Morgan Stanley's Mike Wilson is done calling for US stocks to fall off a cliff.
After having one of the lowest S&P 500 (^GSPC) year-end targets for the past year, Morgan Stanley's chief investment officer changed his tune in a note to clients on Sunday.
Wilson now sees the S&P 500 hitting 5,400 in the next 12 months, up from his prior call that the index would fall to 4,500. Wilson's new target reflects about 2% upside in the index over the next 12 months, with valuations falling and earnings continuing to rise.
"Our 2024 and 2025 earnings growth forecasts (8% and 13%, respectively) assume healthy, mid-single-digit top-line growth in addition to margin expansion in both years as positive operating leverage resumes (particularly in 2025)," Wilson wrote in the note.
"Modest valuation compression (from ~20x to ~19x in the base case) as earnings adjust higher is typical in a mid-to-late-cycle backdrop (occurred in the mid-1990s, mid-2000s, and 2018 most recently)."
Wilson is the third macro strategist tracked by Yahoo Finance to boost their S&P 500 target in the last week.
BMO's chief investment strategist Brian Belski boosted his year-end target to a street-high 5,600 on May 15, arguing that momentum in the recent rally will continue throughout the rest of the year.
At Deutsche Bank, chief equity strategist Binky Chadha boosted his year-end target for the benchmark to 5,500 from 5,100 on May 17. Chadha cited robust earnings growth and an improving macroeconomic outlook as reasons stocks could keep moving higher.
Wilson agrees with his peers that the growth outlook has improved, but is more measured on what that could mean for stocks moving forward.
Wilson wrote Monday that macro outcomes have become "increasingly hard to predict" in the current environment, referring to how the market has shifted back and forth between a "soft landing" and "no landing" base case.
This prompted Wilson to initiate a "wider-than-normal" bull and bear case scenario in addition to his base case. Wilson sees a bull case sending the S&P 500 to 6,350, driven by stronger-than-anticipated earnings growth, among other drivers. In his bear case of 4,200, the US economy would slip into recession.
Wilson also warned investors should be "ready for more rotations."
Given the likelihood of a continuously shifting macro consensus, he's recommending a barbell approach — quality growth and cyclical stocks that will outperform if economic data continues to surprise the upside, with defensive stocks mixed in as a hedge.
Wilson upgraded the Industrials (XLI) sector to Overweight due to an improving earnings outlook and an attractive entry point after underperformance over the past year. He also likes Utilities (XLU), citing its typical role as a defensive sector, as well as the sector's potential to benefit from the AI boom and a potential interest rate-cutting cycle.
"Markets appear to have moved from a 'soft landing' outcome in January to a 'no landing' in March and now back towards a 'softer landing,'" Wilson wrote.
"Markets even wrestled briefly with a slower growth/higher inflation outcome in April ... Bottom line, markets are fickle and will trade the data as it's released, particularly when the outcomes are so uncertain."
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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