Morgan Stanley flags 6 bullish market catalysts that investors are underestimating for 2026

• Morgan Stanley predicts continued stock market growth driven by multiple bullish catalysts.
• Key drivers include strong earnings, deregulation, lower interest rates, and AI adoption.
• The bank recommends areas such as financials, healthcare, and small-cap stocks.

Worried that stocks are due for a rough patch after three consecutive years of strong returns?

Don't be, says Morgan Stanley.

"We think consensus is still underestimating the collective impact of a series of bullish catalysts," said Mike Wilson, the bank's chief US equity strategist, said in a note on Monday.

He continued: "While these variables have received attention individually, we believe their collective impact remains underappreciated in terms of fueling the rolling recovery."

Here are six big catalysts the bank sees pushing stocks higher in 2026:

1. Earnings: The bank sees mid-teens earnings-per-share growth in 2026.
2. Deregulation: The financials sector in particular should get a boost from loosened regulation. "eSLR rule finalization and other upcoming changes should 'usher in the major unlock of bank capital productivity', according to our banks analysts," Wilson wrote, referring to changes to rules that mandate how much capital banks have to hold to meet regulatory requirements.
3. Interest rates and Fed policy: 10-year Treasury rates should dip to below 3.75%, Wilson said, and the Fed should cut in January and April. Plus, it's resumed its short-term bond-buying program.

4. AI adoption: The percentage of businesses seeing better profit margins thanks to AI is growing, according to a Morgan Stanley analysis.
5. Oil and US dollar should continue to decline: The S&P 500's 30% foreign sales exposure means a falling US dollar should boost earnings, and cheaper oil prices leads to lower gas prices for everyday consumers.
6. Valuations should expand: Yes, broader stock-market valuations are already high. But there are a few stats that point to why they can say elevated and climb even higher, Morgan Stanley said.

"(1) the S&P 500 forward P/E ratio expands ~90% of the time when EPS growth is above the long-term median and monetary policy is accommodative; (2) the median S&P 500 stock trades at a 3-turn discount to the cap weighted index; (3) the Mag 7 forward P/E ratio has not expanded since 2023 and mega cap tech sales growth revisions are accelerating to 20-year highs," Wilson wrote.

Wilson said his top recommendations in stocks include financials, healthcare, consumer discretionary, industrials, and small-caps.

Examples of funds offering exposure to these trades are the State Street Financial Sel Sec SPDR ETF (XLF), the Vanguard Health Care ETF (VHT), the iShares U.S. Consumer Discretionary ETF (IYC), the Fidelity MSCI Industrials Index ETF (FIDU), and the Schwab U.S. Small-Cap ETF (SCHA).

For those looking to simply stick with the broader market, Wilson's 2026 S&P 500 price target is 7,800, implying about 13% upside from current levels.