AI Powerhouses Or Small-Cap Rebound? ETFs To Watch As Morgan Stanley Eyes S&P 500 At 7,800

Author: Chandrima Sanyal | November 19, 2025 03:38pm

The S&P 500 may have stumbled into November, but Morgan Stanley is looking well past the noise. The bank has raised its year-end 2026 forecast for the index to 7,800, an upside of 18% from current levels, citing stronger earnings and a productivity lift from accelerating AI adoption.

Recently, UBS echoed a bullish tone, expecting the S&P 500 to reach 7,500 by the end of 2025, powered by resilient tech profits.

• XLK has seen steady growth this year. Check its prices.

Reuters reports that Morgan Stanley sees the market entering a two-speed rally: the mega-cap tech group is set to continue leading the AI boom, while small caps, long stuck in neutral, could outperform as the Fed cuts rates and business confidence rebounds.

That split creates a rare ETF setup.

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AI Track: Mega-Cap ETFs Positioned To Outperform

The thesis from Morgan Stanley is based on an AI-driven earnings cycle, which places tech-heavy ETFs directly in the slipstream.

Technology Select Sector SPDR Fund (NYSE:XLK) delivers concentrated exposure to Apple, Inc (NASDAQ:AAPL) and Microsoft Corp (NASDAQ:MSFT)–the core of the AI productivity trade.

Vanguard Information Technology Index Fund ETF (NYSE:VGT) adds broader tech depth, including chipmakers central to AI infrastructure.

Invesco QQQ Trust (NASDAQ:QQQ) remains the cleanest play on Nasdaq 100 leaders that are still benefiting from cloud, data, and automation demand.

These funds would be the main beneficiaries of the surge in capex that Morgan Stanley expects, but are the most sensitive if AI valuations come under pressure.

Small-Cap Track: ETFs Ready For The Fed-Cut Liftoff

Morgan Stanley also expects small caps to outperform large caps. This view is supported by a Bank of America survey, which found that 74% of small- and mid-sized U.S. businesses expect higher revenues in 2026 and nearly 60% plan expansion as supply chains begin to stabilize and inflation cools.

That places the emphasis on:

• iShares Russell 2000 ETF (NYSE:IWM), the broadest small-cap benchmark
• iShares Core S&P Small-Cap ETF (NYSE:IJR), a higher quality slice of profitable small-cap firms
• ProShares Russell 2000 Dividend Growers ETF (BATS:SMDV), a dividend-growth option for investors seeking a defensive tilt

These ETFs may finally gain momentum after years of lagging the megacaps if earnings recover and borrowing costs decrease.

Equal-Weight ETFs: The Middle Ground

Should both engines (the AI giants and the cyclical small caps) fire, equal-weight ETFs provide balanced exposure. Historically, Invesco S&P 500 Eql Wght ETF (NYSE:RSP), ALPS Equal Sector Weight ETF (NYSE:EQL), and Invesco S&P 100 Equal Weight ETF (NYSE:EQWL) reduce concentration risk and tend to outperform when market breadth improves.

Morgan Stanley’s 7,800 call steals the headlines, but the real ETF story sits in how the rally unfolds. With tech leadership firmly intact, and small caps set for a potential revival, investors may need to pick a lane, or lean on equal-weight strategies to ride both sides of the market.

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