Morgan Stanley sees mild US recession potentially bullish for S&P 500

Concerns about a US recession have eased recently. However, according to Morgan Stanley strategists, a downturn in the country's economy is still possible. A potential recession within the next 12 months would likely be mild and could support the stock market.

A moderate economic downturn could create conditions for growth in US stock indices because it would reset corporate earnings expectations and prompt the Federal Reserve to ease its policy. Currently, Morgan Stanley projects seven Fed rate cuts in 2026. The bank predicts that the US stock market will bottom out and begin to recover in early 2026.

The most likely manifestation of such a mild recession would be a stock market decline similar to the April sell-off, which could occur this summer or fall. This scenario would not provide the same potential for growth as an optimistic forecast without a recession. However, according to Morgan Stanley, the S&P 500 will reach 6,000 points within the next 12 months.

The bank believes that small-cap companies and lower quality stocks will benefit the most in the event of a moderate recession. These firms tend to receive major support from interest rate cuts.