The S&P 500 is echoing its 2021 setup, according to Morgan Stanley

Morgan Stanley says the S&P 500 is echoing its early-to-mid 2021 setup, when investors rotated toward higher-quality megacap stocks after an early-cycle rebound. The bank argues that AI adoption is becoming a key driver of margin expansion and forecast upgrades, especially for companies with strong pricing power and AI at the core of the business. High-quality megacaps now account for about 42% of the index, while weaker, more levered stocks make up just under one-third. Morgan Stanley thinks the quality rotation can support the index even if near-term risks from Iran-related escalation or a Fed rate hike pressure the market. The note is broadly constructive on quality leadership and suggests the rally may broaden beyond a narrow group of stocks.