Mike Wilson, Morgan Stanley chief strategist - From high inflation Uber Bear To Mega Bull

Mike Wilson’s recent outlook, as detailed in articles in Bloomberg, The Heisenberg Report, and on Morgan Stanley Insights, marks a dramatic shift from his previous three-year bearish stance, declaring the end of a “rolling recession” and the dawn of a bullish era for US equities heading into 2026. Wilson, who called a market top in 2024 and the the inflationary bear market, thereafter  turned optimistic in 2024, and is now forecasting a two-year up cycle in stocks supported by broadening earnings growth, firmer pricing power, and resilient profit margins.​

My takeaways from his bullish stance:

• The “Liberation Day” (self-goal) lows marked a transition from recession to recovery, with stocks in a new bull market and earnings cycle.
• Investment Case and Key Drivers - Wilson raises his 12-month S&P 500 price target to 7,800, citing key bullish catalysts as under:
  • Positive operating leverage and broad rebound in earnings revisions - S&P 500 net profit margins are amazing led by the M-7.
  • AI-related efficiency gains to improve net income margins.
  • Supportive tax and regulatory policies - power generation, less red tape and regulation
  • Range-bound interest rates, and a slightly more accommodative Fed stance, neither dovish nor hawkish, balancing inflation and employment. 
  • Forecasted earnings: 2025 EPS of 272 (12% growth), 2026 EPS of 317 (17% growth), 2027 EPS of 356 (12% growth), with a valuation multiple of 22x forward EPS.​ These are slightly higher than my estimates, but plausible. The S&P 500 average profit growth tends to be in the high single digits, indices normally don’t grow that fast, by definition they’re not supposed to.
• • Wilson's sees a slight risk because of the high multiple but believes it doesn't take away from his optimism.

These estimates are mostly going to be correct, in my opinion - I have $270 in 2025 EPS and $310 for 2026, about the same as FactSet, though in my experience it tends to get lower as we get closer to the target dates. As we had discussed, in our webinars the median valuation multiples used to be 18, and 19 though Wilson is very comfortable with 22x because of the high growth. I can live with that for now, but we should not see deceleration in the next few quarters.

Risks and Market Skepticism

Wilson’s bullish base case is optimistic requiring most factors to go right, and of course invites skepticism, especially with approaching high levels of debt, and to his credit, Wilson does cite risks of an AI-driven bubble.  One key factor, I would like to point out is that I’ve followed Mike Wilson over the past decade, and he does his due diligence, and then some, and a lot better than many analysts.

Wilson also pooh-poohs references to the internet/Dot-com bubble.

These are the main reasons why the strategist believes we're nowhere close to the Dot-com era, and I agree with him. If anything we're closer to the GFC and the 1929 crash but still very much in the beginning of those cycles.

• Today’s hyperscalers dominate the economy and the stock indices, and are fundamentally stronger than leading companies during the late 1990s tech boom.​
• He emphasizes that while market participants debate if we’re nearing a valuation bubble like 1999-2000, there are key differences today, notably in company quality and economic fundamentals.​ Savita Subramanian of Bank of America had the same argument.
• Large-cap benchmark stocks have much better operating and higher quality metrics with the median large-cap free cash flow yield nearly triple that of 2000, and the S&P 500’s margin-adjusted forward multiple approximately 35% below the dot-com peak.​ (Not that its saying much - some of those multiples were insane)
• Wilson highlights that today’s top-ten index stocks are not trading at valuations anywhere near late-1990s extremes—they’re priced between 1997/98 levels and 13 “turns” cheaper than the 1999 blow-off top.​
• Margins for today’s leading stocks are about 22 percentage points higher than 25 years ago; 92% of the S&P 1500 is free-cash-flow positive now, compared to 72% in 2000.​
• He dismisses concerns about market leadership concentration and extreme valuations, contending that the environment is more favorable, with policy support and robust corporate fundamentals.​

Wilson does make a plausible case, and I am cautiously optimistic, and have noted some of the key risks such as leverage in the past two weeks, which should keep the market from overheating.