Morgan Stanley
Investment Management

Equity Outlook: A Constructive Case for Stocks

Aug 18, 2026

Rising earnings expectations support a constructive outlook for equities through the end of 2026, despite ongoing market risks.

Andrew Slimmon
Head of Applied Equity Advisors Team, Morgan Stanley Investment Management

Key Takeaways

  • Rising earnings expectations continue to support a constructive outlook for U.S. equities.
  • A shift toward higher interest rates by the Fed could challenge the market's current trajectory.
  • Large technology companies and commercial banks delivered strong earnings growth that has yet to be fully reflected in share prices.
  • A balanced allocation across U.S., European and Asian equities could outperform a U.S.-centered portfolio strategy.

There is one constant for managers of an equity portfolio: We’re always nervous about the future.

 

If our strategies are performing well, we worry that individual stocks are becoming too overbought and are due for a breather. If our returns lag, we worry about not meeting our investors’ expectations. When we think that the behavior of the overall stock market is “irrational,” we wonder whether we may be missing something. And if markets appear to behave “logically,” we worry it’s too obvious.

 

That’s where we are right now. It appears that the equity market is acting rationally. This behavior suggests we could experience continued strong returns in the second half of 2026. But there’s reason for caution as shared in our Mid-Year Equity Market Outlook.

 

The case rests on three factors: rising 2027 earnings estimates, unrecognized strength in select sectors and improving earnings momentum outside the U.S.

 

Earnings Drive Optimism

Equity markets are forward-looking, pricing in future earnings rather than past results. Investors are now increasingly focused on 2027, where the earnings outlook remains constructive.

 

According to FactSet data, the consensus earnings-per-share (EPS) estimate for the S&P 500 in 2027 has increased from approximately $357 at the beginning of the year to $406 most recently.

 

Those upward revisions have been regular from week to week. Since the start of 2025, Wall Street has been forced to increase its overall estimates for S&P 500 earnings, as corporate results keep beating forecasts. In my view, that pattern is likely to continue until evidence suggests otherwise.

 

If the current 2027 EPS estimate of $4061 rises further by the end of the year, applying a reasonable price-to-earnings multiple of 20x suggests the S&P 500 could still have meaningful upside for the remainder of 2026. Viewed through that lens, the market's roughly 14% year-to-date2 advance appears supported by fundamentals.

 

What Could Go Wrong?

While the outlook is constructive, there are always plenty of risks and the path to higher valuations is unlikely to be linear.

 

The most significant risk, in my opinion, is Federal Reserve policy. Historically, equity markets have struggled when the Fed raises interest rates. Although a rate hike is not my base case, it would throw a wrench in my “logical” scenario.

 

In addition, markets also do not always respond immediately to improving fundamentals, as has been the case this year. Stock prices can take time to reflect stronger earnings. Though frustrating, that disconnect between fundamentals and share-price performance can create opportunities.

 

For example, the market has been narrowly focusing on risks for AI infrastructure companies, despite strong fundamentals. My view is that investors who have become less optimistic about large technology companies -- the so-called hyperscalers -- are making a premature mistake. Hyperscalers and large commercial banks are among the sectors that have delivered strong earnings growth and positive earnings revisions without seeing comparable stock price appreciation, a potential opportunity for investors.

 

A Broader Global Opportunity

Global developed-market equities outperformed U.S. equities in 2025. According to Bloomberg data, that has happened only three other times since the Global Financial Crisis—2012, 2017 and 2022—and international markets could continue to perform well this year.3

That said, I am not advocating for a wholesale shift away from U.S. equities. Instead, a diversified allocation that includes U.S., European and Asian stocks may outperform a portfolio invested solely in the U.S. market.

 

The reason again is earnings revisions. As equity managers, we are seeing certain opportunities outside the U.S., such as European bank stocks, where stock prices have been lagging EPS growth, resulting in lower P/Es and potentially a good point of entry.

 

Bottom Line

The current equity rally appears broadly supported by improving earnings expectations rather than speculative enthusiasm alone. While risks—including potential Fed policy changes—remain, the combination of rising earnings estimates, attractive opportunities among underappreciated sectors and a more balanced global allocation supports a constructive outlook for equities through the end of 2026. For investors, the implication is not to abandon U.S. equities, but to broaden exposure toward companies and regions where earnings momentum may not yet be fully reflected in valuations.

 

Sources & Disclosures

Sources

1. S&P 500 forward earnings per share as of August 14, 2026.

2. S&P 500 index as of August 14, 2026.

3. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment. Past performance is no guarantee of future results.

 

Disclosures

RISK CONSIDERATIONS

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and may therefore be less that what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks.In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small- and medium-capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risks). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.  Ai: Investing in companies in anticipation of a catalyst event, such as AI adoption, carries the risk that such catalysts may not occur, may be delayed, or that the market may react differently than expected. Companies focused on AI may have limited product lines, markets or financial resources, and their management and performance may be particularly impacted by events that adversely affect AI adoption, such as rapid changes in product technology cycles, product obsolescence, government regulation, cybersecurity concerns and competition.

 

DEFINITIONS
The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto. The S&P 500® Index measures performance of the large cap segment of the U.S. equities market, covering approximately 75% of the U.S. market, including 500 leading companies in the U.S. economy.

 

IMPORTANT INFORMATION
There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long- term, especially during periods of downturn in the market.

 

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the particular Strategy may include securities that may not necessarily track the performance of a particular index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required.

 

For important information about the investment managers, please refer to Form ADV Part 2.

 

The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass. Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

 

Forecasts and/or estimates provided herein are subject to change and may not actually come to pass. Information regarding expected market returns and market outlooks is based on the research, analysis and opinions of the authors or the investment team. These conclusions are speculative in nature, may not come to pass and are not intended to predict the future performance of any specific strategy or product the Firm offers. Future results may differ significantly depending on factors such as changes in securities or financial markets or general economic conditions.

 

This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.

 

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

 

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

 

This material is not a product of Morgan Stanley’s Research Department and should not be regarded as a research material or a recommendation.

 

The Firm has not authorized financial intermediaries to use and to distribute this material, unless such use and distribution is made in accordance with applicable law and regulation. Additionally, financial intermediaries are required to satisfy themselves that the information in this material is appropriate for any person to whom they provide this material in view of that person’s circumstances and purpose. The Firm shall not be liable for, and accepts no liability for, the use or misuse of this material by any such financial intermediary.

 

This material may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this material in another language, the English version shall prevail.

 

The whole or any part of this material may not be directly or indirectly reproduced, copied, modified, used to create a derivative work, performed, displayed, published, posted, licensed, framed, distributed or transmitted or any of its contents disclosed to third parties without the Firm’s express written consent. This material may not be linked to unless such hyperlink is for personal and non-commercial use. All information contained herein is proprietary and is protected under copyright and other applicable law.

 

DISTRIBUTION

This material is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

 

MSIM, the asset management division of Morgan Stanley (NYSE: MS), and its affiliates have arrangements in place to market each other’s products and services.  Each MSIM affiliate is regulated as appropriate in the jurisdiction it operates. MSIM’s affiliates are: Calvert Research and Management, Eaton Vance Management, Parametric Portfolio Associates LLC, Parametric SAS, and Atlanta Capital Management LLC.

 

This material has been issued by any one or more of the following entities:

 

EMEA

This material is for Professional Clients/Accredited Investors only.

In the EU, MSIM materials are issued by MSIM Fund Management (Ireland) Limited (“FMIL”). FMIL is regulated by the Central Bank of Ireland and is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at 24-26 City Quay, Dublin 2, DO2 NY19, Ireland.

 

Outside the EU, MSIM materials are issued by Morgan Stanley Investment Management Limited (MSIM Ltd) is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.

 

In Switzerland, MSIM materials are issued by Morgan Stanley & Co. International plc, London (Zurich Branch) Authorised and regulated by the Eidgenössische Finanzmarktaufsicht ("FINMA"). Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland.

 

Italy: MSIM FMIL (Milan Branch), (Sede Secondaria di Milano) Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy. The Netherlands: MSIM FMIL (Amsterdam Branch), Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. France: MSIM FMIL (Paris Branch), 61 rue de Monceau 75008 Paris, France. Spain: MSIM FMIL (Madrid Branch), Calle Serrano 55, 28006, Madrid, Spain. Germany: MSIM FMIL Frankfurt Branch, Große Gallusstraße 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG). Denmark: MSIM FMIL (Copenhagen Branch), Gorrissen Federspiel, Axel Towers, Axeltorv2, 1609 Copenhagen V, Denmark.

 

MIDDLE EAST

Dubai International Financial Centre: This information does not constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products in the UAE (including the Dubai International Financial Centre and the Abu Dhabi Global Market) and accordingly should not be construed as such. Furthermore, this information is being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority, the UAE Securities and Commodities Authority, the Financial Services Regulatory Authority or any other relevant licensing authority or government agency in the UAE. The content of this report has not been approved by or filed with the UAE Central Bank, the Dubai Financial Services Authority, the UAE Securities and Commodities Authority or the Financial Services Regulatory Authority.

 

Abu Dhabi Global Market ("ADGM"): This material is sent strictly within the context of, and constitutes, an Exempt Communication. This material relates to (strategy) which is not subject to any form of regulation or approval by the Financial Services Regulatory Authority of the Abu Dhabi Global Market (the “FSRA”).

 

Saudi Arabia

This financial promotion was issued and approved for use in Saudi Arabia by Morgan Stanley Saudi Arabia, Al Rashid Tower, Kings Sand Street, Riyadh, Saudi Arabia, authorized and regulated by the Capital Market Authority license number 06044-37.

 

U.S.

NOT FDIC INSURED | OFFER NO BANK GUARANTEE | MAY LOSE VALUE | NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY | NOT A DEPOSIT

 

Latin America (Brazil, Chile Colombia, Mexico, Peru, and Uruguay)

This material is for use with an institutional investor or a qualified investor only. All information contained herein is confidential and is for the exclusive use and review of the intended addressee, and may not be passed on to any third party. This material is provided for informational purposes only and does not constitute a public offering, solicitation or recommendation to buy or sell for any product, service, security and/or strategy. A decision to invest should only be made after reading the strategy documentation and conducting in-depth and independent due diligence.

 

ASIA PACIFIC

Hong Kong: This document has been issued by Morgan Stanley Asia Limited, CE No. AAD291, for use in Hong Kong and shall only be made available to “professional investors” as defined under the Securities and Futures Ordinance of Hong Kong (Cap 571). The contents of this document have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong. Accordingly, save where an exemption is available under the relevant law, this document shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. Singapore: This material is disseminated in Singapore by Morgan Stanley Investment Management Company, Registration No. 199002743C. This material should not be considered to be the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor under section 304 of the Securities and Futures Act, Chapter 289 of Singapore (“SFA”), (ii) to a “relevant person” (which includes an accredited investor) pursuant to section 305 of the SFA, and such distribution is in accordance with the conditions specified in section 305 of the SFA; or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. This material has not been reviewed by the Monetary Authority of Singapore. Australia: This material is provided by Morgan Stanley Investment Management (Australia) Pty Ltd ABN 22122040037, AFSL No. 314182 and its affiliates and does not constitute an offer of interests. Morgan Stanley Investment Management (Australia) Pty Limited arranges for MSIM affiliates to provide financial services to Australian wholesale clients. This material will not be lodged with the Australian Securities and Investments Commission.

 

Japan

For professional investors, this material is circulated or distributed solely for informational purposes. For non-professional investors, this material is provided in connection with Morgan Stanley Investment Management (Japan) Co., Ltd. (“MSIMJ”)’s business with respect to discretionary investment management agreements (“IMA”) and investment advisory agreements (“IAA”).  This does not constitute a recommendation or solicitation of transactions nor offers any particular financial instruments. Under an IMA, with respect to the management of client assets, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc. of the securities, and MSIMJ accepts such commission. The client shall delegate to MSIMJ the authorities necessary to make such investment decisions. MSIMJ exercises these delegated authorities accordingly, and the client shall not make individual instructions.  All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate (the upper limit is 2.20% per annum (including tax)) shall be incurred in proportion to the contract period. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for underlying securities. Since these charges and expenses vary by contract and other factors, MSIMJ cannot present the rates, upper limits, etc. in advance. All clients should read thoroughly the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement. This material is distributed in Japan by MSIMJ, Registered No. 410 (Director of Kanto Regional Finance Bureau (Financial Instruments Firms)), Membership: the Japan Securities Dealers Association, the Investment Management Association of Japan and the Type II Financial Instruments Firms Association.

 

RO 5843183  Expiration 8/31/2027

View Sources & Disclosures Close Sources & Disclosures

DISCOVER MORE INVESTING INSIGHTS FROM INVESTMENT MANAGEMENT

Please refer to the webinar replay and latest TAKE for more information 

Webinar Replay Read more in Slimmon's Take