Morgan Stanley's Mike Wilson sees stocks nearly flat in 2024.
Wilson projects earnings growth in the S&P 500 (^GSPC) to $229 per share, resulting in a year-end target for the benchmark index of 4,500. That target represents nearly 2% upside to current levels, well below the average yearly return of about 10% for the S&P 500.
Wilson's projection stems, in part, from lackluster commentary from companies about the health of the US economy and consumer headed into 2024.
"While the medium-term outlook for earnings looks positive, the near-term backdrop remains challenged," Wilson wrote. "Earnings revisions breadth, which typically leads consensus estimates, has rolled over once again and is at the lowest level since March this year. Underpinning this trend is more cautious corporate commentary overall that’s once again centered on the macro. "
Wilson also highlights how the erosion of fiscal stimulus to fuel consumer spending and the impact of the Federal Reserve's "higher for longer" interest rate strategy is "increasingly weighing on both corporate and consumer sentiment."
"The combination of these factors suggests that earnings headwinds will likely persist into early next year before a durable recovery takes hold," Wilson wrote.
Importantly though, Wilson, who has been bearish on the market and earnings since before the 2022 drawdown, sees earnings improvements ahead in 2024.
He sees positive operating leverage and growth from artificial intelligence driving margin expansion. That's in line with many analysts who project the earnings decline likely bottomed last quarter, with S&P 500 companies expected to come out of their earnings recession during the current reporting period.
Wilson notes that margin pressure is a common driver of an earnings recession as companies rightsize their operations to drive profits. Bank of America's Ohsung Kwon recently told Yahoo Finance his team is becoming increasingly confident that has taken place and companies are well positioned entering 2024. Wilson feels similar about the rebalancing from corporates.
"It takes time for companies to right size expenses in line with slowing top line growth," Wilson wrote. "Once that happens, however, and demand begins to recover, positive operating leverage resumes and drives margin expansion and earnings growth. This expectation is embedded into our 2024 (+7% growth) and 2025 earnings forecasts (+16% growth)."
Wilson sees earnings per share growth of 16% from 2024 to 2025, with AI playing a key role. Morgan Stanley sees AI-based innovation driving increased business-to-business spending and increasing efficiency.
And, historically, companies spending more on tech has been good for earnings, per Wilson.
As an array of headwinds abound, Wilson sees stock-specific risks remaining "elevated." Under that thought process, Wilson recommends a "barbell" strategy of defensive growth and cyclicals.
Wilson believes we entered the late part of the business cycle in 2022, and history indicates those two sectors will lead the way during that period.
Josh Schafer is a reporter for Yahoo Finance.
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