The S&P 500 is on track to reach new heights in the coming year. According to Morgan Stanley’s chief stock strategist Mike Wilson, the index could hit 7,200 by mid-2026 if current trends continue.

Wilson has become more optimistic about the stock market’s performance. He bases his projection on expected strong earnings, positive cash flow trends, and a consistently high valuation multiple.

He predicts the S&P 500 could reach 7,200 based on projected earnings per share of $319 and a forward price-to-earnings (P/E) multiple of 22.5. This outlook reflects strong earnings growth across key sectors.

Wilson says improvements in corporate earnings have come faster than expected. He credits several factors including rising adoption of artificial intelligence, a weaker U.S. dollar, and tax savings from earlier policies.

He also believes demand is rebounding in multiple sectors, especially those that were affected by economic slowdowns over the past three years. These include areas that faced what he calls “rolling earnings recessions.”

As companies experience easier year-over-year comparisons, earnings could appear stronger. This could drive more investor interest and upward pressure on stock prices, especially in industrial sectors.

Private-sector wage growth has slowed in recent years, a trend that is being accelerated by automation and AI. Wilson suggests that this trend may help companies expand profit margins in the future.

He also highlights the increased likelihood of interest rate cuts by the Federal Reserve in early 2026. This expected monetary easing could be beneficial for equities, especially if earnings continue to grow.

Wilson believes that when earnings are rising and interest rates are falling, stock valuations tend to increase. Historically, in 90% of such cases, market multiples have expanded, he says.

While Wilson is confident in his long-term outlook, he acknowledges some short-term risks. These include elevated Treasury yields, inflation caused by tariffs, and typical seasonal weaknesses in the market.

He advises investors to stay cautious in the near term but expects any pullbacks to be limited. Wilson recommends buying during short-term market dips rather than exiting positions.

Wilson sees tariffs as a potential challenge, particularly for consumer goods companies. He suggests that investors should hold fewer stocks in this segment due to inflation and pricing pressure.

However, he notes that broader policy uncertainty has declined since April, which has contributed to stronger investor sentiment and a market rebound in recent months.

His top investment pick remains the industrial sector. Despite already being the best-performing group in the S&P 500 in 2025, he believes this sector still has room for growth.

Industrials are showing stable earnings revisions, high capacity usage, and increasing loan activity. These trends signal strong performance ahead, according to Wilson.

He highlights specific companies expected to benefit from domestic infrastructure and technology investment. These include Rockwell Automation, Eaton, Trane Technologies, and Johnson Controls International.

Commercial and industrial loans have now exceeded $2.8 trillion — their highest level since 2020. This reflects strong business activity and supports Wilson’s bullish view on industrial stocks.

Overall, Wilson’s forecast points to a strong year for U.S. equities if earnings remain solid and policy conditions improve. He advises investors to remain patient and take advantage of any market corrections.

Despite challenges ahead, the long-term outlook remains bright, with AI, infrastructure spending, and lower interest rates potentially driving the next leg of the market’s growth.