U.S. stocks have experienced two great years, with the S&P 500 index (SPX) rising 24% last year and another 23% so far this year.
Perhaps late is better than never; Morgan Stanley's well-known bear has joined the bullish camp on U.S. stocks — raising its rating on U.S. stocks to overweight, expecting the S&P 500 index to reach 6,500 points by the end of 2025, with a target price of 5,400 points by June 2025.
In fact, the investment bank's benchmark target price for the S&P 500 index at the end of next year is already higher than its previous “bull market” scenario of 6,350 points. Now, its target price for the index under the “bull market” scenario for next year has reached as high as 7,400 points.
Why did Morgan Stanley change its mind? The firm stated in its 2025 outlook that it still believes stock valuations are high — in fact, higher than before. “Valuation should be higher than six months ago because the market is becoming increasingly convinced of good fundamentals. When investors see solid macroeconomic support for the fundamentals, valuations may be even higher in the next six months.”
Morgan Stanley believes that American exceptionalism will continue. “The price-to-earnings ratio of the S&P 500 index will slightly narrow from 22.2 times to 21.5 times over the next 12 months but will still be above the 10-year average. They stated, “Our research shows that during periods of above-average earnings growth and accommodative monetary policy, significant valuation compression is rarely seen,” wrote the U.S. team led by Mike Wilson, who has been known for his bearish stance on U.S. stocks in recent years.
They expect earnings per share to grow 13% in 2025 and another 12% in 2026. “We anticipate that as the Fed cuts rates next year and business cycle indicators continue to improve, recent earnings growth will continue to expand in 2025. The potential resurgence of corporate animal spirits following the election (as we saw after the 2016 election) may promote a more balanced earnings situation for the entire market in 2025,” the team said.
The Morgan Stanley team's views on the U.S. Department of Government Efficiency and its leaders Elon Musk and Vivek Ramaswamy are also quite interesting.
The team said: “While many doubt whether they can truly cut spending by increasing efficiency, we believe it makes sense to take a more open-minded approach, given the individuals involved and that this seems to be the focus of Trump's second term. Since the final outcome is still undecided, we believe the term premium will indicate how the bond market views this issue.” They refer to the excess returns required for investors to take on interest rate risk.
Morgan Stanley is also optimistic about Japanese stocks, while due to tariff risks, the firm has downgraded its rating on European stocks to neutral. Trade tensions have made emerging market stocks its least favored market.
The investment bank expects the yield on 10-year U.S. Treasury bonds to drop to 3.55% next year, down from the previous 3.75%, as they anticipate that the Fed's rate cuts will exceed market expectations.
In terms of commodities, due to supply growth from OPEC and non-OPEC countries, their target price for Brent crude oil in 2025 is $66 per barrel, while they expect limited upside for gold, with a target price for gold in 2025 of $2,600 per ounce.
Article reposted from: Jinshi Data