December 5, 2025 10:02 PM GMT US Equity Strategy December 5, 2025 Strategy Data Pack – December 2025 Key Points: • Forecast Update M O R G A N S T A N L E Y R E S E A R C H Michael Wilson Chief US Equity Strategist & CIO of Morgan Stanley M.Wilson@morganstanley.com +1 212 761-2532 Andrew Pauker Equity Strategist Andrew.Pauker@morganstanley.com +1 212 761-1328 Michelle M. Weaver, CFA US Thematic Strategist Michelle.M.Weaver@morganstanley.com +1 212 296- 5254 Diane Ding, Ph.D. Quantitative Strategist Qian.Din ...

Summary of the US Equity Strategy Conference Call Industry Overview - The conference call focuses on the US equity market outlook for 2026, emphasizing a "rolling recovery" following a three-year rolling recession that ended in April 2025 [5][15]. Key Points and Arguments 1. **S&P 500 Price Target Increase**: The S&P 500 price target has been raised to 7,800, supported by strong earnings growth and a favorable valuation environment [5][56]. 2. **Earnings Growth Forecast**: Expected earnings per share (EPS) growth includes $272 for 2025 (12% growth), $317 for 2026 (17% growth), and $356 for 2027 (12% growth) [5][56]. 3. **Sector Upgrades**: Upgrades to "overweight" (OW) status for Consumer Discretionary Goods and Healthcare sectors, while small caps are expected to outperform large caps [5][6][56]. 4. **Economic Recovery Indicators**: Evidence of recovery includes a 2.2% revenue beat rate for the S&P 500 and 8% EPS growth for the median stock in the Russell 3000, marking the strongest growth in four years [5][36]. 5. **Monetary Policy Outlook**: Anticipation of more significant rate cuts than currently expected, leading to an accommodative monetary policy environment that supports earnings growth [5][6][31]. 6. **Risks to Forecast**: Near-term risks include potential monetary policy not being dovish enough and tighter liquidity affecting high momentum areas [6][31]. Additional Important Insights 1. **Historical Context**: The current economic environment is compared to previous cycles, noting that the economy had less slack at the start of President Trump's second term compared to his first [7][8]. 2. **Policy Implications**: The administration's policies are seen as rebalancing the economy, focusing on reducing the current account deficit and encouraging investment over consumption [60][61]. 3. **Inflationary Regime**: The US economy is viewed as being in an inflationary regime, with expectations of "hotter but shorter" economic cycles compared to the past [66][70]. 4. **Investment Strategy**: Emphasis on high-quality stocks as a hedge against inflation and economic uncertainty, with a focus on sectors that can maintain pricing power [76][77]. Conclusion - The outlook for US equities in 2026 is optimistic, driven by strong earnings growth, favorable monetary policy, and sector-specific upgrades. However, potential risks related to monetary policy and economic conditions remain a concern. The overall strategy suggests a focus on high-quality investments that can withstand inflationary pressures and economic volatility [5][6][56][76].

Economic Outlook - The core view is that the recession is behind, with optimism for 2025 into 2026, indicating a transition from negative to positive growth policies [1][3] - The analysis suggests a rolling recovery has been in place for three years, with the government playing a significant role [3][4] - The Federal Reserve is perceived to be behind the curve, needing to lower rates to stimulate the private economy [5][6] Capital Expenditure and Investment - Increased capital expenditure aligns with government initiatives aimed at reducing consumption and boosting investment, indicating a shift towards a higher velocity economy [2][9] - The tax bill is incentivizing companies to invest in infrastructure and automation, addressing years of underinvestment [17][18] Market Dynamics - There is a divergence in performance among companies, with risks associated if the market begins to push back against free cash flow growth [12][13][14] - Companies are increasingly relying on debt markets for funding, which is seen as a natural evolution in their capital strategies [15][16] Earnings Growth and Valuation - Earnings growth is expected to be better than anticipated, with a new economic cycle characterized by shorter, hotter cycles post-COVID [19] - The current environment suggests that U.S. equities remain a compelling investment opportunity, driven by anticipated growth [18][19]

Economic Outlook - Morgan Stanley 认为 2025 年至 2026 年经济衰退已经过去，这与市场普遍观点不同 [1] - 经济正试图减少消费，增加投资，这将带来更高的经济增速 [2] - 经济已在经历滚动复苏，但并非所有行业都会同时复苏 [4] - 预计盈利增长将超过预期，经济周期将更短 [19] Monetary Policy - 如果联邦基金利率高于两年期美国国债收益率，则美联储的政策将滞后于市场 [6] - 美联储需要降息 50 个基点才能达到中性，降息 150 个基点以上才能刺激消费 [6] - 只有在美联储的政策低于两年期美国国债收益率时，小盘股和低质量股票的表现才会相对较好 [9] Investment Strategy - 第三季度财报季提供了一个强大的选股环境 [1] - 市场对自由现金流增长放缓和资产负债表变重的公司开始质疑 [13] - 税收法案鼓励企业投资基础设施、工厂、自动化生产和机器人技术 [17][18] - 大公司正在更多地依赖债务市场进行融资，这可能影响资本回报计划 [12][16]

Summary of Key Points from the Conference Call Industry Overview - The focus is on the US equity market, particularly the transition from a late cycle to an early cycle backdrop, indicating a rolling recovery is beginning [4][15]. Core Insights - **Economic Transition**: The July jobs report supports the bullish case for stocks, confirming a shift to an early cycle environment with rebounding earnings and cash flow expected over the next 6-12 months [4][15]. - **Rate Cuts Anticipation**: The expectation of significant rate cuts is based on the belief that tariff-induced inflation will subside later in the year, with core CPI expected to peak in August [4][12][15]. - **Inflation Data Impact**: A hot CPI print could lead to quality leadership in stocks, while a lighter print may favor small caps and lower quality stocks, suggesting investors should remain nimble around CPI reports [4][12][15]. - **Labor Market Dynamics**: A measured rise in the unemployment rate and weak payroll prints could pull forward market expectations for rate cuts, which would be constructive for equities [9][12]. Sector Analysis - **Preferred Sectors**: The company remains bullish on Industrials and Financials while underweighting Consumer Discretionary Goods due to tariff pressures and weaker pricing power [4][15][13]. - **Earnings Revisions**: There is a notable improvement in earnings revisions breadth, which has moved from -25% in April to +16%, indicating a positive shift in corporate confidence [27][15]. Earnings Season Insights - **Earnings Performance**: The 2Q earnings season has shown a surprise ratio of +8% for EPS and +3% for sales, with expectations of 10% y/y EPS growth for 2025 and 13% for 2026 [27][28]. - **Market Reactions**: Price reactions to earnings have been muted, with an absolute change of -0.1% and relative to the S&P 500 flat at 0.0% [57]. Additional Considerations - **Tariff Pressures**: The sectors most exposed to tariff costs, particularly consumer goods, are expected to face margin compression due to a lack of pricing power, which is a key reason for the underweight stance on Consumer Goods [13][15]. - **Future Outlook**: The overall outlook remains positive for the next 6-12 months, driven by factors such as positive operating leverage, AI adoption, and a weaker dollar, despite near-term inflation risks [15][4]. Conclusion - The company maintains a bullish outlook on US equities, emphasizing the importance of upcoming economic data, particularly CPI, in shaping market dynamics and sector performance [4][15].

Market Overview - The S&P 500 experienced a shift in momentum, entering a four-day losing streak after six consecutive all-time highs, driven by soft jobs data, rising unemployment, and new tariffs announced by President Trump [1] Investment Opportunities - Morgan Stanley and Goldman Sachs suggest that the recent market decline could present a buying opportunity, with SPDR S&P 500 ETF Trust (SPY) rebounding after the initial drop [2] - Morgan Stanley strategist Michael Wilson advocates for buying during the recent selloff, citing a strong earnings outlook for the upcoming year despite short-term challenges [3] Economic Recovery Insights - Wilson indicates that signs of a "rolling recovery" are emerging, supported by earnings revisions and expectations of fading inflation later this year, which may lead to a rate-cutting cycle [4] - Structural tailwinds such as AI adoption, a weakening U.S. dollar, and potential tax cuts are expected to support equities moving forward [5] Earnings Performance - Second-quarter earnings for S&P 500 companies are projected to increase by 9.1%, significantly surpassing analysts' forecasts of 2.8%, with the highest percentage of firms exceeding earnings estimates in four years [6] Sector-Specific Outlook - Goldman Sachs strategist David Kostin expresses optimism regarding mega-cap tech firms, noting their ability to manage tariff impacts on profits, while acknowledging potential revenue growth pressures in the latter half of the year [7]