U.S. stocks could extend their bull-market run well into next year, a top Wall Street analyst suggested Monday, as the world's largest economy outperforms its peers under the leadership of President-elect Donald Trump and the Federal Reserve adds valuation support with more 2025 interest rate cuts.
The assessment from Morgan Stanley's Mike Wilson, well-known on Wall Street for his usually sober takes on the market's near-term prospects, suggests investors are keen to ride the current post-election rally well into next year, even as valuations on the S&P 500 reach multiyear highs.
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Bank of America's weekly Flow Show report, published Friday, said global investors are "all-in on Trump 2.0" and are positioned for further gains for U.S. assets into the January inauguration.
U.S. stock funds, the report indicated, gathered $55.8 billion in new money last week, the most since March, with record flows into large-capitalization names and the best new allocation for small-cap funds this year.
Wilson sees the trend of betting on U.S. stocks, which are outperforming their global peers by the most in 75 years, continuing into 2025 as corporate profits improve and the economy extends its "no landing" narrative with support from new Trump administration policies.
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“U.S. valuations are rich, but this is helped by better macro in the U.S., potential future U.S. tariff policy being more negative for rest-of-world growth, and animal spirits leading to the rally broadening out,” Wilson said.
He and his team peg the S&P 500 at around 6,500 points by the end of next year, an 11% advance from current levels. Their bull case sees benchmark 10-year Treasury note yields falling to 2.2% and lifting the index as high as 7,400 points.
LSEG data suggest S&P 500 earnings will grow by around 14.1% next year, triple the 4.7% pace expected for 2024, while CME Group's FedWatch tool sees two or three quarter-point rate cuts over the next 12 months.
“We expect this broadening in earnings growth to continue as the Fed cuts rates into next year and business-cycle indicators continue to improve,” Wilson said.
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Treasury yields could derail any Trump-paced rally next year, however, as markets adjust their inflation forecasts and trim bets on Fed rate cuts in advance of his administration's broader economic agenda. The bond market move indicates investors' concern that Trump's proposals could reignite inflation.
Benchmark 10-year Treasury note yields have risen some 80 basis points, or 0.8 percentage point, since late September, despite 75 basis points of Fed rate cuts. And they're hovering near the 4.5% mark, uncomfortably close to the S&P 500's current dividend yield.
Wilson's reference to rich valuations, which have the S&P 500 trading at around 22.6 times the level of earnings expected over the next 12 months, remains a chief concern for some investors, including Bank of America's Savita Subramanian, who flags "dangerously bullish" signals in the current market.
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Equity sentiment, she notes, is at the highest levels in two and a half years, with passive fund flows on pace for their best year ever and a majority of consumers seeing higher stock prices over the next 12 months.
"Growing optimism suggests that reasons to be bullish are well-aired, leaving little room for an upside surprise," Subramanian argued. "But our bear market signposts — the triggers that typically precede an S&P 500 peak — are not signaling elevated risks of an imminent bear market."
Curiously, both Wilson and Subramanian noted similar risks to market performance into year-end and beyond, given the uncertain impact of Trump's expected trade, immigration and budget policies and the fading influence of the so-called Magnificent 7 tech giants.
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"We see pockets of euphoria in megacap tech, where sell-side analysts' long-term growth expectations for the Magnificent 7 are at a record high despite larger size, tougher [comparisons] and an arms race in AI spending representing new headwinds," Subramanian said.
"We see less upside to the cap-weighted index and prefer the equal-weighted benchmark," she added.
Wilson has a similar take and urges investors to "stay nimble amid changing market leadership" into next year.
"We also appreciate that valuation may be volatile depending on the impact of new policy initiatives,” he added.
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