(Corrects July 21 story to say in paragraph 2 that Morgan Stanley expects S&P 500 to reach 7,200 points by middle of next year, not this year)

(Reuters) -Morgan Stanley backed its bullish stance on U.S. equities on Monday, citing strong earnings momentum, and said it was expecting a modest pullback in the third quarter that could create an opportunity to buy the dip.

The Wall Street brokerage is leaning more towards its bull case of the benchmark S&P 500 hitting 7,200 points by the middle of next year, it wrote in a note. In May, the brokerage said the S&P 500 was expected to hit 6,500 in the second quarter of 2026.

"With earnings on solid footing into next year and the Fed closer to cutting rates, valuations can remain supported around current levels (~22x) as we think about the 12-month outlook," Morgan Stanley equity strategists led by Michael Wilson said.

However, the brokerage said rising Treasury yields - especially the 10-year note breaching above 4.5% - could increase rate sensitivity for equities and an underperformance of rate-sensitive stocks such as small caps.

Morgan Stanley also expects tariff-related cost pressures to show up later this year, which could impact company margins and bump up inflation, leading to a change in rate cut expectations by the Federal Reserve.

Lastly, it estimates that seasonal trends may hit stocks in from mid-July through August.

However, the brokerage said it would buy the dips as the risks could be temporary and only lead to a mild consolidation.

Jefferies also raised its S&P 500 year-end target to 5,600 from its previous forecast of 5,300, according to the brokerage's note published on Friday.

(Reporting by Shashwat Chauhan in Bengaluru; Editing by Anil D'Silva)