Morgan Stanley reaffirmed its optimistic outlook on U.S. equities on Monday, pointing to robust earnings momentum. The firm anticipates a slight pullback in the third quarter, which could present a buying opportunity.

In a recent note, the Wall Street brokerage leaned towards its bullish scenario, projecting the benchmark S&P 500 could reach 7,200 points by mid-year. Previously, in May, they estimated the index would hit 6,500 by the second quarter of 2026.

“With earnings on solid ground heading into next year and the Federal Reserve nearing rate cuts, valuations should remain stable around current levels (approximately 22x) as we look at the next 12 months,” stated Morgan Stanley equity strategists led by Michael Wilson.

However, the firm noted that rising Treasury yields—particularly the 10-year note surpassing 4.5%—could heighten rate sensitivity for equities, potentially impacting the performance of rate-sensitive stocks like small caps.

Additionally, Morgan Stanley expects tariff-induced cost pressures to emerge later this year, which could squeeze company margins and elevate inflation, prompting shifts in the Federal Reserve’s rate cut expectations.

The brokerage also indicated that seasonal trends might affect stocks from mid-July through August. Nevertheless, they plan to buy the dips, viewing the associated risks as likely temporary, leading only to mild consolidation.

In a related note, Jefferies raised its year-end target for the S&P 500 to 5,600, up from a previous forecast of 5,300, as reported on Friday.