Morgan Stanley's Mike Wilson said the S&P 500 could reach 6,500 in the next 12 months, up about 10% from its current level of about 5,900. The forecast, released on Monday, is the latest in a series of optimistic predictions from Wall Street following Donald Trump's successful re-election earlier this month.
Previously, Macro Risk Advisors predicted that the S&P 500 could reach 7,700 next year; veteran market commentator Ed Yardeni predicted that the S&P 500 will reach 7,000 in 2025 and break through 10,000 by the end of this century.
However, Wilson's prediction is particularly notable because he has previously been known as a market skeptic. In May, he also predicted that the S&P 500 would fall to 4,500 by the end of the year, 15% below where the market was trading at the time. Since May, his 12-month target has been just 5,400.
The new outlook is based on a forecast of $303 in earnings per share in 2026 and a valuation of 21.5 times earnings, Wilson said in a report on Monday.
“We expect the earnings growth expansion to continue through 2025 as the Federal Reserve continues to cut rates next year and business cycle indicators continue to improve,” Wilson wrote. “In our baseline scenario, we see only a modest decline in market valuation multiples as our research shows that significant compression in market valuation multiples is rare during periods of above-average earnings growth and accommodative monetary policy.”
Morgan Stanley expects earnings per share growth of 13% in 2025 and 12% in 2026. These figures are in line with mainstream forecasts and even slightly lower than the FactSet consensus estimate, which expects earnings growth of nearly 13% and earnings per share of $309 in 2026.
Still, the forecasts could be considered aggressive because they call for earnings growth to accelerate over the next two years from 9% in 2024. That growth is likely to rely on the successful implementation of Trump’s economic plans, which include slashing the corporate tax rate to 15% from 21% and extending his 2017 tax overhaul to provide more tax breaks for individuals.
While these measures could boost growth, they also carry risks. Slashing tax rates when the economy is already growing at a high rate could reignite inflation, and proposed import tariffs could further push up consumer prices. If inflation picks up, the Fed might have to scale back its rate cuts, thereby curbing inflation but also potentially curbing growth.
While the ranks of pessimists are shrinking, some skeptics remain. Independent strategist David Rosenberg said Monday it would be wise to reduce portfolio risk until “the policy dust settles.”
“It should be clear that this rally was not driven by earnings, but rather by sentiment,” Rosenberg wrote. “If earnings were the primary driver, the S&P 500 would be trading about 1,000 points lower now.”
Article forwarded from: Jinshi Data