Morgan Stanley trading desk, dubbed the "most accurate in the past two years," turns bullish

J.P. Morgan's Institutional Market Intelligence Trading Desk (Market Intel Desk), renowned for its precise capture of market turning points over the past two years, has once again issued an important signal—shifting from "tactically cautious/neutral" to "tactically bullish." This change comes right before a critical window of intensive macro and micro data releases, drawing widespread market attention.

The latest report shows that the key basis for this stance shift revolves around five pillars: outperforming macro fundamentals, continued consumer resilience, low earnings expectations, stabilizing bond yields, and technical improvement. At the same time, the desk has adjusted its previous long Nasdaq 100 (NDX) / short Russell 2000 (RTY) pair trade, now preferring to express its views through derivatives instruments.

Notably, the last time the desk adjusted its position was August 31, when it turned from bullish to "tactically cautious/neutral." Subsequently, the S&P 500 remained flat, while the recommended long NDX/short RTY pair trade rose over 8% cumulatively, with U.S. equities as a whole outperforming other major markets. This renewed "bullish turn" indicates that the team now sees the short-term market risk-reward profile as having significantly improved.

Precision Track Record, "Bullish" Signal Carries Weight

Over the past two years, the J.P. Morgan Institutional Market Intel Trading Desk's calls at key moments have been validated by market trends, earning it high reference value among institutional investors.

The most recent stance switch happened on August 31, when the desk downgraded its view from bullish to "tactically cautious/neutral," citing reasons including Federal Reserve policy uncertainty, positioning structure, widening credit spreads, seasonal negative effects, and momentum factor retracement pressure. At that time, the team recommended focusing positions on the long NDX, short RTY pair trade.

The outcome confirmed this judgment: since that adjustment, the SPX has remained nearly flat, while the long NDX/short RTY pair has gained over 8% cumulatively. U.S. equities as a whole have continued to outperform other major markets. This background lends greater market credibility to the latest "bullish" signal.

Five Reasons Supporting the "Bullish" Logic

In its latest report, the trading desk systematically explained the five core reasons for shifting to a bullish outlook:

First, macro fundamentals are outperforming expectations. The latest flash PMI data shows economic growth stronger than market forecasts, likely supporting employment, consumption, and corporate earnings. The team emphasized that S&P 500 earnings per share (EPS) growth is tied to nominal GDP rather than real GDP, so the current economic level suggests market estimates for earnings may be too conservative.

Second, consumer resilience continues to exceed expectations. Although the market questions how consumers can withstand inflation and high-interest rates, actual spending data has consistently outperformed, challenging the "K-shaped recovery" hypothesis. Meanwhile, labor market improvement is further supporting consumption performance.

Third, earning estimates have room for upward revision. EPS growth for Q2 2026 is as high as 52%, with current Q3 forecasts at about 29%. The team believes this estimate is likely too low— all 11 sectors in the S&P 500 are expected to post positive revenue and EPS growth.

Fourth, bond yields may stabilize. J.P. Morgan's rates strategist Jay Barry expects the 10-year U.S. Treasury yield to edge up from 5.18% to 5.20% in the next month before retreating to 5.05% by year-end. Lower yield volatility will help relieve some of the downside pressure on equities.

Fifth, technicals continue to improve. Seasonal factors are turning favorable, retail investor participation is expected to rise, and overall positioning is relatively light, giving upside room for equities.

A Dense Array of Short-Term Catalysts—Focus on the Data Window

The trading desk also mapped out key imminent catalysts that could trigger market volatility:

On inflation data, PCE and ISM Manufacturing data will be released this week. The ISM Manufacturing price paid subindex is a critical lead inflation gauge, while the services price paid subindex is even more influential. If data comes in hot, it may cause a bearish flattening of the yield curve. CPI data will be published on October 14, and the next Federal Reserve meeting is set for October 28.

Labor market: Improving employment data strengthens the growth and consumption narrative, but under the current market pricing framework, the "good news is bad news" logic could return—strong jobs numbers may drive the market to price in more rate hikes.

AI theme: The launch of META's Muse injects new momentum into the theme. This week, the OpenAI Developer Day and Micron Technology (MU) earnings will be important events to watch.

Strategy Adjustment: Tech Remains the Core Long, Pair Trade Shifts to Derivatives

On the level of specific operations, the trading desk is making clear adjustments to its positioning strategy:

The tech sector remains the core long, but it no longer recommends shorting RTY as a hedge. If oil prices and yields drop further, they may trigger a short squeeze in RTY. The team now suggests using derivatives instruments to express this short squeeze exposure.

Within tech, the team expects structural broadening, with semiconductors and "Mag 7" constituents likely to outperform the overall tech space. While consensus is not yet established for software, attention and sentiment are slowly building, making it a non-consensus bullish opportunity. The viability of the AI theme continues to be recognized, and the team recommends maintaining exposure.

Outside of tech, the team thinks that for cyclical sectors to stage a lasting rebound, a bullish steepening of the yield curve is required. In non-AI segments, bank stocks are favored due to the benefits of economic reopening, potential yield curve steepening, and improved capital market prospects.

For rate-sensitive sectors—real estate, telecom, and utilities—the team believes these may join short squeeze rallies but are likely to underperform the S&P 500 in the medium term (except AI-related names).

The biggest potential catalyst: according to the team, if the U.S. and Iran reach an agreement, it would drive a strong rally in European equities and the RTY. Additionally, the post-COVID recovery theme (airlines, autos, cruise lines, discretionary goods, hotels, etc.) is also worth attention, with options as the preferred tool for exposure.

Long-Term Risks Remain, "Bullish Turn" Is Not Unconditional Optimism

Although the short-term stance is bullish, the trading desk still clearly lists several lingering medium- to long-term concerns:

First, is the bond market underestimating the endpoint of this Federal Reserve rate hike cycle? If the economy expands at the 5% real growth shown in the flash PMI, inflation keeps rising, and ongoing jobs gains drive up wage inflation, an even more aggressive tightening path may be required.

Second, will the market start to price in a 50-basis point Fed rate hike at any given meeting?

Third, when will agricultural inflation feed through to core inflation?

Fourth, besides tech, are there other sustainable structural opportunities?

The answers to these questions will largely determine whether this "bullish turn" can evolve into a more sustained upward trend, or if it will remain a tactical, short-lived rebound.