Morgan Stanley Says EPS Revisions Are Fueling Optimism for Stock Market Gains

The stock market is riding a powerful recovery wave, and Morgan Stanley believes one key trend will keep pushing indexes higher: EPS revision momentum. In other words, The stock market is going up again, and experts think it will keep rising because companies are now expecting to make more money than they thought earlier this year.

Earnings revisions breadth, which tracks the number of analysts raising earnings-per-share (EPS) estimates versus those lowering them, has rebounded sharply in recent months. This improvement follows a rough start to 2025, when concerns over tariffs, inflation, and AI-driven spending cuts weighed on corporate outlooks.

EPS Revision Trends Signal More Upside

According to Bloomberg Intelligence, EPS growth expectations for 2025 fell from 11.4% to 6.9% during the year’s first quarter. In April, earnings revisions breadth (ERB) hit a low of –25%, signaling widespread analyst downgrades. By June, ERB improved to –5%, marking a swift turnaround in sentiment. Morgan Stanley sees this shift as a clear signal for future stock market strength. “The ERB bottomed on April 17th around Microsoft’s earnings report and has not looked back,” wrote Mike Wilson, the bank’s chief investment officer.

Notably, the rebound is driven more by positive revisions than by a mere slowdown in negative ones. Historically, markets perform better in this scenario. Morgan Stanley estimates that when upward EPS revisions dominate, the S&P 500 averages 12% gains over the next 12 months. By contrast, when markets rise on fewer negative revisions alone, gains average just 8%.

S&P 500 Expected to Reach 6,500 This Year

Morgan Stanley now expects the S&P 500 to climb to 6,500 by year‑end, a roughly 5% increase from current record levels. Improved corporate profit outlooks, a weakening dollar, and incentives from the Big Beautiful Bill are all expected to support this trajectory.

Earlier in the year, much of the earnings pressure came from doubts around the Magnificent Seven tech stocks. However, analysts are now turning more bullish, especially as earnings growth appears set to outpace broader economic expansion.

Wilson emphasized that EPS revisions, rather than purely monetary or fiscal stimulus, will be the primary catalyst in this environment. “We expect the market to be driven by a more bullish rate of change on EPS revisions, monetary policy expectations, and term premiums,” Wilson noted. This reflects a notable shift from 2023 and 2024, when markets gained despite flatlining earnings forecasts, driven mainly by hopes for easier monetary policy.

Positive EPS Revisions Could Broaden Market Strength

Another encouraging development is the prospect of market breadth improving. While recent record highs have centered on tech giants, a broader base of companies participating in upward earnings revisions could stabilize gains and reduce reliance on a handful of major stocks.

Morgan Stanley also expects policy tailwinds to boost earnings. The weaker dollar, combined with targeted tax benefits from President Trump’s Big Beautiful Bill, may create further incentives for domestic growth and positive corporate guidance.

While risks remain, including geopolitical tensions and inflation uncertainty, improving EPS revisions offer investors a tangible metric to gauge market health.

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