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Wall Street’s biggest bear turns around and increases S&P 500 price target by 20%
Morgan Stanley’s Mike Wilson stopped calling for US stocks to fall off the cliff.
After having one of the lowest S&P 500 (^GSPC) year-end goals for last year, Morgan Stanley’s chief investment officer changed his tune in a note to clients on Sunday.
Wilson now sees the S&P 500 hitting 5,400 over the next 12 months, up from his previous forecast that the index would fall to 4,500. Wilson’s new target reflects an appreciation of about 2% in the index over the next 12 months, as valuations fall and profits continue to rise.
“Our earnings growth forecasts for 2024 and 2025 (8% and 13%, respectively) assume healthy mid-single-digit revenue growth and margin expansion in both years as positive operating leverage resumes (particularly in 2025),” Wilson wrote in the note.
“Modest valuation compression (from ~20x to ~19x in the base case) as earnings adjust upward is typical in a mid-to-late cycle scenario (occurred in the mid-1990s, mid-2000s and , most recently in 2018).
Wilson is the third macro strategist tracked by Yahoo Finance to boost his S&P 500 target last week.
BMO Chief Investment Strategist Brian Belski raised his year-end target to a high street 5,600 on May 15arguing that the momentum of the recent recovery will continue throughout the rest of the year.
At Deutsche Bank, chief equity strategist Binky Chadha raised his year-end target for the benchmark index to 5,500 from 5,100 on May 17. Chadha cited robust earnings growth and an improving macroeconomic outlook as reasons why shares could continue rising.
Wilson agrees with his peers that growth prospects have improved, but is more thoughtful about what that could mean for the stock’s future.
Wilson wrote on Monday that macroeconomic outcomes have become “increasingly difficult to predict” in the current environment, referring to the way the market has oscillated between a “soft landing” It is “no landing” base case.
This led Wilson to initiate a “broader than normal” bullish and bearish scenario in addition to his base case. Wilson sees a bullish scenario sending the S&P 500 to 6,350, driven by stronger-than-forecast earnings growth, among other factors. In its bearish case of 4,200, the US economy would enter a recession.
Wilson also warned that investors should be “ready for more rotations.”
Given the likelihood of a shifting macro consensus, he recommends a barbell approach – quality growth and cyclical stocks that will outperform if economic data continues to surprise to the upside, with defensive stocks mixed in as cover.
The story continues
Wilson updated the Industrials (XLI) sector to Overweight due to an improving earnings outlook and an attractive entry point after underperformance over the past year. He also likes utilities (XLU), citing its typical role as a defensive sector, as well as the sector’s potential to benefit from the AI boom and a potential interest rate reduction cycle.
“Markets appear to have moved from a ‘soft landing’ outcome in January to a ‘no landing’ in March and now back to a ‘softer landing,'” Wilson wrote.
“Markets even briefly struggled with a slower growth/higher inflation outcome in April… In short, markets are unstable and will trade the data as it comes out, especially when the results are so uncertain.”
(Getty Images) (lvcandy via Getty Images)
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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