The stock market has been on a tear for the past two years. The benchmark S&P 500 (^GSPC 0.35%) index is over 24% this year and almost 50% over the last two years (as of November 20). Given this incredible run and the high valuations that come with it, many believe that the current bull market has run its course and is due for a correction.
But a team of strategists at Morgan Stanleywhich 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 Morgan Stanley team 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 expect stocks to continue to climb higher after an incredible run in late 2020 and 2021, Wilson and his team predicted a stock market selloff . His call proved right – all three major indexes ended the year 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 did not materialize. He has 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 expansion in earnings growth to continue into 2025 as the Fed cuts rates next year and business cycle indicators continue to improve. A potential increase in corporate pet spirits after the election (as we saw after the 2016 election) could catalyze a more balanced earnings profile across the market in 2025.
Morgan Stanley added that valuations should be elevated due to strong fundamentals supported by a solid macro outlook. The bank also believes market earnings multiples will decrease slightly to 21.5 but remain elevated compared to their 10-year average.
Wilson’s team predicts a 13% increase in profits next year and 12% in 2026. Brent Crude oil should trade at $66 per barrel, while the Treasury bond yield of 10 years down from 4.41% (as of November 20) to 3.55%. . I am also bullish on Japanese stocks.
A tough game
Market strategists like Wilson have a lot of investment knowledge. However, predicting the price movements of the stock market is an extraordinarily difficult task, so I do not envy these strategists. Wilson and his team made some strong points. Sentiment, fundamentals and the economic outlook have improved, so the market can continue its impressive run.
I’ll be watching the 10-year Treasury yield closely, which has surged higher on concerns about President-elect Donald Trump’s potentially inflationary policies. Much remains to be seen on this 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 higher valuations. The 10-year yield is also used to determine the cost of equity in many investments, which is the return required to take 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 is likely to be, leading to rate cuts. less likely or less frequent interest of the market assumes.
While we have passed the presidential election, much is still unknown. The market seems poised to continue its run, but valuations are high, so there’s even less margin for error now. This level of uncertainty is a reminder that investors are often better off thinking less about 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.