven surge in capital spending.

• Labor Market Contrast: Unemployment was higher than projected, yet markets showed unexpected resilience.

  “While growth did cool, the real surprise was the disconnect between the economy and financial markets. Unemployment ran higher than projected, yet markets showed resilience powered largely by an AI driven capital spending boom.” (A, 00:18)

• 2026 Outlook: Improvements on several fronts are expected:

  • Modestly accelerating global growth
  • Easing inflation by mid-year
  • Improving real incomes
  • U.S. markets expected to lead global performance

  “Looking ahead to 2026, the backdrop is brighter. Global growth should accelerate modestly, inflation should ease in the second half of the year, and real incomes look poised to improve.” (A, 00:35)

2. Policy Sequencing & Political Context

• Election Aftershocks: An “out of consensus” call last year predicted a tough first half (during Trump’s second term start) and a stronger second half. The rationale:

  • Expectation that initial policies would be intentionally “growth negative” (akin to a new CEO clearing the decks)
  • Anticipation of a shift towards more growth-friendly policy by mid-year.

  “We based our differentiated view on the notion that policy sequencing in the new Trump administration would intentionally growth negative. To start, we liken 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.” (B, 01:33)

• Comparison with Trump’s First Term:

  • 2025 market conditions had less slack and more deceleration signals (unlike the cyclical upturn after 2016’s downturn).
  • Earnings revisions, market breadth, and cyclicals pointed to a slowdown.

  “The US Economy had much less slack when President Trump took office the second time compared to the first time he came into office, and this was the main reason we thought it was likely to be sequenced differently.” (B, 01:57)

3. Rolling Recession and Bull Market Genesis

• End of Rolling Recession: April marked the conclusion of a prolonged rolling recession affecting government and consumer services.

  “April marked the end of a rolling recession that began three years prior... We believe 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.” (B, 02:54)

• Missed Fed Timing:

  • The Fed’s delayed response to labor market weakness has withheld the usual early-cycle boost to stocks.
  • Ongoing government shutdowns and lagged data have slowed policy adjustments.

  “Normally the Fed would have cut rates more in this type of weakening labor market, but due to the imbalances and distortions of the COVID cycle, we think the Fed is later than normal in easing policy and that has held back the full rotation toward early cycle winners.” (B, 03:24)

• Potential for Dovish Turn:

  • Weak labor markets and "run it hot" policy preferences suggest the Fed will become more accommodative, though timing remains uncertain.

  “...the administration's desire to run it hot, means that ultimately the Fed is likely to deliver more dovish policy than the market currently expects. It's really just a question of timing...” (B, 03:51)

4. Market Opportunities and Risks for 2026

• Earnings Upside:

  • The new bull market, still unrecognized by many, offers substantial earnings growth opportunities as more sectors participate in the recovery.
  • S&P 500 forecast: 7,800 (+17% earnings, modest valuation expansion).

  “This narrative remains underappreciated and we think there's significant upside in earnings over the next year as the recovery broadens and operating leverage returns with better volumes and pricing in many parts of the economy.” (B, 04:15)

• Valuation Perspective:

  • Stocks aren't as expensive as top-level indices suggest, given forecasted earnings increases.

  “Our forecast reflects this upside to earnings, which is another reason why many stocks are not as expensive as they appear, despite our acknowledgment that some areas of the market may appear somewhat frothy...” (B, 04:40)

• Sector Preferences (2026):

  • Overweight: Financials, Industrials, Healthcare
  • Upgrade: Consumer Discretionary (goods > services; first time since 2021)
  • Relative Trades: Software over semiconductors (on reversal potential); Small caps over large caps (first time since March 2021)

  “Our favorite sectors include financials, industrials and healthcare. 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…” (B, 04:53)

• Risks Noted:

  • Delayed labor data or lack of corroboration may present near-term risks to the bullish outlook.

Notable Quotes & Memorable Moments

• On Policy Sequencing:

  “We liken 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.” (B, 01:34)

• On Market Timing:

  “In short, we believe a new bull market began in April with the end of the rolling recession and bear market.” (B, 04:03)

Timestamps of Important Segments

• 00:00 – 01:03: Overview of 2025’s surprises and positive setup for 2026
• 01:03 – 01:57: Policy sequencing and context of administration change
• 01:57 – 02:54: Comparison to historical cycles and rolling recessions
• 02:54 – 03:51: Bull market beginnings, Fed policy lag, and market risks
• 04:15 – 05:18: Underappreciated earnings opportunity, sector preferences, trades for 2026

Tone & Language

The language is analytical yet conversational, typical of Morgan Stanley market outlooks, with a calm but forward-looking and confident tone. The presentation remains accessible for investors and interested market watchers.

Conclusion

This episode offers a comprehensive framework for understanding 2026 U.S. equity prospects, emphasizing the importance of policy sequencing, early-cycle market dynamics, and sector rotation. Mike Wilson makes a persuasive case for a broadening recovery and highlights actionable areas for investors—while acknowledging near-term uncertainty related to Fed policy timing and labor market data.

For more detailed analysis, refer to the Morgan Stanley report published earlier in the week. And as always, the views are for informational purposes only and not to be treated as financial advice.