The stock market has been on a tear for the last two years. The benchmark S&P 500 (^GSPC 0.35%) index is up 24% this year and nearly 50% over the last two years (as of Nov. 20). Given this incredible run and the lofty valuations that come with it, many believe the current bull market has run its course and is due for a correction.
But a team of strategists at Morgan Stanley, who recently published a report with a new price target for the S&P 500 in 2025, has an outlook that may surprise you.
From bear to bull
The team at Morgan Stanley is led by Mike Wilson, who is known for predicting the previous bear market. Wilson has been one of the most talked-about market strategists in recent years.
In 2022, as most analysts expected stocks to continue to surge higher after an incredible run in late 2020 and 2021, Wilson and his team predicted a stock market sell-off. His call proved right — all three major indexes ended the year deep in the red, recording their worst annual losses since 2008.
Since then, Wilson has remained more bearish, incorrectly calling for another year of losses in 2023, which didn’t come to fruition. He’s also been bearish this year, initially calling for a pullback. So it might surprise investors to hear that Wilson is now a bull with a very favorable view of the market in 2025.
Morgan Stanley’s base case suggests the S&P 500 will rise about 10% next year to 6,500. Morgan Stanley’s bull case suggests an even bigger tailwind with the market reaching 7,400, implying about 25% upside from current levels:
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.
Morgan Stanley added that valuations should remain high due to strong fundamentals bolstered by a solid macro outlook. The bank also believes the market’s earnings multiple will decline slightly to 21.5 but remain elevated compared to its 10-year average.
Wilson’s team is forecasting 13% earnings growth next year and 12% in 2026. Brent Crude oil should trade at $66 per barrel, while the yield on the 10-year Treasury bond dips from 4.41% (as of Nov. 20) to 3.55%. They are also bullish on Japanese stocks.
A hard game
Top market strategists like Wilson have a lot of investing knowledge. However, predicting the stock market’s near-term price moves is an extraordinarily difficult task, so I don’t envy these strategists. Wilson and his team made some strong points. Sentiment, fundamentals, and the economic outlook have improved, so the market may continue its impressive run.
I’ll be closely watching the 10-year Treasury yield, which has moved higher on concerns over President-Elect Donald Trump’s potentially inflationary policies. A lot remains to be seen on that front. If the 10-year remains elevated as the Federal Reserve cuts its benchmark federal funds rate or moves higher, I doubt the market will be able to sustain these levels.
That’s because many investors use the 10-year yield as a discount rate when valuing financial assets, so a higher 10-year yield leads to lower present valuations. The 10-year yield is also used to determine the cost of equity on many investments, which is the return required for taking on the risk. In addition, the 10-year yield is used as a benchmark for borrowing costs, so the higher the 10-year yield remains, the more inflationary the environment will likely be, making interest rate cuts less likely or less frequent than the market assumes.
While we are past the presidential election, a lot is still unknown. The market looks poised to continue its run, but valuations are high, so there is also less margin for error right now. This level of uncertainty is a reminder that investors are often better off thinking less about the next year and more about the next decade and beyond.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
