Bloomberg reports that Michael Wilson, a renowned Morgan Stanley strategist with bearish views on US equities in recent years, now holds an outright bullish outlook for 2025. The strategist anticipates the S&P 500 to end next year around the 6,500 level, representing a 11% increase from Friday's close. This upward trajectory is expected to be driven by improving economic growth and further Federal Reserve interest-rate cuts. Previously, he had set a target of 5,400 for the benchmark in mid-2025.

Benefits of US Valuations and Macroeconomic Factors

Morgan Stanley strategists note that US valuations are currently rich, but this is partly due to better macroeconomic conditions in the US. Potential future US tariff policies are expected to have a more negative impact on the rest of the world's growth, while animal spirits are leading to a broader rally in the market. Deregulation under the Donald Trump administration will also benefit US corporates, although the impact of other potential policies remains unclear.After accurately predicting the stock selloff in 2022, Wilson maintained a bearish outlook through 2023 as markets rallied. However, he finally relented and raised his target for the S&P 500 earlier this year, suggesting that the benchmark could reach 6,100 by the end of 2024.Since the start of 2023, US stocks have surged by over 50%, driven by the excitement surrounding artificial intelligence developments, a surprisingly resilient economy, and interest-rate cuts. Wilson believes that this broadening in earnings growth will continue as the Fed cuts rates into the next year and business cycle indicators continue to improve.The implementation of Trump's economic agenda may further support market sentiment. However, Wilson advises investors to remain flexible in their sector and stock selections due to the lack of visibility regarding the impact of policies on immigration, trade, deregulation, and government spending.Post-election uncertainty has led the strategists to maintain a wider-than-normal range of outcomes for stocks. In the worst-case scenario, the S&P could drop 22% to 4,600 points, while in the most bullish case, it could surge 26% to 7,400 points.The bank expects the US stock market to continue to outperform the rest of the world, especially Europe. Morgan Stanley strategists have lowered their rating for the MSCI Europe index to neutral, as more visibility is needed on US policies such as trade tariffs.Over at Goldman Sachs Group Inc., strategists led by Peter Oppenheimer forecast total global equity returns in dollar terms of 10% through to the end of 2025. They write that equity valuations have increased, leaving little room for further valuation expansion. Instead, they expect index returns to be driven largely by earnings growth.