Stocks were little changed ahead of key inflation data

Morgan Stanley expects the S&P 500 to end 2024 at 4,500

Morgan Stanley’s Mike Wilson sees stocks roughly stabilizing in 2024.

Wilson expects earnings in the S&P 500 (^GSPC) to grow to $229 per share, leading to the benchmark index’s year-end target of 4,500. This target represents an upside of about 2% from current levels, well below the average annual return about 10% For the Standard & Poor’s 500 Index.

Wilson’s forecast stems, in part, from lackluster comments from companies about the health of the U.S. economy and consumers by 2024.

“While the medium-term outlook for earnings looks positive, the near-term backdrop remains challenging,” Wilson wrote. “The range of earnings revisions, which typically leads consensus estimates, has moved back and is at the lowest level since March of this year. This trend is supported by generally more cautious corporate comments that are once again focused on the macro economy.”

Wilson also highlights how the erosion of fiscal stimulus to fuel consumer spending and the impact of the Fed’s “higher for longer” interest rate strategy is “increasingly impacting business and consumer sentiment.”

“The combination of these factors suggests that earnings headwinds will likely persist into early next year before a durable recovery takes hold,” Wilson wrote.

More importantly, Wilson, who has been pessimistic about the market and earnings since before the 2022 pullout, sees future earnings improvements in 2024.

He sees positive operating leverage and AI-driven growth driving margin expansion. This is in line with many analysts who expect the earnings decline will likely bottom out in the fourth quarter, with S&P 500 companies expected to emerge from their earnings slump during the current reporting period.

Wilson points out that margin pressure is a common primary driver of earnings stagnation as companies adjust their operations to increase profits. Bank of America’s Osung Kwon recently told Yahoo Finance that his team has become increasingly confident about what’s happened and that companies are well positioned going into 2024. Wilson feels similarly about rebalancing from companies.

“It takes time for companies to size expenses in line with slowing revenue growth,” Wilson wrote. “However, once that happens, and demand begins to recover, positive operating leverage resumes and drives margin expansion and earnings growth. These forecasts are included in our 2024 outlook (growth +7%) and 2025 earnings outlook (growth +16%).”

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