Morgan Stanley is delivering a decisive message to investors: the bull market is broadening, and the next big move isn’t in mega-cap tech. While Chief Strategist Mike Wilson remains constructive on the “AI enabler” complex, he is signaling a major transition toward under-owned small-cap sectors.
In a research note shared with TheStreet, Wilson identifies a “pause that refreshes” for big tech, creating a clear opening for the Russell 2000 to lead. As the U.S. economic “gas pedal” stays down with a 2.6% GDP target for 2026, the shift into small-caps has become the firm’s most high-conviction roadmap for the year ahead.
Morgan Stanley’s Wilson thinks a “run it hot” economy will continue supporting equity prices this year because:
- The economic gas pedal is down: GDP is expected to grow 2.6% in 2026, according to Goldman Sachs. Longtime Wall Street fund manager Louis Navellier sees a path to 5% GDP growth this year.
- Market breadth is improving: Expanding beyond big-cap tech reflects widespread tailwinds across many sectors. Positive breadth is historically a good sign for the stock market, according to Carson Group Strategist Ryan Detrick.
- Earnings momentum remains strong:FactSet reports fourth-quarter S&P 500 earnings growth of 13%, with 59% of companies reporting results so far. That puts us on pace for a fifth consecutive quarter of double-digit earnings growth for the benchmark.
- Tech valuations are resetting: Mega-cap technology revenue growth expectations of 18% are a multi-decade high, yet forward P/E ratios have dropped to 27, just the 12th percentile since early 2003.
Stocks hit the reset button in 2026
Lower interest rates are particularly good news for small-cap stocks, which benefit most from easier credit and lower interest expense, as well as top-line demand tailwinds from GDP growth.
Cl / GETTY IMAGES.
Unsurprisingly, the removal of Chairman Jerome Powell, who took fire for holding the Fed Funds Rate neutral for most of 2025, and the nomination of Kevin Warsh, who may be more dovish on monetary policy, have helped drive a solid rally in small-cap stocks this year.
Fast fact: The iShares Russell 2000 ETF (IWM) manages $77.3 billion, while Vanguard’s Russell 2000 ETF (VTWO) manages $14.3 billion.
The iShares Russell 2000 ETF is up 17% from its November low, including an 8.8% return in 2026 that is significantly better than the tech-heavy S&P 500’s 1.9% return.
Morgan Stanley’s Wilson expects that trend to continue.
“The S&P Small Cap Index is seeing its best [earnings] revisions breadth since August (+7%) and its strongest EPS growth since 2022 (+10%). Further, it just made a new relative high versus large caps last week. These developments are supportive of our small-cap relative preference amid a return of positive operating leverage.”
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Compared to the S&P 500, the IWM is weighted far less toward technology stocks and much more toward previously less-loved sectors like industrials and health care. For instance, information technology accounts for 14.1% of the Russell 2000 but 33.4% of the S&P 500 ETF (SPY).
Russell 2000 ETF sector weightings (2/9/2026)
- Industrials: 19.2%
- Financials: 17.4%
- Health care: 17%
- Technology: 14.1%
- Consumer Discretionary: 8.8%
Source: BlackRock, iShares Russell 2000 ETF
Morgan Stanley analyst says AI rally isn’t over
Wilson is a fan of small-cap stocks, but he also thinks that big-cap technology, and specifically AI stocks, could still march higher in 2026.
“Fundamental tailwinds remain in place for the AI enabler complex, and the AI adopter trade remains underappreciated, in our view,” wrote Wilson in a research note shared with TheStreet.
One of the major catalysts that could cause Magnificent 7 stocks to rally again is that forward revenue growth estimates on Wall Street suggest 18% top-line growth that would support earnings upside, says Wilson.
Related: Bank of America sends quiet warning to stock market investors
“The Information Technology sector is reporting the highest (year-over-year) revenue growth rate of all eleven sectors at 20.4%,” according to FactSet‘s S&P 500 data.
FactSet reports that the average Wall Street analyst expects S&P 500 information technology stocks to report 37.7% year-over-year earnings growth in the first quarter and 30.4% year-over-year growth in 2026, largely driven by big-cap technology stocks.
Wilson also thinks big-cap technology stocks’ results this year will benefit from ongoing weakness in the U.S. Dollar, given that those companies have substantial overseas revenue streams.
“The U.S. Dollar Index is down 9% Y/Y, a relative tailwind for mega cap Tech given high foreign sales exposure,” said Wilson. “The Nasdaq 100, for instance, has ~50% foreign revenue exposure.”
Todd Campbell owns shares in the iShares Russell 2000 ETF (IWM).
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