Morgan Stanley’s Wilson says U.S. valuations supported as earnings recovery builds

Original story by: Yahoo Entertainment Last updated: Oct 6, 2025

Context: Morgan Stanley's equity strategist, Michael Wilson, believes current U.S. equity valuations are justified as the economy enters an early-cycle phase. This outlook is supported by improving earnings momentum and structural inflation, which are expected to bolster stock prices. His view remains out of consensus among investors.
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Detailed Summary:
- Morgan Stanley's thesis suggests a return of positive operating leverage not seen since 2021.
- The firm anticipates accelerated earnings per share growth in 2026, driven by pent-up demand and decelerating labor cost growth since 2022.
- Constructive inflation is expected to benefit earnings in 2026, similar to 2021, as inflation is positively correlated with revenue and profit growth.
- Comparisons to the late-1990s tech bubble are rejected; current free cash flow yield for median large-cap stocks is nearly triple that of 2000.
- When adjusted for profit margins, market multiples are considered reasonable, trading at a 40% discount to the late-1990s period.
- Morgan Stanley's "run it hot" thesis supports higher structural inflation, positioning equities and gold as key inflation hedges.
- Equity prices relative to gold are significantly lower than the 1999 peak, indicating stocks may be a cheaper inflation hedge.
- The firm maintains an overweight stance on healthcare, identifying it as a strong defensive hedge for U.S. equity investors against potential near-term headwinds.