Morgan Stanley: Earnings, Not Oil, Power Rally
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- Morgan Stanley CIO Mike Wilson identified earnings as the chief driver of the U.S. equity rally, stating: "Equity markets move on two things: earnings and liquidity. Right now, earnings are more than offsetting lingering liquidity concerns."
- S&P 500 earnings are growing at 16%, with a median first-quarter surprise of 6% to the upside — the strongest upside surprise since 2022.
- Earnings momentum is broad-based beyond tech, with financials, industrials, and consumer cyclicals also generating upward revisions, which Wilson reads as a move away from narrow "Magnificent Seven" leadership toward something more sustainable.
- The U.S. and Israeli war on Iran and the oil-price shock have had "uneven" impacts on the market, with the energy sector actually contributing to S&P 500 income growth and higher gasoline prices not yet producing a meaningful pullback in consumer spending.
- Companies are flagging higher freight costs, input prices, and tighter supply chains, but the impact on earnings remains negligible as firms adapt and pass costs on to consumers.
- Federal Reserve rate cuts appear unlikely this year as traders reprice the yield curve for sticky inflation — a dynamic Wilson called the "big reason why valuations corrected so sharply over the past six months."
- S&P 500 valuation has compressed from roughly 23x 2026 earnings to about 20x even as the index sits near all-time highs; Wilson forecasts the U.S. equity market "will grind higher for the rest of the year with intermittent bouts of volatility."
Why it matters: With the S&P 500 near record highs but its forward multiple compressing from 23x to 20x as earnings grow, the rally is being carried by actual profit beats of 6% — the best since 2022 — rather than multiple expansion. That breadth across financials, industrials, and cyclicals matters for investors: it reduces the fragility of a market that had become dangerously concentrated in a handful of megacap tech names.
