Morgan Stanley’s chief investment officer believes any pullback in the S&P 500 is an opportunity to buy shares, predicting the index will break the 8,300 level in the coming months.
In Morgan Stanley’s Thoughts on the Market podcast, Mike Wilson say the US is now in a rolling recovery, and the equity correction in the first quarter is a clear signal that the market had already priced in several risks.
“In the first quarter, many investors looked at the S&P 500’s price decline of less than 10% and concluded that the market was complacent. I think this completely misses the point. About half of the Russell 3000 saw price declines of 20% or more, and the S&P 500’s price-to-earnings ratio fell 18% from its peak, while forward earnings continued to rise.
That is not complacency. That’s a market doing what it does best: discounting risk before the story catches up. And those risks were not small.
We had concerns about private lending and a big debate about AI disrupting the labor market, and about a new war that sent oil prices up 100%. In many of the areas most directly exposed to these risks, the market returned more than 40%.
So the provocative question I would like to ask now is this. What if the biggest risk from now on isn’t being too optimistic, but being too cautious after the market has already done its work?”
Wilson believes the S&P 500 will rise to 8,300 over the next 12 months, driven by higher earnings expectations.
“We increased our S&P 500 earnings per share by about 5% as operating leverage from the ongoing recovery, AI adoption, budget support and a capital investment cycle that continues to widen. That earnings point is critical. In previous cycles, when oil shocks ended the business cycle, earnings were already slowing or contracting before the shock hit. Today, the opposite is happening.”
With the 8,300 target in mind, Morgan Stanley’s CIO emphasizes that the S&P 500 won’t rise in a straight line, allowing long-term investors to accumulate on dips.
“The correction earlier this year was more significant than most think in terms of valuation, and the earnings story is only going to get better. The path won’t be smooth, so take advantage of any corrections to position yourself for the continued rise in earnings that we think will continue. Keep in mind that by the time the evidence seems clear, the opportunity has usually already passed.”
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