These are the Reasons to Stay Positive on Stocks
Historically, elevated geopolitical risk has created buying opportunities for the S&P 500, and Morgan Stanley doesn’t expect this bout to be any different.
Strategists led by Michael Wilson say in a new research note published Monday that periods of volatility similar to the present have typically led to gains for U.S. equities over the subsequent one, three and twelve months.
| Events | Start Date | 1D | 1W | 1M | 3M | 12M |
| Average | 0.20% | 0.60% | 2.00% | 3.20% | 9.00% | |
| Median | 0.10% | 0.80% | 2.80% | 4.10% | 11.40% | |
| Korean War | 6/25/1950 | -1.10% | -2.60% | -4.60% | 7.20% | 17.60% |
| Vietnam War | 11/1/1955 | 0.20% | 5.50% | 7.30% | 3.60% | 9.70% |
| Suez Crisis | 10/29/1956 | -0.10% | 2.60% | -4.20% | -4.10% | -12.90% |
| 1958 Lebanon Crisis | 7/15/1958 | 0.30% | 2.90% | 6.20% | 13.60% | 32.00% |
| Cuban Missile Crisis | 10/16/1962 | -0.30% | -6.30% | 5.10% | 14.10% | 26.80% |
| Indo-Pakistani War | 8/5/1965 | 0.30% | 0.70% | 3.00% | 7.80% | -2.20% |
| Six-Day War | 6/5/1967 | 2.00% | 4.10% | 3.30% | 6.50% | 13.10% |
| Arab Israeli War | 10/6/1973 | -0.10% | -0.20% | -4.00% | -11% | -41.10% |
| Fall/ Liberation Saigon | 4/30/1975 | 0.90% | 2.00% | 4.40% | 1.80% | 17.00% |
| Iran Hostage Crisis | 11/4/1979 | -0.60% | 1.70% | 5.35% | 12.30% | 26.70% |
| Soviet Afghan War | 12/24/1979 | 0.10% | 0.30% | 5.40% | -7.80% | 26.10% |
| Iran-Iraq War | 9/22/1980 | -0.70% | -5.30% | 1.20% | 4.10% | -10.10% |
| Multinational Force in Lebanon | 8/25/1982 | 0.80% | 0.60% | 4.90% | 13.90% | 37.10% |
| 1986 U.S. Bombing of Libya | 4/15/1986 | 1.90% | 2.00% | -1.40% | -1.70% | 17.40% |
| U.S. invasion of Panama | 12/20/1989 | 0.60% | 1.70% | -1.10% | -0.90% | -3.70% |
| Gulf War | 8/2/1990 | -1.90% | -3.30% | -8.10% | -12.60% | 10.10% |
| Iraqi No-fly Zones Conflict | 3/1/1991 | -0.30% | 1.20% | 2.40% | 5.20% | 11.40% |
| Croatian War | 3/31/1991 | 2.20% | 2.00% | 2.40% | 1.80% | 8.50% |
| Bosnian War | 4/6/1992 | -1.90% | 0.10% | 2.80% | 2% | 9.00% |
| Kosovo War | 2/28/1998 | -0.40% | 0.40% | 5.80% | 4.10% | 18.00% |
| Afghan War | 10/7/2001 | -0.50% | 2.60% | 5.00% | 9.60% | -26.10% |
| Iraq War | 3/20/2003 | 2.30% | -0.80% | 1.90% | 13.60% | 28.20% |
| Russia Invasion of Ukraine | 2/20/2022 | -1.00% | 0.80% | 2.60% | -9.80% | -6.20% |
| Source: Morgan Stanley Wealth Management/Bloomberg | ||||||
The U.S. over the weekend struck Iranian nuclear sites, as Iran and Israel on Monday continued to attack each other.
Wilson and team argue that for oil prices
CL.1
-5.97%
to derail equities and threaten the business cycle, the year-on-year spike in crude would need to be in the region of 75% and the current rally in oil prices, therefore, would have to extend to $120 per barrel.
While acknowledging the risks of steepening oil prices, Morgan Stanley notes the change in crude prices is negative year-on-year and that a sustained period of disruption to supplies of oil through the Strait of Hormuz would be necessary to drive prices significantly higher. Moreover Wilson adds that his overweight call in energy stocks versus an underweight in the consumer sector partially mitigates that risk.
It’s not just historical precedent that informs Morgan Stanley’s constructive stance on equities, though. While the Fed may be in wait-and-see mode, the markets are looking past the current stasis in monetary policy and discounting future rate cuts. Two 25 basis point reductions is the median estimate. Morgan Stanley forecast seven rate cuts in 2026 and detect a more dovish bias to recent Fed statements.
They anticipate some weakness in hard data over the summer months but make the case that it will likely support stock markets by pulling forward expectations of Fed rate cuts.
The positive outlook on U.S. stocks is also buttressed by their earnings profile. Wilson’s team projects mid-teens earnings-per-share growth by the first half of 2026, even if GDP growth is below trend. They cite operating leverage as the key factor whereby revenue growth is running ahead of SG&A (selling, general and administrative expenses) and COGS (cost of goods sold). They also expect dollar weakness to provide a tailwind to earnings per share growth and analyst expectations for EPS.
Leading indicators are pointing to an inflection in EPS growth.
These locomotives for the market tend to favor large-cap over small-cap stocks, owing to the foreign revenue streams and greater operational efficiency of the former. This is why Morgan Stanley has a stated preference for the S&P 500 over the Russell 2000.
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