Morgan Stanley sees S&P 500 climbing another 11% — to 6,500 — next year

The new year is setting up to be a strong one thanks to lower Federal Reserve rates and a more business friendly presidency in Washington, according to Morgan Stanley. Strategist Michael Wilson sees the S & P 500 reaching 6,500 in 2025. That implies upside of 10.7% from Friday’s close. “The combination of the Fed rate cutting cycle with the election result has the potential to drive broad sentiment materially higher,” Wilson wrote. The Fed began cutting interest rates in September for the first time in more than four years, with a half-percentage point reduction. It again lowered rates this month, by a quarter-point. Wilson said the election results could lead to a “rise in corporate animal spirits” that may “catalyze a more balanced earnings profile across the market in 2025,” while an easier regulatory regime under President-elect Donald Trump boosts investor sentiment. Against this backdrop, the strategist advised clients to stay overweight financials — which should benefit from both lower fed rates and looser regulations. The sector is already up 6.8% since the Nov. 5 election, outperforming the other 10 S & P 500 sectors. XLF mountain 2024-11-05 Financials since Election Day To be sure, Wilson warned clients to stay nimble as higher rates and a stronger dollar also pose risks to the postelection rally. The benchmark 10-year Treasury note yield is up more than 80 basis points (0.8 percentage point) since the Fed began cutting rates. That’s in part to new data pointing to a more resilient economy than expected, and concern about the course of inflation under the new administration in Washington. Some of Trump’s policies, especially on tariffs on imported goods, have raised worry that inflation may creep back up — limiting how much the Fed can ease monetary policy. These unanswered questions have also led to a 3% surge in the dollar index since the election. “We would also add that if this administration is successful in cutting back government spending, this could lead to weaker growth next year than what is anticipated in our base case,” Wilson wrote. “This is also a reason why we are maintaining a wider than normal bull versus bear case skew.” While Wilson’s base case sees the S & P 500 rising to 6,500, his most optmistic bullish scenario takes the benchmark all the way to 7,400 — 26% above Friday’s close. His bearish scenario, however, is for the index to fall to 4,600 — about implying 21% downside. Wilson gained notoriety on Wall Street for nailing several broad market moves in recent years. However, his initial 2024 S & P 500 target proved too conservative at 4,500. He later raised it to 5,400 for midyear, but the benchmark blew past that level as well. Elsewhere Monday morning on Wall Street , Baird upgraded Roku to outperform from neutral, calling this year’s sell-off in the stock a buying opportunity. “ROKU is well positioned to capture the benefits of an ongoing transition toward streaming activity, having already achieved meaningful scale with ~86 [million] active accounts,” Baird told clients in a note. “We also believe the continued fragmentation of content and heightened industry focus on monetization/engagement should help magnify the value of ROKU’s platform.”