Morgan Stanley’s Mike Wilson has finished predicting a sharp drop in U.S. stocks.
Morgan Stanley’s chief investment officer had set a year-end target for the S&P 500 (^GSPC) at its lowest in the past year, but changed his tune in a client note on Sunday.
Wilson now sees the S&P 500 index hitting 5,400 over the next 12 months, an upward revision from his previous forecast of the index falling to 4,500. Wilson’s new target reflects an increase of about 2% for the index over the next 12 months as valuations fall and earnings continue to rise.
“Our earnings growth forecasts for 2024 and 2025 (8% and 13%, respectively) assume healthy mid-single-digit sales growth in both years, along with margin expansion, as operating leverage returns to positive, particularly in 2025,” Wilson wrote in the note.
“A moderate compression in valuations (from about 20x to about 19x in the base case) as earnings are revised upwards is typical in a mid-to-late cycle backdrop (occurred in the mid-1990s, mid-2000s, and most recently in 2018).”
Wilson is the third macro strategist tracked by Yahoo Finance to raise his S&P 500 target last week.
Brian Belski, chief investment strategist at BMO, on May 15 raised his year-end price target to a record 5,600, arguing that the recent upward momentum will continue through the rest of the year.
Binky Chadha, chief equity strategist at Deutsche Bank, raised his year-end target for the index to 5,500 from 5,100 on May 17. Chadha cited strong earnings growth and an improving macroeconomic outlook as reasons for stocks’ continued gains.
Wilson agrees with peers that growth prospects have improved, but is cautious about how that will affect the stock price going forward.
Macroeconomic outcomes are “increasingly difficult to predict” in the current environment, Wilson wrote Monday, noting that markets are oscillating between base case scenarios of a “soft landing” and a “no landing.”
So Wilson has launched a “broader-than-usual” set of bull and bear scenarios in addition to his base case. In his bull case, Wilson sees the S&P 500 rising to 6,350, driven in part by better-than-expected earnings growth. In his bear case, at 4,200, the U.S. economy would fall into recession.
Wilson also warned that investors should “prepare for further rotation.”
Given the potential for continued shifts in the macroeconomic consensus, he recommends a barbell approach: mixing defensive stocks as a hedge with high-quality growth and cyclical stocks that are poised to perform if economic data continues to beat expectations.
The story continues
Wilson upgraded the industrial sector (XLI) to overweight, citing an improving earnings outlook and an attractive entry point after a disappointing year. He also likes utilities (XLU) because of the sector’s classic role as a defensive sector and because it could benefit from the AI boom and a potential interest rate-cutting cycle.
“The market went from a ‘soft landing’ result in January to a ‘no landing’ in March, and now appears to be heading for a ‘softer landing’ again,” Wilson wrote.
“Markets briefly struggled with the slowing growth/rising inflation results in April…After all, markets are fickle and will trade as soon as data is released, especially when the outcome is so uncertain.”
(Getty Images) (lvcandy via Getty Images)
Josh Shaffer is a reporter for Yahoo Finance. Follow him on X Follow.
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