Wall Street expects U.S. stocks to rise again in 2025, but traders should follow an investing strategy because the outlook for U.S. stocks is more complicated than it appears, according to Morgan Stanley's chief equity strategist.
Mike Wilson, Morgan Stanley's chief investment officer and chief U.S. equity strategist, said investors should adopt a barbell investing strategy, which refers to a portfolio that balances high-risk assets with low-risk assets.
Wilson recently said the strategy is ideal for investors looking to profit in riskier areas of the market while hedging against potential losses, and should be a focus for investors as markets enter next year shrouded in uncertainty.
Wilson noted that the market dynamics have been mixed this year, with gains in both high-quality, large-cap and cyclical stocks as well as lower-quality stocks. These types of stocks have performed well at different times given the changing expectations for inflation, economic growth and Federal Reserve rate cuts.
“As we head into next year, I think this pattern will continue and it makes sense to own large-cap stocks, high-quality cyclicals and growth stocks right now,” Wilson said.
Wilson also highlighted potential catalysts and risks for U.S. stocks next year, and the barbell strategy may be well suited to deal with these situations.
Among positive catalysts, Wall Street is eyeing deregulation and corporate tax cuts under a second Trump term, which could boost earnings growth. Wilson added that earnings prospects are particularly bright for large-cap, high-quality stocks.
On the other hand, economic risks are surrounding some of Trump's other policies.
For example, while Trump's tariffs during his first term as president did not lead to a noticeable increase in inflation, experts say his tariff plans this time are far more extensive, which could cause inflation to surge next year.
Near-term risks also lie in Trump’s plan to deport millions of immigrants, which economists say could hit the labor market. Job cuts proposed by the Department of Government Efficiency could also have a negative impact on economic growth in the short term, Wilson said.
“Given uncertainty about the sequencing and execution of policies such as tariffs, immigration, and the extent of the Fed’s rate cuts next year, we suspect that U.S. equity performance in the first quarter of next year will be more conservative than what we observed this fall,” he added.
Wilson said in a recent interview with Bloomberg that the risk of a U.S. recession has not completely gone away, either. He noted that the U.S. is in the late stages of its economic expansion cycle and the economy is still under pressure from rising interest rates and some signs of strain among small businesses and consumers.
“I don’t think the risk of a hard landing is off,” Wilson said. “That’s why we’re trading in a narrow range again. People are favoring large-cap stocks. We don’t want to be completely overweight small-cap stocks or low-quality stocks, and we don’t think there’s going to be a big run next year. Everything changes.”
Market forecasters generally expect more modest gains for the S&P 500 in 2025 after the benchmark index posted a second straight year of double-digit returns in 2024.
Wilson, who was a well-known Wall Street bear in 2022 and 2023, raised his expectations for stocks. Morgan Stanley predicts that the S&P 500 will close around 6,500 next year, which means the index will rise more than 7% from current levels.
Article forwarded from: Jinshi Data
