Morgan Stanley’s Mike Wilson is done calling for a fall in US stocks.
After hitting one of the S&P 500’s (^GSPC) lowest year-end targets for the past year, Morgan Stanley’s chief investment officer changed his mind in a note to clients on Sunday.
Wilson now expects the S&P 500 to reach 5,400 in the next 12 months, up from his previous forecast that the index would fall to 4,500. Wilson’s new target reflects a roughly 2% rise in the index over the next 12 months, with valuations falling and profits continuing to rise.
“Our earnings growth forecasts for 2024 and 2025 (8% and 13%, respectively) call for healthy single-digit revenue growth in addition to margin expansion in both years, at as positive operating leverage returns (particularly in 2025),” Wilson said. wrote in the note.
“A modest compression in valuations (from ~20x to ~19x in the base case) as earnings adjust upward is typical in a mid- to late-cycle context (which happened in the middle 1990s, mid-2000s and more recently in 2018). “
Wilson is the third macro strategist tracked by Yahoo Finance to increase his S&P 500 target in the past week.
Brian Belski, BMO’s chief investment strategist, raised his year-end target to a record high of 5,600 on May 15, saying momentum from the recent rally would continue through the rest of the year.
At Deutsche Bank, chief equity strategist Binky Chadha raised his year-end target for the benchmark index to 5,500 from 5,100 on May 17. Chadha cited robust earnings growth and an improving macroeconomic outlook as reasons why stocks could continue to advance.
Wilson agrees with his peers that growth prospects have improved, but he is more measured about what that could mean for the future of stocks.
Wilson wrote Monday that macroeconomic outcomes have become “increasingly difficult to predict” in the current environment, referring to how the market has oscillated between a “soft landing” and “soft landing” baseline scenario. no landing.”
This prompted Wilson to run a “broader than normal” bull and bear scenario in addition to his base case. Wilson sees a bullish scenario that would propel the S&P 500 to 6,350 points, thanks in part to stronger-than-expected earnings growth. In his 4,200 bearish scenario, the U.S. economy would fall into recession.
Wilson also warned that investors should be “prepared to rotate more.”
Given the likelihood of an ever-changing macroeconomic consensus, he recommends a dumbbell approach: quality growth stocks and cyclical stocks that will outperform if economic data continues to surprise to the upside, with defensive stocks mixed in like blanket.
Wilson upgraded the Industrials (XLI) sector to overweight due to improving earnings prospects and an attractive entry point after last year’s underperformance. He also likes Utilities (XLU), citing its typical role as a defensive sector, as well as the sector’s potential to benefit from the AI boom and a possible interest rate cut cycle.
“Markets appear to have gone from a ‘soft landing’ in January to a ‘no landing’ in March and now back to a ‘soft landing,'” Wilson wrote.
“Markets even briefly faced slower growth and higher inflation in April…Ultimately, markets are fickle and will trade data as soon as it is released, especially when results are so uncertain .”
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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