The good news is that for every recession there’s a recovery, and Wilson continues to call for a bullish “rolling recovery,” stating: “We’re buyers of dips into year-end.” He wrote that the bank is standing by its S&P 500 bull case of 7200 through the middle of next year.
In Morgan Stanley’s outlook for 2025, Wilson notes, the bank highlighted that DOGE might lead to a “government labor cycle” and against that backdrop, “we believe the DOGE layoffs marked the end of the rolling recession that likely began 3 years prior.” He cited the bank’s projects that job cuts over the period lasting from 2022-2025 were roughly 30% higher on average than during the last economic expansion that lasted from 2010 to 2019.
The market reaction to these layoffs was swift: stocks, especially small caps, fell sharply into April as massive government-sector job cuts—some 280,000 positions announced in February and March alone—drove recessionary levels of household and corporate confidence.
Wilson acknowledges ongoing risks from lagging labor indicators, but contends that the worst of the economic pain is now behind. Payroll revisions for the year ending March 2025 showed a total downward adjustment of 911,000 jobs—much larger than expected—with most of the damage concentrated in the private sector. (Wilson noted it was the second worst net payroll revision for any two-month period in U.S. history.)
Given that consumer confidence was also stuck in recessionary gloom, Wilson said it “makes sense” that lagging jobs data would come in weaker on the back of this, saying it’s “already troughed.” Still, he argues that the data suggests that “job cuts peaked in the aggregate in March of this year, and it’s unlikely we will revisit such an extreme again this fall.”
As more evidence of the rolling recession, Wilson cited negative median stock earnings growth and small-cap growth in earnings per share (EPS) from 2022 through 2024. Both spent years in negative territory, only to rebound sharply in early 2025. Exhibit data from the note show Russell 3000 median EPS growth transitioning into positive territory for the first time in years by mid-2025, a dynamic only seen during early-cycle recoveries.
Morgan Stanley’s forecast is buoyed by a historic rebound in “earnings revisions breadth,” a top-down measure that looks at the net flow of upward versus downward adjustments across the market. The three-month change hit +35%, another figure consistent with the start of new bull markets. Wilson argues that with corporate earnings guidance now inflecting higher, job cuts should slow, and further labor market weakness—if it emerges—will be met by aggressive Federal Reserve rate cuts, mitigating the risk of a renewed downturn.
The report also calls attention to policy risks. The Fed’s reaction function remains critical, as markets increasingly expect a rapid easing cycle. If government payroll softness intensifies in the fall, Morgan Stanley expects an even more dovish policy stance from the central bank, which should ultimately support equities.
While some market participants fear another bout of labor market weakness could trigger a fresh recession, Wilson disagrees. He doesn’t anticipate a sharp rise in unemployment “unless we were to see another exogenous shock to the economy.” Of course, history has a way of throwing up exogenous shocks when you least expect it.
