Morgan Stanley Predicts 13% Gain for S&P 500 in 12 Months

Morgan Stanley, a prominent U.S.-based investment bank, has offered a bullish outlook for the S&P 500 Index, predicting that the index is unlikely to drop to its April lows and could instead reach new record highs within the next 12 months. This optimistic forecast contrasts with previous concerns about potential recessions, suggesting a shift in market sentiment.

Andrew Sheets, Global Head of Cross-Asset Strategy at Morgan Stanley, highlighted several factors contributing to this positive outlook. He suggested that the S&P 500 Index might appreciate by around 8% by 2026, driven by favorable developments in the macroeconomic environment. Although inflation might rise slightly and economic growth could decelerate, market expectations are aligned with these scenarios. Additionally, Sheets noted the beginning of positive revisions in company earnings, which had previously factored in the possibility of a recession. April’s lows reflected broader downward risks that had materialized, but a more optimistic momentum is expected in the coming period.

Sheets also emphasized the weakening of the U.S. dollar, which could positively impact company earnings and support the index. These predictions also favor cryptocurrencies, as markets, led by Bitcoin, have been performing in parallel with U.S. technology stocks. Sheets anticipates that the U.S. Federal Reserve (Fed) may reduce interest rates in the next 12 months, believing that the recession risk remains low and that the market has factored these expectations into current prices.

“Recession has been priced into the markets,” Sheets stated. “A weak dollar, positive earnings revisions, and improved exchange rates will aid the S&P 500’s strength. We expect the Fed to cut rates, which usually doesn’t reduce the index’s coefficient. Consequently, we believe the S&P 500 could reach 6,500 points by mid-next year,” he added. Currently, the S&P 500 Index stands at 6,038. Despite the slowdown in economic growth, the effects of moderate inflation and a weak dollar could lead to upward movements in the index.

Markets have generally adopted a forward-looking approach, meaning that short-term negatives are largely reflected in market prices. With improved earnings revisions and supportive monetary policy from the Fed, investors may exhibit more optimism in the medium term. The forecast of new peaks for the S&P 500 by mid-next year is closely monitored, especially in relation to developments in the U.S. economy and changes in global financial conditions.

Morgan Stanley's prediction of new peaks for the S&P 500 is based on several factors, including the firm's expectation of fewer rate cuts than the market anticipates, with potentially only one cut this year. Higher interest rates are seen as beneficial for credit, which could positively impact the overall market performance. The firm's economics team expects a modest push from tariffs, underlined by firmer prices for new cars, apparel, and other goods such as household items. This economic environment is conducive to a bullish trend, as the earnings revisions breadth continues to improve. Morgan Stanley projects that the S&P 500 could experience a 13% increase over the next 12 months, driven by these positive economic indicators and the firm's strategic insights.

The S&P 500 was down 0.1% in afternoon trading and is just 1.8% below its all-time high set in February. This slight dip does not deter Morgan Stanley's bullish stance, as the firm believes that the index has the potential to surpass its previous highs. The firm's prediction is supported by historical data, which shows that more upward revisions tend to result in stronger overall stock market performance. Morgan Stanley's strategic growth outlook is further bolstered by the firm's accurate predictions in the past, adding weight to their current prediction of new peaks for the S&P 500.