Morgan Stanley has shifted to a more optimistic stance on the stock market, projecting an 11% increase in the S&P 500 by the end of 2025. Mike Wilson, the firm's chief investment officer and chief U.S. equity strategist, released a note on Monday outlining this new outlook.
What Happened: Wilson's revised target for the S&P 500 is 6,500, up from his previous mid-year 2025 target of 5,400. This shift comes as a surprise given Wilson's historically bearish perspective, which accurately predicted the 2022 bear market. He attributes the bullish outlook to anticipated Federal Reserve interest-rate cuts, economic growth, and potential deregulation under the incoming Trump administration, Business Insider reported on Tuesday.
"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," Wilson said.
Despite acknowledging high valuations, he believes they are justifiable if the economy remains stable. He recommends focusing on high-quality cyclical stocks, particularly in the financial sector, while advising caution with consumer discretionary and staple stocks due to pricing power concerns and tariff risks.
Wilson advises investors to remain adaptable amid potential policy shifts under President-elect Donald Trump, which could impact markets in both the short and long term.
Why It Matters: The bullish outlook from Morgan Stanley comes at a time when the market is closely watching key economic indicators. Recent comments from Federal Reserve Chair Jerome Powell suggested a cautious approach to rate cuts, with expectations for a December cut dropping to 62% from 72% last week, according to the CME Group's FedWatch tool.
Additionally, the upcoming earnings report from NVIDIA (NASDAQ: NVDA) is expected to significantly impact the S&P 500. NVIDIA's influence on the AI-driven technology sector means its financial results could sway overall market sentiment, making Morgan Stanley's bullish outlook particularly noteworthy in the current climate.
Price Action: After Trump's win, SPDR S&P 500 ETF Trust (NYSE: SPY) has experienced significant upswing. However, as per Benzinga Pro, it has dropped by 1.76% in the past five days. Meanwhile, Invesco QQQ Trust, Series 1(NASDAQ: QQQ) has fallen by 2.65% in the same period, as of Tuesday pre-market hours.