As the financial report season begins, Morgan Stanley is actively optimistic: profit growth will resist the disturbance of the Middle East war, and the U.S. stock market correction is in its final stage.

Morgan Stanley strategists say that the accelerating profits of companies are protecting the S&P 500 index from a larger decline, while also masking a broader market correction in the US. Led by Michael Wilson, the strategist team pointed out that strong profit performance and continued economic recovery are the reasons why the S&P 500 index has not dropped by more than 10% since hitting its historical high in January. However, beneath the surface, they believe there is evidence to suggest that the market is in the "final stage" of a correction. Strategists believe that there are better indicators to evaluate the extent of the US market's pullback the expected earnings per share (EPS) of the S&P 500 index has dropped by 18% from its peak in October of last year, and over half of the stocks in the Russell 3000 index have fallen by at least 20%. Wilson stated, "We see this as not being complacent, but a market that has appropriately and accurately priced in risks at the index and individual stock levels." He added that risks from private credit and artificial intelligence (AI) impacts have already been absorbed by the market. Meanwhile, Morgan Stanley strategists continue to favor cyclical sectors, including financials, industrials, and consumer discretionary sectors, as their profits are strong and valuations have compressed. They also believe that there are opportunities in high-quality growth stocks, such as AI cloud service providers, as market sentiment and valuations in related sectors have adjusted to more attractive levels. Strategists suggest that investors should be prepared to increase their risk exposure, even as uncertainties remain due to the Middle East conflict affecting energy supply and the path of monetary policy. The team wrote, "The final stages of an adjustment are often not easy, and the market may need to retest lows, especially if interest rates or bond volatility rise again." As tensions rise in the Middle East, investors are concerned about the possibility of the situation escalating further, leading to a potential drop in the S&P 500 index once again as of writing, S&P 500 index futures were down 0.62%. Expectations for corporate profit growth are high among Wall Street analysts, despite the risks. Analysts generally expect first-quarter earnings for the S&P 500 index to increase by about 14% year-on-year, with the potential for six consecutive quarters of double-digit growth, and the full-year profit growth expectations for 2026 have been revised from around 15% at the end of February to over 19%. Similar to Morgan Stanley, several institutions and market practitioners have expressed optimism about profit growth (especially in the information technology industry) supporting the outlook for the US market. Senior strategist Ed Yardeni stated that tech stocks have become attractive again for investors willing to make long-term investments after falling from their historical highs last year. The uncertainty of AI's impact on software businesses, coupled with the effects of the Middle East conflict, has led to a 13% decline in information technology stocks since hitting historical highs in October. However, profit expectations in the industry have accelerated during this period, with a price-earnings ratio of 20.6, almost on par with the S&P 500 index's ratio of 19.6. Yardeni wrote in a client report, "This is an attractive entry point for investors with longer investment horizons." The Global Banking Institute at Fidelity Bank has also upgraded its rating on the information technology sector from "neutral" to "positive", citing the sector's underperformance relative to the S&P 500 index and the broad application of AI supporting its solid growth prospects. The bank's global investment strategy team noted that while valuations, capital spending, and the disruptive impact of AI are concerning, the fundamentals of the information technology industry remain strong. They used double-digit profit growth in the fourth quarter of last year as an example. Strategists also pointed out that the information technology industry has outperformed the S&P 500 index since the outbreak of the Middle East conflict, highlighting the sector's long-term quality characteristics. Strategists stated, "The gradual decline in recent months has brought valuations to more attractive levels, and we believe the pessimism surrounding this industry may have gone too far." In a March report, Goldman Sachs noted that there is still room for the US stock market to rise, with the S&P 500 index expected to reach 7,600 points by the end of 2026 due to continued corporate profit expansion and moderate economic growth. This forecast is based on a deep analysis of earnings prospects for component companies the bank further projected that earnings per share for S&P 500 component stocks would increase to around $309 by 2026 and further rise to around $342 by 2027, with annual growth rates of approximately 12% and 10%, respectively. Goldman Sachs's outlook on the year-end target for the S&P 500 index reflects the market's confidence that corporate profit growth will continue to expand even if interest rates remain high and financial conditions slightly tighten. The bank added that tech companies remain the core engine of profit growth in the US market, with the information technology industry expected to contribute the most incremental profit to the S&P 500 index in the coming years earnings per share in the industry are projected to increase from around $70 in 2025 to $92 in 2026, and further rise to $109 in 2027. Other key industries will also make significant contributions, including finance, healthcare, and communication services sectors. However, compared to the tech sector, the profit growth of these industries is expected to be more moderate. Investors will closely monitor whether the ongoing Middle East conflict and the resulting spike in energy costs pose a significant threat to this optimistic outlook for corporate profit growth. The war in the Middle East has led to a sharp increase in oil prices, with US inflation data in March seeing the largest increase in nearly four years and consumer confidence continuing to weaken. Meanwhile, the MSCI Global Index and the S&P 500 Index have just experienced their worst quarter since 2022. Institutions generally believe that forward-looking guidance from companies and management's comments will be more critical than the reported performance data. Negotiations between the US and Iran ended fruitlessly over the weekend, and current oil prices remain significantly higher than before the outbreak of the Middle East conflict. Therefore, another focus for investors is how large US publicly traded companies will view the chain effects of the soaring oil prices rising oil prices will inevitably increase costs for a range of companies and squeeze consumer spending. Additionally, persistently high energy costs may exacerbate inflation pressures, undermining expectations for a Fed rate cut. In a scenario where interest rates remain high, it will undoubtedly not bode well for corporate profit growth. The next stage of the US stock market's rise does not fully depend on the "US-Iran ceasefire", but rather on whether earnings reports can prove that the war has not eroded profits. Brent Schutte, Chief Investment Officer of Northwestern Mutual Wealth Management Company, stated, "You will see whether these future earnings expectations can stand or will be revised downward. Hence, the guidance provided by companies is extremely important." The upcoming earnings reports from large Wall Street commercial banks will offer a key window for investors to observe the health of the economy, as a strong economy is usually an important foundation for corporate profit growth. Goldman Sachs will report its earnings on Monday. JPMorgan Chase will release its earnings on Tuesday, with Bank of America and Citigroup also announcing their results on the same day. Other banks will release their financial reports later next week. Garrett Melson, Portfolio Strategy Analyst at Natixis Investment Managers Solutions, emphasized the importance of these large commercial banks' latest comments on consumer spending behavior and the impact of oil prices on consumer budgets. He said, "The consumption patterns they observe will be a key factor in the markets' judgment on how substantial the economic slowdown risks are from a consumption perspective."