(Bloomberg) -- US stocks will continue rallying after four months of gains as Federal Reserve interest rate cuts coincide with robust corporate earnings, according to Morgan Stanley’s Michael Wilson.

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The strategist, who correctly predicted a rebound from April’s selloff, said the economy was heading into an “early cycle backdrop,” where nominal earnings continue to pick up alongside a drop in borrowing costs. Moreover, rate-sensitive stocks such as small caps have underperformed this year, suggesting room for catch up, he added.

“We push back on the idea that rate cuts are already priced,” Wilson wrote in a note. “We’re respectful of the upcoming weak seasonal window, but remain buyers of dips should they come.”

The S&P 500 Index has surged to a record since April on bets that US trade tariffs won’t have as big of an economic impact as initially feared. Renewed optimism around artificial intelligence has propelled the technology heavyweights, and strategists at Evercore ISI predict the euphoria could fuel another 20% gains in the benchmark by the end of 2026.

Focus this week is on key labor market data for clues on economic growth and the Fed’s policy outlook. Swaps markets are currently pricing in an almost 90% chance of a rate reduction later this month.

Wilson warned the rally faces risks from weak seasonal trends in September as well as hotter-than-expected inflation data. However, he said any consolidation in stocks in the near term “would set up a strong finish to the year should it play out.”

Flows specialists at Goldman Sachs Group Inc. said institutional investors are positioned cautiously after selling US stocks for two straight months. Still, exposure “remains modest relative to history, which we expect will keep dips shallow barring fundamental shocks,” they wrote in a note.

--With assistance from Jan-Patrick Barnert.

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