Morgan Stanley lifts S&P 500's annual target on hopes of earnings-driven rallies

May 13 (Reuters) - Morgan Stanley raised its annual target for the benchmark S&P 500 index .SPX on Wednesday, saying U.S. stocks have enough room to rally as companies continue to post strong earnings.

The brokerage lifted its annual target for the index to 8,000 from 7,800, with an 8% upside to the index's Tuesday close of 7,400 points.

Per-share earnings estimates for S&P 500 companies were set at $339 for 2026, a 23% jump from a year earlier, based on expectations of efficiency gains from broader AI adoption as well as improving pricing power.

"Our bullish index view is an earnings story, not a multiple expansion one," Morgan Stanley said, adding that valuations may compress modestly as expectations for near-term interest rate cuts fade.

Of the 440 S&P 500 companies that have reported first-quarter earnings up to May 8, about 83.2% have beaten analyst estimates, according to LSEG data.

The benchmark index also ended April with its biggest monthly percentage gain since November 2020, underscoring the strength of the recent rebound in U.S. equities amid the ongoing Middle East conflict.

"Over the next 12 months, we see the rolling recovery continuing to progress, driven by a strong earnings environment as positive operating leverage persists and is further enhanced by AI adoption," Morgan Stanley said.

"Resiliency in earnings data despite geopolitical risk, private credit concerns and AI disruption is supportive of our view," it added, although it sees inflation as a major threat to its thesis.

Morgan Stanley's 2027 mid-year target for the benchmark index was bumped to 8,300, while the EPS for the components were pegged at $380 for 2027 and $429 for 2028.

"Positive operating leverage, AI adoption/'run it lean,' improving pricing power and an AI capex cycle that continues to show momentum are key drivers of our constructive view on earnings" it said.

Earlier this month, HSBC and RBC also raised their S&P 500 forecasts, reflecting growing optimism on Wall Street about the outlook for U.S. equities.

In a separate note, Morgan Stanley also lifted its 2027 mid-year target for the MSCI Europe index to 2,700 from 2,600.

"Our target assumes the Strait of Hormuz reopens in the coming months, at which point we expect a resumption in broadening flows and tactical catch-up to U.S. strength," Morgan Stanley added.