Morgan Stanley chief equity analyst Mike Wilson has been saying for years the U.S. was in a “rolling recession” when economists were seeing nothing but GDP growth. Since April, he's been declaring a “rolling recovery,” with the early stages of an economic boom working its way through various sectors in the economy.

His optimism has been borne out by an economy that has surprised to the upside consistently throughout 2025, with skeptics warning the impact of tariffs and wider macroeconomic uncertainty would surely show up soon in the data. Third-quarter earnings are giving Wilson a little bit of pause, he wrote on Monday: It's not that he thinks his thesis is wrong, he's just noting investors are jittery as they digest the state of play. “This remains an out-of-consensus view from our conversations.”

“Markets remain choppy,” Wilson wrote on Monday, adding “unresolved risks” are weighing heavily on traders' minds. Much of his discussion centered on the fact that most companies simply aren't raising guidance much; the outlook remains ratcheted down to where it settled after April's “Liberation Day” tariff announcement. He also discussed the midweek swoon on Oct. 16 as midsize banks disclosed much cloudier earnings than their Wall Street counterparts, prompting JPMorgan CEO Jamie Dimon to describe a “cockroach” moment: “When you see one cockroach, there are probably more.”

Wilson maintains the U.S. economy is poised for a “rolling recovery” with an early-cycle rebound playing out over the next six to 12 months. He wrote on Monday his thesis remains intact despite current volatility and tepid investor sentiment. If trade tensions de-escalate and earnings per share (EPS) revisions stabilize, combined with improved liquidity, that could set the stage for a powerful upswing in equities, he argued. Policy developments, including anticipated trade negotiations at the upcoming APEC summit, are seen as potential catalysts. However, Wilson added, he's on guard for a “further near-term correction,” in other words, a sickening lurch downward in stocks, before declaring “all clear” for stocks. He cited recent credit market stress, funding volatility, and renewed scrutiny of regional banks after surprise credit losses at several institutions.

Mixed signals: Strong forecasts meet shaky earnings

Earnings season has just begun, with a particular focus on the financial sector. Early results show total EPS surprises are solid, averaging almost 6%, above the historical norm. Yet the market's reaction has been lukewarm, with stock prices showing muted-to-negative responses even after earnings beats—an unusual pattern that many chalk up to persistent macro uncertainty. In short, companies are beating expectations, but investors appear far from convinced, especially in economically sensitive sectors like regional banks and capital goods, where underlying risks linger.

While top analysts are painting a picture of imminent recovery, their view is notably “out of consensus” compared with the broader investment community. The backdrop is a historically elevated level of stock-specific risk. Dispersion in earnings revisions is also rising, pointing to a strong opportunity for skilled stock pickers, but also underlining the level of uncertainty that permeates the current market.

Investor anxiety: Volatility, credit fears, and valuations

The mood in the broader market remains cautious. Last week, the VIX—Wall Street's fear gauge—spiked to its highest level since April before easing, amid new trade policy uncertainties. Index-level measures, such as the S&P 500's earnings revisions breadth, have retreated from earlier highs but remain in line with typical seasonal patterns. Regression analyses suggest the S&P 500 is fairly valued at current earnings levels; nonetheless, any further pullback in earnings momentum could weigh heavily on equities unless the much-discussed next “l(fā)eg higher” materializes.

A key concern among investors is the beleaguered position of regional banks, which have seen their stock prices underperform after disclosures of unexpected credit charges. This, in turn, has led to worries that problems in one of the most economically sensitive corners of the market could either spread or require more internal reviews, keeping financial stocks in limbo until there is greater clarity. Year to date, both regional banks and alternative asset manager stocks remain weak performers, and more broadly, large swaths of the market are still trapped in a risk-off mindset.

The path forward: Opportunities and risks

Despite these headline risks, Wilson is not retreating from his bullish thesis. His team highlighted notable pockets of resilience, such as strong demand in cruise bookings into 2027, upticks in advertising revenue, continued AI-driven growth in tech, healthier than expected corporate travel, and an encouraging, if uneven, outlook for consumer spending. Wilson also notes companies may have an easier time clearing expectations as the year closes because, while it's “atypical” they haven't raised guidance much in recent earnings, it was already lowered in April and has held flat since. Therefore, it may be a low bar to clear.

Nevertheless, for investors to share in the optimism, several hurdles must be cleared: confirmed trade de-escalation, stabilization of earnings revisions, and sustained improvements in market liquidity. Until then, the tension between analyst optimism and investor skepticism is set to define the tone of markets heading into 2026.

For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing.