It’s been a great two years in the stock market, with the S&P 500 following last year’s 24% gain with, so far, another 23% appreciation.
Perhaps better late than never, Morgan Stanley has jumped on board the U.S. train — moving its rating on U.S. stocks to overweight, and targeting 6,500 at the end of 2025, compared to a June 2025 target of 5,400.
In fact, its new base target is above its previous “bull” scenario, which was 6,350. Now it says the S&P could jump as high as 7,400 next year.
Why the change of heart? Well, the firm still says valuations are richer than they used to be. “Valuations should be richer than six months ago because markets have grown more certain that fundamentals are good. And valuations can be richer in six months’ time when investors see that fundamentals are sustained by solid macro,” the firm said in its 2025 outlook.
U.S. exceptionalism will continue, the firm argued. The multiple on 12 months forward earnings will contract slightly, to 21.5 from 22.2, but remain at a premium to the 10-year average. “Our work shows that it’s rare to see significant multiple compression in periods of above-average earnings growth and accommodative monetary policy,” they said.
They expect 13% earnings per share growth in 2025 and another 12% gain for 2026. “We expect the recent broadening in earnings growth to continue in 2025 as the Fed cuts rates into next year and business cycle indicators continue to improve. A potential rise in corporate animal spirits post the election (as we saw following the 2016 election) could catalyze a more balanced earnings profile across the market in 2025,” according to the U.S. team, led by Mike Wilson.
It was interesting to read the firm’s take on the Department of Government Efficiency and its leaders, Elon Musk and Vivek Ramaswamy.
“While many are skeptical they will be able to actually cut spending via efficiency efforts, we think it makes sense to take a more open-minded approach given the individuals involved and the fact that this seems to be a focal point for Trump in his second term,” they said. “With the jury very much out on the ultimate outcome, we think term premium will tell the tale of how the bond market is thinking about this issue,” they said, referring to the excess return investors require for taking on interest-rate risk.
