Equities could face tough 6 months warns Morgan Stanley's Wilson

Equities could face tough 6 months warns Morgan Stanley's Wilson
But there could be gains for stocks in the second half of 2025.
JAN 06, 2025
By  Bloomberg

by Omar El Chmouri and Sagarika Jaisinghani

US equities could face a tough six months ahead as Treasury yields surge and the dollar advances on worries about inflation, according to Morgan Stanley strategists.

The correlation between the S&P 500 Index and bond yields has turned “decisively negative” as the 10-year Treasury yield climbed above 4.5%, strategist Michael Wilson warned in a note. The 30-year yield hit its highest level since late 2023 on Monday.

The dollar is now approaching levels that could pressure companies with a large international exposure, and that could hurt stocks more broadly in the first half of the year given market breadth is already poor, Wilson said.

“We think 2025 could be a year of two halves,” the strategist wrote, with market-friendly policies such as potential tax cuts likely to shore up stocks later in the year. 

The team in November issued a 12-month target of 6,500 points for the S&P 500, implying gains of about 9% from Friday’s close.

The rally in US stocks faltered in December on worries about economic growth and a more hawkish-than-expected policy outlook from the Federal Reserve. Technology stocks — which have driven the majority of the gains in the S&P 500 since October 2022 — were among the biggest laggards.

Wilson was among the biggest Wall Street bears until he turned more positive on stocks in mid-2024. While he expects the S&P 500 to rally this year, he has warned that it is not broad enough yet. 

The gap between the benchmark index as a whole and its individual components, as measured by the 200-day moving average, is historically wide, Wilson said. 

“This divergence can close in two ways — either breadth improves or the S&P 500 trades closer to its own 200-day moving average,” the strategist wrote. “The first scenario likely relies on a combination of lower rates, a weaker dollar, clarity on tariff policy/cabinet confirmations and stronger earnings revisions.”

 

Copyright Bloomberg News

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