S&P 500 Second-Half Outlook: Earnings Revisions, Fed Cuts & Key Risks

Publication Date: 2025-07-01 05:40:52

Morgan Stanley strategist Michael Wilson anticipates an extended rally for the S&P 500 (SPY) into the latter half of 2025. This optimistic outlook is primarily driven by improving earnings fundamentals and the increasing likelihood of Federal Reserve interest rate cuts. This analysis provides a detailed breakdown of these factors and highlights actionable insights for investors.

Fundamentals Driving the Rally

Earnings Revision Breadth Is Improving

One of the key indicators supporting the S&P 500's continued ascent is the significant improvement in earnings revision breadth. This metric, which tracks the proportion of analysts raising versus lowering their earnings estimates, has climbed to -5% from a low of -25% in April.

Current Level: Revision breadth has improved to -5%.
Significance: Historically, improving revision breadth often precedes actual earnings per share (EPS) surprises. When analysts begin to revise forecasts upwards, it typically signals a positive shift in corporate performance, which in turn supports stock prices.
Historical Context: Similar inflections in earnings revision breadth observed in 2016 and 2020 were followed by multi-month market rallies, suggesting a strong correlation between this indicator and market performance.

Pro tip: To stay ahead of estimate shifts, investors can schedule alerts via the Earnings Calendar API to monitor actual versus consensus EPS surprises for each quarter.

Monetary Easing on the Horizon

Markets Price In Aggressive Fed Cuts

The prospect of Federal Reserve interest rate cuts is another significant tailwind for the S&P 500. Markets are increasingly pricing in aggressive easing, with Morgan Stanley forecasting seven rate cuts for 2026.

Morgan Stanley View: Seven rate cuts are projected for 2026.
Market Reaction: The anticipation of monetary easing has already led to outperformance in long-duration assets, as investors front-run the expected policy shift.
Valuation Impact: Lower discount rates, a direct consequence of rate cuts, boost the present value of future earnings. This effect is particularly beneficial for growth-oriented sectors, where a larger proportion of value is derived from future cash flows.

Actionable insight: Utilize the Economics Calendar API to automate alerts on Fed meeting minutes and rate-decision dates, enabling timely responses to policy changes.

Diminished Geopolitical & Policy Risks

Several external factors that previously posed risks to market stability have also diminished, contributing to a more favorable investment environment.

Oil Prices: A 14% decline in oil prices since June 19 has alleviated concerns regarding inflation and potential recessionary pressures, providing relief to both consumers and businesses.
Legislative Wins: The removal of Section 899, a significant legislative hurdle, is expected to ease foreign investment, potentially attracting more capital into the U.S. market.
Leadership Broadening: With rate-risk muted, the market is expected to see a broadening of leadership. Initially, large-cap quality names are anticipated to outperform, followed by an expansion of leadership across various sectors as confidence builds.

Actionable Insights & Next Steps

Investors can leverage financial data tools to capitalize on these trends:

Automate Earnings Alerts: Configure alerts for upcoming EPS release dates and consensus estimates. Flag any surprises beyond ±5% to identify significant deviations from expectations.
Monitor Rate-Decision Dates: Subscribe to the Economics Calendar for Fed announcements. Build triggers to react when actual policy decisions deviate from market expectations, allowing for agile portfolio adjustments.
Gauge Sector Rotation: Track sector-level forward Price-to-Earnings (P/E) ratios via the Ratios TTM API to identify sectors where valuation support is strongest and potential for rotation exists.

Conclusion

The combination of improving earnings revision breadth, anticipated Federal Reserve rate cuts, and a reduction in geopolitical risks sets a strong foundation for further S&P 500 gains in the second half of 2025. By utilizing real-time market intelligence tools, investors can effectively monitor these key drivers and make informed decisions.