One major Wall Street analyst just raised his target.
Barring a significant downturn in the last month of the year, the S&P 500 will likely see double-digit returns for the third straight year.
As of November 18, the S&P 500 was at 6,600 - up about 13% year-to-date. Over the past three years, it has averaged about a 19% return per year.
Can the momentum continue in 2026? One major Wall Street analyst thinks so. This week, Morgan Stanley chief U.S. equity strategist Michael Wilson raised his target for the S&P 500 from 7,200 to 7,800 at the end of 2026. If the S&P 500 did hit 7,800 by the end of next year, that would mark about an 18% return from the current level.
Wilson contends that this is a new bull market, saying the 2023-2024 bull market ended when the market crashed in the first quarter and early April, and the new one began in late April.
"We believe that we're in the midst of a new bull market and earnings cycle, especially for many of the lagging areas of the index," Wilson and his team wrote in a note Monday, per Business Insider. "We think that most of the elements of a classic early-cycle environment are with us today."
Corporate Earnings Drive Returns
Wilson and his team believe the new bull market will be driven by strong corporate earnings growth in 2026 and 2027. They anticipate that the S&P 500 average earnings will finish 2025 at $2.72 per share, a 12% increase for the year. In 2026, they anticipate it rising to $317 per share - a 17% gain. In 2027, Wilson estimates another 12% gain to $356 per share.
Wilson outlined several factors driving earnings and markets higher, including positive operating leverage, efficiency gains driven by AI, accommodating tax and regulatory policies, and increased pricing power.
Further, Wilson sees valuations dropping slightly but still relatively high with a P/E ratio for the S&P 500 of 22.
"Our forecasts reflect this upside to earnings which is another reason why many stocks are not as expensive as they appear despite our acknowledgement that some areas of the market may appear somewhat frothy -- i.e., certain unprofitable, speculative growth areas," Wilson said in his note, per MarketWatch.
Small-Cap Strength
Investors should look for a continued resurgence in small cap stocks, the Morgan Stanley team said, as they expect small caps to outperform large caps.
The Russell 2000 index has lagged the S&P 500 this year, up just 5.8% year-to-date as of November 18.
The Morgan Stanley team also sees consumer cyclicals outperforming consumer staples, in general.
Drilling down further, Wilson added that these trends should also be favorable for financials, industrials, and healthcare stocks next year.
Financials and health care will benefit from lower rates and increased M&A activity, among other factors.
"Healthcare benefits from rate cuts into 2026, supportive earnings momentum, undemanding valuations, lessening policy overhangs and M&A tailwinds," Wilson and his team wrote in the note, per Business Insider."Biotech, in particular, tends to see strong relative performance 6 -- 12 months post the first Fed cut, though the sector overall sees relative outperformance."