Morgan Stanley: Valuations appear rich, reaffirms 4500 price target on S&P 500

Morgan Stanley said they still expect a soft landing for the US economy, though they have lowered the probability to 50% from the previous 80%.

Meanwhile, the Wall Street giant has raised its real gross domestic product (GDP) forecasts by 50%, expecting 2.3% growth in 2024 and 2.1% in 2025. They project three rate cuts in 2024, compared to the consensus expectations of two, with the first cut anticipated for September.

However, the firm’s economists believe the cycle's terminal rate will be 3.625% by the end of 2025, saying the economy is now entering “a new secular rates regime driven by structural changes and higher debts/deficits.”

For the equity market, Morgan Stanley says valuations “appear rich,” trading at over 21.8x forward earnings for Q4 2024 and with an equity risk premium of just 41 basis points—levels reminiscent of the end of 1998 before the Tech Wreck.

Moreover, the stock/bond correlations remain positive, undermining the diversification benefits traditionally associated with a 60/40 portfolio.

“We are forecasting US fixed income markets to ultimately compete with US stock index returns especially once the Fed begins to cut, with both grinding out mid-single advances in the most likely case,” the firm noted.

Within this, Morgan Stanley reiterates a December 2024 price target of 4,500 for the S&P 500, reflecting views that the index will trade within a broad range of 4,100 to 5,100.

“That said, we are inclined to neutralize strong factor positionings. We are balancing exposures between defensives and cyclicals, growth and value and mega versus large/mid and small caps,” they added.