Morgan Stanley Raises S&P 500 Price Target
Investing.com — Morgan Stanley (NYSE:MS) has updated its 12-month price target for the S&P 500 index to 6,500, indicating a nearly 11% upside potential from current levels.
This adjustment reflects the firm's expectations for ongoing earnings growth and a favorable monetary policy environment. The new target is based on a 21.5x price-to-earnings (P/E) ratio of projected 2026 earnings per share (EPS) at $303.
The outlook predicts mid-single-digit revenue growth along with margin expansion, contributing to EPS growth forecasts of 13% for 2025 and 12% for 2026.
> “We expect the recent broadening in earnings growth to continue in 2025 as the Fed cuts rates into next year,” strategists led by Michael J. Wilson noted.
They also indicated that the recent election could boost corporate "animal spirits," similar to the effects observed after the 2016 election, possibly creating a more balanced earnings profile across the market in 2025.
Morgan Stanley’s base case expects only slight depreciation of the market's historically high multiple, emphasizing that significant multiple compression is uncommon during periods of strong earnings growth and accommodating monetary policy.
The firm acknowledges the potential for valuation volatility in the year, influenced by new policy initiatives, interest rate trajectories, and geopolitical dynamics. Notably, the median stock multiple of the S&P 500, currently at 19.0x, should remain supported if expected earnings recovery materializes in 2025.
While Morgan Stanley anticipates reaching its 6,500 price target, they caution that this may take time due to overbought conditions and uncertainty surrounding new policy implementations.
In addition to the base case, Morgan Stanley's targets include 7,400 in the bull case and 4,600 in the bear case.
Investment Recommendations
Investors are advised to remain long on quality cyclicals, bolstered by expected Fed rate cuts and stabilizing macroeconomic trends, which may encourage relative outperformance.
The firm also points to potential easing of regulations and improved market sentiment post-election as additional benefits.
Sector Analysis
- Top Overweight Sector: Financials
- Underweight Position: Consumer Discretionary Goods and Consumer Staples
- Concerns over tariffs, limited pricing power, and the shifting market leadership.
- Within Technology, preference lies with Software over Semiconductors, driven by improving relative earnings forecasts.
Morgan Stanley maintains a neutral stance on small-cap versus large-cap stocks due to the negative correlation with interest rates and weaker earnings revisions in the small-cap sector.
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