Morgan Stanley analysts Michael Wilson, Andrew Pauker, Michelle Weaver, Diane Ding and Nicholas Lentini have raised their base case 12-month S&P 500 price target to 6,500, forecasting a 21.5 times price-to-earnings (P/E) ratio multiple on 12-month forward earnings per share (EPS) of US$303 ($406), in their 2025 US equities outlook released on Nov 18.
A healthy mix of mid-single-digit revenue growth and margin expansion drives Morgan Stanley’s 2025 and 2026 EPS growth forecasts of 13% and 12%, respectively.
Morgan Stanley maintains a wider than normal bull versus bear case skew given potential uncertainties from the outcome of the recently-concluded US presidential election. The bank has a bull case of 7,400 and a bear case of 4,600.
Morgan Stanley expects the recent broadening in earnings growth to continue into 2025 as the Fed cuts rates into next year and business cycle indicators show continued improvement.
A potential rise in corporate animal spirits following the US elections could catalyse a more balanced earnings profile across the market in 2025.
In its base case, Morgan Stanley sees a modest depreciation of a historically elevated market multiple as its work shows it is uncommon to see significant multiple compression in periods of above average earnings growth and accommodative monetary policy.
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However, Morgan Stanley understands that valuations could be volatile throughout the year depending on the impact of new policies, interest rate movement and geopolitical dynamics.
Morgan Stanley notes that the S&P 500 median stock multiple is “less extended” at 19 times and should remain supported if earnings recovery broadens out in 2025 as expected.
Morgan Stanley recommends remaining long quality cyclicals as Fed rate cuts and stabilising macro indicators are supportive of relative outperformance of this segment.
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In their view, the US election outcome raises the possibility of a lighter regulatory environment and potential recovery in animal spirits, which will further boost this segment.
“Financials remain our favoured overweight following our upgrade in early October,” the report says.
Morgan Stanley remains underweight in consumer discretionary goods stocks and consumer staples as the combination of potential tariffs and limited pricing power are likely to weigh on this area.
In the technology sector, Morgan Stanley prefers software over semiconductors, as software relative earnings revisions suggest a catch up in relative performance.
On the other hand, a negative correlation to interest rates and weaker relative earnings revisions means that Morgan Stanley maintains its neutral stance on small versus large caps.
Looking forward to 2025, Morgan Stanley emphasises the importance of investors remaining nimble around market leadership changes, particularly given potential uncertainties from the recent elections.
