Morgan Stanley declares the three-year “rolling recession” over and a new bull market underway, dubbing it the “Rolling Recovery.” Capitulation around the 2024 election marked the bottom, ushering in classic early-cycle conditions: compressed costs ready for operating leverage, surging earnings-revision breadth, and pent-up demand in previously depressed sectors. Early proof is already visible. Q3 delivered the highest revenue beat rate in years and the strongest median EPS growth in the Russell 3000 since 2021.

Leadership is set to broaden dramatically in 2026 as the recovery rolls from mega-cap tech into the rest of the market. The key catalyst, an out of consensus view, is an accommodative “run it hot” Fed driven by lagging labor data and pro-growth policy preferences, delivering both rate cuts and balance-sheet support. This, combined with AI-driven productivity gains, pricing power, and lighter regulation/taxes, will fuel above-average earnings growth for the median stock and support small caps and laggard sectors.

The firm raises its 12-month S&P 500 target to 7,800 (from current ~6,400), implying a 22% upside, based on 22x forward EPS of $356 by 2027. The path: 2025 EPS $272 (+12%), 2026 $317 (+17%), 2027 $356 (+12%). Valuation compresses modestly but stays rich, justified by strong EPS growth and easy policy. Upgrades: small caps to overweight vs. large caps; Consumer Discretionary and Healthcare to overweight. Near-term risk: a less-dovish Fed than expected.