Investment Opportunities for 2026: Emphasis from Morgan Stanley

Investing.com – US stocks may remain under pressure in the short term; however, Michael Wilson, an analyst at Morgan Stanley, emphasized that investors should view this weakness as an opportunity to buy as they enter 2026.

In a note, Wilson stated, "The Federal Reserve and tensions around liquidity have put pressure on stocks" and reiterated his high confidence in a 12-month bullish stance.

Morgan Stanley indicated that recent market dynamics have developed as the firm warned at the end of September. At that time, Wilson highlighted the risk that "less dovish-than-expected Fed guidance and tight liquidity could create short-term headwinds."

The bank expresses that the current tactical scenario is unfolding; it reports that high-momentum stocks are most sensitive to liquidity constraints, and the S&P 500 reacted to the "increasing hawkishness" presented at the Federal Open Market Committee meeting on October 29.

Despite a modest decline of 5% in the S&P 500, Wilson noted, "There has been significant damage beneath the surface," stating that two-thirds of the top 1,000 stocks experienced declines of more than 10%.

This comprehensive weakness is suggested by Morgan Stanley to be an indication that "the markets are closer to the end of this correction rather than its beginning."

The bank added that if the Fed delays interest rate cuts or maintains a tighter balance sheet, "mega-cap stocks may lag" in the final stages of the correction, a situation typical of a late correction pattern.

However, Wilson noted that additional weakness presents an opportunity to "reinvest in our continuous improvement thesis," stating that alternative labor data is "generally soft," which supports the idea that the Fed will be "forward on interest rate cuts" in the future.

Morgan Stanley pointed out that its 2026 forecasts are "outside the consensus" and predicted a 17% year-over-year growth in earnings per share (EPS) as the US finds itself in an early-stage environment. Additionally, it reiterated its overweight position in Small Caps, Consumer Staples, Healthcare, Industrials, and Financials, stating that the resilience in earnings revisions is "dependent on monetary policy and liquidity," rather than fundamentals, confirming the situation.