The Stock Market’s Secret Weapon Powering Record Highs#

On July 1, 2025, Morgan Stanley reported that the U.S. stock market’s recovery from its April low is gaining momentum, driven by a significant improvement in earnings revisions breadth (ERB), the net proportion of analysts raising versus lowering earnings estimates. With trade concerns and geopolitical tensions easing, major indexes hit new highs on June 30, 2025, and analysts project sustained growth, with the S&P 500 expected to reach 6,500 by year-end.

Market Performance (June 30, 2025, 11:50 a.m. ET)#

S&P 500: 6,190.75, up 0.23%
Dow Jones Industrial Average: 44,027.87, up 0.37% (+160.76 points)
Nasdaq Composite: 20,338.95, up 0.25%

Key Driver: Earnings Revisions Breadth#

Improvement Trend: ERB has rebounded from -25% in April to -5% by June, with June’s figure improving from -10%. This recovery, driven by more positive analyst revisions rather than fewer negative ones, signals stronger forward equity returns, historically yielding 12% S&P 500 gains over 12 months compared to 8% for fewer negative revisions.
Earnings Outlook: Bloomberg Intelligence data shows earnings-per-share (EPS) growth estimates fell from 11.4% to 6.9% earlier in 2025, largely due to perceived weakness in the Magnificent Seven stocks (e.g., Microsoft, Apple). However, recent positive revisions, particularly post-Microsoft’s April earnings, indicate earnings growth outpacing broader economic growth.
Morgan Stanley’s Forecast: The bank projects the S&P 500 at 6,500 by year-end, a 5% gain from current levels, driven by bullish EPS revisions, a weaker U.S. dollar, and tax incentives from the “One Big Beautiful Bill Act.”

Supporting Factors#

Easing Headwinds: Concerns over tariffs and AI spending slowdowns have diminished, boosting market confidence. The resolution of a 12-day Iran-Israel conflict and robust summer fuel demand further support economic stability.
Policy Environment: The “One Big Beautiful Bill Act,” extending 2017 tax cuts and introducing new fiscal measures, is expected to encourage positive earnings outlooks. A weaker dollar, influenced by Trump’s push for lower Federal Reserve rates (0.5–1.75%), supports export-driven sectors and market broadening.
Monetary Policy Shift: Unlike 2023–2024, when markets rose despite stagnant EPS revisions due to expected monetary easing, 2025’s growth is driven by improving corporate earnings and monetary policy expectations, with lower back-end rates and term premiums.

Implications and Outlook#

Market Broadening: Positive EPS revisions are expanding beyond the Magnificent Seven, supporting a more diversified rally across sectors like defense, industrials, and energy, though clean energy faces challenges from new taxes.
Risks: Potential Senate delays in passing the tax bill, rising U.S. debt concerns (CBO estimates 2.4–3.3 trillion deficit impact), and tariff-related trade war fears could disrupt the bullish trajectory.
Investor Opportunities: The improving ERB and supportive policy environment suggest continued upside for equities, particularly in sectors benefiting from tax incentives and a weaker dollar.

Conclusion#

The U.S. stock market’s record highs are powered by a recovering earnings revisions breadth, with Morgan Stanley forecasting a 5% S&P 500 increase to 6,500 by year-end 2025. Positive analyst revisions, a weaker dollar, and tax incentives from the “One Big Beautiful Bill Act” are key catalysts, despite risks from U.S. debt and trade policy uncertainties. Investors should monitor EPS trends and Senate developments for strategic positioning.