Every year, market strategists at top Wall Street banks face the formidable challenge of predicting the future of the S&P 500 index. This task is particularly daunting given the inherent unpredictability of the market and the relatively short time frame of one year. Historically, being overly bearish poses greater risk for strategists; they may face job loss for failing to anticipate a market rally more often than for missing a downturn.
Amid this landscape, Mike Wilson, Morgan Stanley’s Chief Market Strategist, took a contrarian stance in 2022, expressing bearish sentiments while many others were still optimistic about the late-cycle COVID-19 market surge. His predictions were validated when the S&P 500 plummeted nearly 20% that year. Recently, Wilson has shifted his outlook, presenting a new price target for the S&P 500 that could catch many analysts off guard.
Since earlier this year, Wilson has adopted a bullish perspective, asserting that a new bull market characterized by a “rolling recovery” commenced in April and is still in its nascent phases. Central to his optimism is the anticipation of robust corporate earnings, spurred by various factors including positive operating leverage, heightened pricing power, and efficiency gains attributed to advancements in artificial intelligence. Wilson pointed out that the forecasts indicating upside to earnings are key, suggesting that many stocks may not be as overvalued as they appear, despite some segments of the market seeming excessive, particularly in speculative growth categories.
Morgan Stanley’s analysis shows that the S&P 500 exceeded Wall Street’s revenue projections by 2.2% in the third quarter—double the typical average. Additionally, the bank reported an 8% median growth in earnings per share (EPS) for the Russell 3000, marking the strongest increase in four years. Wilson anticipates that S&P 500 companies will achieve 12% earnings growth year-over-year this year, followed by 17% next year, and another 12% in 2027.
As discussions surrounding potential interest rate cuts from the Federal Reserve grow, there is skepticism in the market. However, Wilson believes the market underestimates the extent of the Fed’s dovish stance, considering indicators like a weakening labor market and the current administration’s inclination to “run it hot” in terms of economic policy. This scenario may lead to both rate cuts and support from the Fed’s balance sheet.
Based on these insights, Wilson has revised his S&P 500 price target from 7,200 at the beginning of the year to 7,800 within the next year, signaling an 18% potential increase from current levels. This target relies on a 22-times forward earnings multiple based on his 2027 EPS estimate of $356.
Despite acknowledging that certain market sectors appear overvalued, Wilson noted the unusual nature of S&P 500 earnings multiples contracting when the index experiences growth in EPS and monetary easing. He has also shifted focus towards small-cap stocks over large-cap ones and remains positive on the financial and healthcare sectors.
For long-term investors, patience and strategic thinking are essential. Historical trends suggest that those who hold investments over an extended period are less prone to financial losses. Currently, many investors are grappling with uncertainty: can the market continue its upward trajectory, or are we facing an AI-driven asset bubble?
Rather than trying to time the market, retail investors are encouraged to utilize strategies like dollar-cost averaging, which can help manage investment costs effectively over time. For those focused on stock picking, Wilson’s emphasis on the financial and healthcare sectors is a promising starting point, as both offer more reasonable valuation multiples compared to some of the more exuberant parts of the market. With healthcare stocks often trading at lower multiples and potentially benefiting from regulatory clarity, alongside financials that remain profitable and poised for growth, this could be an opportune avenue for savvy investors.
