US stocks face uncertainty as economic growth determines rally
US stocks have started the year on a cautious note as traders scale back their optimism regarding the timing and magnitude of US interest rate cuts. This has halted the nine-week rally of the S&P 500. According to Michael Wilson, a strategist at Morgan Stanley, the stock market is likely to experience “twists and turns” throughout the year as views on the economy continue to shift. The key factor that will determine the fate of US stocks is economic growth.
Morgan Stanley predicts twists and turns in the US stock market
Michael Wilson of Morgan Stanley expects the US stock market to see volatility throughout the year due to changes in the economic outlook. He suggests that a trading range is likely until there is more clarity on the state of the economy. Wilson believes that the stock market will need a reacceleration of growth for prices to move significantly higher. In light of this, he advises investors to focus on single stocks, factors, and sectors rather than cap-weighted indexes.
Growth reacceleration needed for US equities to surge, says Morgan Stanley
According to Morgan Stanley’s Michael Wilson, US stocks will only resume last year’s rally if there is a reacceleration of economic growth while interest rates remain relatively tame. Wilson states that growth needs to pick up for equity prices to make significant gains. This suggests that US stocks are currently in a trading range until there is a more definitive outcome in terms of economic growth.
Three possible scenarios for the US economy, according to Morgan Stanley
Wilson outlines three possible scenarios for the US economy this year. The first scenario, which he considers the most likely, is a soft landing with muted real growth and decelerating inflation. In this situation, defensive growth stocks and late-cycle cyclicals are expected to outperform. The second scenario is a soft landing with accelerating nominal growth, which gained probability after the recent meeting of the US Federal Reserve. The final scenario is a hard landing, with recession risks still above average. Traditional defensives would be expected to outperform in this scenario.
Wall Street remains divided on US equities, record highs still expected
While some Wall Street strategists warn that US equities are due for a pause after last quarter’s sharp gains, others, including Goldman Sachs and Bank of America, still anticipate new record highs for the S&P 500 this year. RBC Capital Markets strategist Lori Calvasina recently raised her target to 5,150, implying a 10% gain through 2024. Michael Wilson has maintained his target of 4,500 for the S&P 500 since November, with the index currently at 4,697 points. The market outlook remains uncertain, with differing views among experts.
Analyst comment
Negative: US stocks face uncertainty as economic growth determines rally
As an analyst, I anticipate that the US stock market will experience volatility and “twists and turns” throughout the year, influenced by changing economic outlooks. The market is likely to remain in a trading range until there is more clarity on the state of the economy and a reacceleration of growth. Investors should focus on single stocks, factors, and sectors rather than cap-weighted indexes. The market outlook remains uncertain with differing views among experts.
