Morgan Stanley predicts that the S&P 500 will be at 4500 at the end of 2024
Morgan Stanley’s Mike Wilson expects stocks to remain nearly flat in 2024.
Wilson forecast S&P 500 (^GSPC) earnings growth to $229 per share, leading to a year-end target for the benchmark index of 4,500. This target represents an upside of nearly 2% from current levels and is well below the S&P 500’s average annual return of about 10%.
Wilson’s forecast is based in part on lackluster commentary from companies about the health of the U.S. economy and U.S. consumers in 2024.
“While the medium-term earnings outlook looks positive, the near-term environment remains challenging,” Wilson wrote. “The breadth of earnings revisions, which typically precede consensus estimates, has once again shifted and is at its lowest level since March this year. This trend is underpinned by overall more cautious corporate commentary, with a renewed focus on macroeconomics.”
Wilson also stresses that the erosion of fiscal stimulus to boost consumer spending and the impact of the Federal Reserve’s “longer-term higher” interest rate strategy are “increasingly weighing on both business and consumer sentiment.”
“The combination of these factors suggests that earnings headwinds are likely to persist into early next year before a sustained recovery occurs,” Wilson wrote.
Importantly, Wilson, who was already pessimistic about the market and earnings before the 2022 decline, expects earnings to improve in 2024.
He sees positive operating leverage and growth from artificial intelligence driving margin expansion. That’s in line with the views of many analysts, who believe that the earnings decline may have bottomed out in the last quarter as S&P 500 companies are expected to emerge from their earnings recession in the current reporting period.
Wilson points out that margin pressure is a common reason for an earnings recession, as companies adjust their operations to increase profits. Bank of America’s Ohsung Kwon recently told Yahoo Finance that his team is increasingly confident about what has happened and that the companies are well-positioned for 2024. Wilson sees the realignment of companies in a similar way.
“Companies need time to adjust spending to slowing revenue growth,” Wilson wrote. “However, once this happens and demand begins to recover, positive operating leverage will resume, driving margin expansion and profit growth. This expectation is anchored in our profit forecasts for 2024 (+7% growth) and 2025 (+16% growth).”
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