Come on in, the water is warm. That’s what one of Wall Street’s top analysts is saying about this earnings season, which he believes validates his long-standing argument that the economy is in the midst of a secret recession the likes of which most economists haven’t seen in three years. A strong third-quarter earnings season suggests his argument for a “rolling recovery” in the economy is underway and that “rolling recessions” are a thing of the past.
During the pandemic and its painful aftermath, much of the U.S. private sector has experienced Morgan Stanley strategist, leader Chief Equity Analyst Mike Wilsonknown as a “rolling recession” – a prolonged downturn that has not escaped the impact of overall GDP but has left a deep mark on business hiring, earnings and confidence. The Nov. 3 report noted that “most private sectors in the U.S. economy have not been hiring and/or have been laying off workers for years and therefore do not need to respond to a further slowdown.”
Wilson believes that one of the most striking findings of the current earnings season is that the revenue “beat” rate is more than double the historical average, and the median stock earnings are growing at the fastest pace since 2021. The S&P 500’s collective earnings surprise is currently 2.3% versus the norm of 1.1%, which suggests not only stability but also solid revenue momentum. Wilson noted that this was the fastest earnings growth since the third quarter of 2021 and “marked the end of one of the longest earnings recessions on record,” he added, referring to two or more consecutive quarters of year-over-year declines in corporate profits. Stanley said he believes this is “an underappreciated story” and expects the trend to continue into 2026.
April as a turning point
Wilson said the economic cycle quietly reset in April – the month marked President Trump’s “Liberation Day” when he announced a global round of “reciprocal tariffs” on April 2. Wilson didn’t connect the two events, but he went on to stress that April marked the end of the rolling recession, citing rebounds in surveys and company guidance data. Earnings revisions, a key real-time indicator of business sentiment and future prospects (and Wilson’s “go-to” indicator), then led to a “V-shaped” recovery. The median earnings growth for Russell 3000 stocks in the third quarter reached 11%, a sharp increase from 6% in the previous quarter and only 2% at the beginning of 2025.
Cost structures have become significantly leaner as companies downsize during the downturn, Wilson said, noting that companies’ payroll expenses have fallen sharply in terms of growth rates. Much of the excess labor costs were squeezed out during the worst of the rolling recession, keeping wage bills in line with profitability and allowing businesses to reap disproportionate benefits from any top-line improvements. He believes that “a little bit of solidification of revenue and pricing power will go a long way.” He believes that bottom-line leverage will be greater now that costs are capped.
The National Federation of Independent Business (NFIB) small business survey also showed pricing power stabilizing for the first time in years. While risks remain — such as Fed indecision, tariffs or financing pressures — most indicators now point to a new round of expansion rather than contraction.
From a worker’s perspective, this dynamic is even more brutal and has some viral buzzwords To sum up the shift from over-hiring to lean and efficient: “great resignation“becomes”great flattening” and resulted in a labor force moving from “quit smoking quietly” arrive”work hug“It’s a tough situation for Gen Z, who face unemployment rates roughly twice the national average and find themselves having to convince businesses to relax.”Hire low, fire low mentality“.
Market and policy changes
The market itself has reacted to this muted recovery ahead of consensus, with Wilson sarcastically noting that “as usual, stocks have settled ahead of consensus forecasters.” The positive correlation between stock returns and bond yields, coupled with the new breadth of stock performance, suggests the market expects economic growth to hold steady or even reaccelerate — even as rate cut expectations have eased and trade tensions have eased since the key U.S.-China meeting in October. With S&P 500 earnings per share expected to grow strongly through 2026, equity strategists believe the lead will expand beyond the “Magnificent 7” megacap stocks that dominated the early recovery phase.
In other words, what corporate America is trying to tell us is that the private sector has quietly endured a lot of pain over the years and is poised for broader growth. The recession narrative has shifted toward a potentially accelerating recession, driven by strong earnings, a lean cost base and rising business confidence and investment, including an expected rebound in M&A activity and capital spending.
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