Uncertainty Surrounds 2025 U.S. Equities Outlook

Morgan Stanley’s CIO and Chief U.S. Equity Strategist Mike Wilson joins Andrew Pauker of the U.S. Equity Strategy team to break down the key issues for equity markets ahead of 2025, including the impact of potential deregulation and tariffs.

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Mike Wilson: Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief US Equity Strategist.

Andrew Pauker: And I'm Andrew Pauker from our US Equity Strategy Team.

Mike Wilson: Today we'll discuss our 2025 outlook for US equities.

It's Tuesday, November 26th at 5pm.

So let's get after it.

Andrew Pauker: Mike, we're forecasting a year-end 2025 price target of 6,500 for the S&P 500. That's about 9 percent upside from current levels. Walk us through the drivers of that price target from an earnings and valuation standpoint.

Mike Wilson: Yeah, I mean, I think, you know, this is really just rolling forward what we did this summer, which is we started to incorporate our economists’ soft-landing views. And, of course, our rate strategist view for 10-year yields, which, you know, factors into valuation.

We really didn't change any of our earnings forecast. That's where we've been very accurate. What we've been not accurate is on the multiple. And I think a lot of clients have also -- investors -- have been probably a little bit too conservative on their multiple assumption. And so, we went back and looked at, you know, periods when earnings growth is above average, which is what we're expecting. And that's just about 8 percent; anything north of that. Plus, when the Fed is actually cutting rates, which was not the case this past summer, it's just very difficult to see multiples go down. So, we actually do have about 5 percent depreciation in our multiple assumption on a year-over-year basis, but still it's very high relative to history.

But if the base case plays out, but from an economic standpoint and from a rate standpoint, it's unlikely earnings rates are going to come down. So, then we basically can get all of the appreciation from our earnings forecast for about, you know, 10-12 percent; a little bit of a discount from multiples, that gets you your 9 percent upside.

I just want to, you know, make sure listeners understand that the macro-outcomes are still very uncertain. And so just like this year, you know, we maybe pivot back and forth throughout the year … as [it] becomes [clear], you know, what the outcome is actually going to be.

For example, growth could be better; growth could be worse; rates could be higher; the Fed may not cut rates; they may have to raise rates again if inflation comes back. So, I would just, you know, make sure people understand it's not going to be a straight line no matter what happens. And we're going to try to navigate that with, you know, our style sector picks.

Andrew Pauker: There are a number of new policy dynamics to think through post the election that may have a significant impact on markets as we head into 2025, Mike. What are the potential policy changes that you think could be most impactful for equities next year?

Mike Wilson: Yeah, and I think a lot of this started to get discounted into the markets this fall, you know, the prediction polls were kinda leaning towards a Republican win, starting really in June – and it kind of went back and forth and then it really picked up steam in September and October. And the thing that the markets, equity market, are most excited about I would say, is this idea of deregulation. You know, that's something President-elect Trump has talked about. The Republicans seem to be on board with that. That sort of business friendly, if you will, kind of a repeat of his first term.

I would say on the negativ