S&P 500 to rally 11% by end of 2025, Morgan Stanley says

Investing.com -- Morgan Stanley (NYSE:MS ) raised its base case 12-month price target for the S&P 500 index to 6,500, implying nearly 11% upside potential from the current levels.

The move comes as the Wall Street firm maintains expectations of continued earnings growth and an accommodating monetary policy environment. The new target is based on a 21.5x price-to-earnings (P/E) multiple on projected 2026 earnings per share (EPS) of $303.

The revised outlook anticipates mid-single-digit revenue growth and margin expansion, leading 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 and business cycle indicators continue to improve,” strategists led by Michael J. Wilson said in a note.

They also suggest that the recent election could trigger a rise in corporate "animal spirits," similar to the post-2016 election period, potentially leading to a more balanced earnings profile across the market in 2025.

In its base case scenario, Morgan Stanley's team predicts only modest depreciation of the market's historically elevated multiple, noting that significant multiple compression is rare during periods of above-average earnings growth and supportive monetary policy.

“We also appreciate that valuation may be volatile throughout the year depending on the impact of new policy initiatives, the path of interest rates and geopolitical dynamics,” strategists added.

They point out that the S&P 500 median stock multiple, currently at 19.0x, is less extended and should remain supported if the anticipated earnings recovery broadens as expected in 2025.

While they expect its 6,500 price target to play out, strategists believe this "will likely take time, particularly given the overbought conditions and uncertainty of how new policies will be sequenced and interpreted."

In addition to its base case, Morgan Stanley has set S&P 500 targets of 7,400 in its bull case and 4,600 in its bear case.

In terms of investment recommendations, the firm believes investors should stay long on quality cyclicals, citing support from expected Fed rate cuts and stabilizing macroeconomic trends, which they believe will drive relative outperformance.

It also highlights the potential for lighter regulations and improved market sentiment following the US election, which could further benefit this group.

Sector-wise, Financials remains Morgan Stanley’s top overweight sector following an October upgrade. Meanwhile, the bank maintains an underweight position on Consumer Discretionary Goods, citing the impact of potential tariffs and limited pricing power, as well as on Consumer Staples, which it expects to underperform as market leadership moves away from defensive sectors.

Within Technology, strategists favor Software (ETR:SOWGn ) over Semiconductors, pointing to improving relative earnings revisions as a key driver.

They also maintain a neutral stance on small-cap versus large-cap stocks, attributing this to the negative correlation with interest rates and weaker earnings revisions in the small-cap space.

Source: Investing.com