Morgan Stanley’s Mike Wilson is done with his call for US stocks to fall off a cliff.
After meeting one of the S&P 500’s (^GSPC) lowest end-of-year targets this past year, Morgan Stanley’s chief investment officer changed his tune in a note to clients on Sunday.
Wilson now expects the S&P 500 to reach 5,400 in the next 12 months, down from his earlier call for the index to fall to 4,500. Wilson’s new target reflects an increase of around 2% in the index over the next 12 months, with valuations falling and earnings continuing to rise.
“Our earnings growth forecasts for 2024 and 2025 (8% and 13% respectively) assume healthy revenue growth in the mid-single digits, alongside margin expansion in both years as positive operating leverage resumes (particularly in 2025),” says Wilson. wrote in the note.
“A modest valuation compression (from ~20x to ~19x in the base case) as earnings are adjusted higher is typical in a mid-to-late cycle (occurred in the mid-1990s, mid-2000s and recently in 2018). “
Wilson is the third macro strategist tracked by Yahoo Finance to raise his S&P 500 target in the past week.
Brian Belski, BMO’s chief investment strategist, raised his annual target to a record 5,600 on May 15, arguing that the momentum of the recent rally will continue for the rest of the year.
At Deutsche Bank, chief equity strategist Binky Chadha raised his final target for the benchmark 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 move higher.
Wilson agrees with his peers that growth prospects have improved, but he is more focused on what that could mean for the future of stocks.
Wilson wrote Monday that macro outcomes have become “increasingly difficult to predict” in the current environment, citing how the market has gone back and forth between a “soft landing” and a “no landing” base case.
This prompted Wilson to initiate a ‘broader than normal’ bull and bear scenario in addition to his base case. Wilson sees a bull case that sends the S&P 500 to 6,350, driven in part by stronger-than-expected earnings growth. In his bear case of 4,200, the US economy would enter a recession.
Wilson also warned that investors should be “ready for more rotation.”
Given the likelihood of an ever-changing macro consensus, he recommends a barbell approach: quality growth and cyclical stocks that will outperform if economic data continues to surprise on the upside, with defensive stocks as a hedge.
Wilson has upgraded the Industrials (XLI) sector to ‘overweight’ due to an improving earnings outlook and an attractive entry point following last year’s underperformance. He also likes Utilities (XLU), citing its typical role as a defensive sector and the sector’s position to benefit from the AI boom and a potential rate cut cycle.
“Markets appear to have shifted from a ‘soft landing’ in January to a ‘no landing’ in March and now back to a ‘softer landing,’” WIilson wrote.
“Markets even briefly struggled with slower growth/higher inflation in April… In short, markets are fickle and will trade the data as it is released, especially if the outcomes are so uncertain.”
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
Click here for an in-depth analysis of the latest stock market news and events affecting stock prices.
Read the latest financial and business news from Yahoo Finance
