Morgan Stanley Sees S&P Hitting 7,800

Morgan Stanley’s 7,800 S&P 500 target is underpinned by a projected 17% surge in earnings per share (EPS) to $317 by the end of 2026. This forecast is more optimistic than the consensus estimate of 14% growth and is driven by what the firm calls a "rolling recovery," where various economic sectors are beginning to rebound in unison. The "big, beautiful act," officially known as Public Law 119-21, is a crucial component of this bullish outlook. Signed into law on July 4, 2025, this legislation is expected to deliver an estimated $129 billion in tax relief to S&P 500 companies over the next two years. Key provisions include the immediate expensing of domestic R&D costs and a more favorable calculation for interest expense limitations. On the productivity front, Morgan Stanley anticipates that AI adoption will contribute significantly to corporate bottom lines. The bank projects that AI could add between $13 trillion and $16 trillion in long-term market value to the S&P 500. In the nearer term, AI is expected to generate around $920 billion in annual net benefits for large-cap firms through a combination of cost reductions and new revenue streams. A recent Morgan Stanley survey highlights that this AI-driven transformation is already underway, with companies that are heavily investing in AI reporting an average productivity increase of 11.5%. This is seen as a key factor that could lead to an expansion of corporate margins by approximately 40 basis points by the end of 2026. The forecast also comes at a time when other major financial institutions are issuing their own bullish predictions. Deutsche Bank has a year-end 2026 target of 8,000 for the S&P 500, while J.P. Morgan and Barclays are targeting 7,500 and 7,400, respectively. Separately, the landscape for defense stocks is shifting as ESG (Environmental, Social, and Governance) funds are beginning to ease their investment restrictions. This change in stance is largely a response to evolving geopolitical situations and a renewed focus on national security. This relaxation of ESG criteria is not a minor adjustment. Should Article 8 and 9 funds in Europe, which are focused on sustainability, move to a benchmark weight in aerospace and defense, it could trigger almost $90 billion in inflows to the sector. This potential influx of capital is a significant tailwind for defense companies. This trend is gaining momentum, with major asset managers like JP Morgan Asset Management already lifting defense-related investment exclusions for dozens of their UK and European funds. This move is often attributed to "evolving client expectations relating to defence preparedness" and a changing regulatory environment.