By Julien Ponthus

(Bloomberg) -- Investors should buy into the selloff in US stocks because of the robust earnings outlook for the coming year, according to Morgan Stanley strategist Michael Wilson.

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While the S&P 500 faces pressure from the weakening labor market and tariff-related inflation that may delay Federal Reserve interest-rate cuts, investors should view any pullback as a buying opportunity, Wilson wrote in a note Monday.

“The rolling recovery has begun as evidenced by our earnings revisions breadth analysis,” Wilson wrote. “While the Fed remains on hold for now, the combination of a fading inflation impulse later this year plus softness in the labor market should foster a robust cutting cycle.”

The record breaking rally in US equities came to a halt last week, with the S&P 500 swinging from posting six consecutive all-time highs to a four session losing streak. Stocks sank Friday after data showed slowing job growth and rising unemployment, and as President Donald Trump unveiled a slew of tariffs on US trading partners.

On a brighter note, the second-quarter earnings season is proving much better than expected. S&P 500 firms are on track to post a 9.1% jump in profits, far above analysts’ projection of 2.8%, according to data compiled by Bloomberg Intelligence. The share of companies beating estimates is also the highest in four years.

Goldman Sachs Group Inc. strategist David Kostin said company executives had so far sounded confident in their ability to mitigate the impact of tariffs on profits. While pressure on revenue growth from levies should increase in the second half, there should be support for stocks from mega-cap tech earnings and fiscal policy heading into 2026, he said.

At Morgan Stanley, Wilson said AI adoption, dollar weakness and tax cuts will act as tailwinds for equities. The strategist was among the most bearish voices on US stocks until mid-2024.

--With assistance from Sagarika Jaisinghani and Henry Ren.

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