"Policy bottom" has appeared! Morgan Stanley predicts a rebound in US stocks in the second half of the year, with the S&P 500 aiming for 6500 next year.

Morgan Stanley released a research report stating that although the US stock market faces many challenges in the first half of 2025, they hold a more optimistic outlook for the second half of the year and for 2026, and reiterated their forecast of 6500 points for the S&P 500 index over the next 12 months. Morgan Stanley pointed out that at the beginning of the year, the market faced challenges in the first half due to the impact of "risk aversion" policies. Although the growth resistance related to tariffs exceeded expectations, the market may have already reached its low point. Currently, the average decline of S&P 500 index components this year has reached 30%. In addition, the overall tariff rate for Chinese goods has been significantly reduced from 145% to 30%, significantly reducing the risk of economic recession. The bank's economists expect 7 rate cuts in 2026, providing support for valuations above average levels. However, the main short-term risk to the stock market comes from the back-end interest rates, with the 10-year US Treasury yield hovering around the key level of 4.50%. If it remains high, it will suppress the expansion of price-earnings ratios, keeping the S&P 500 index in the range of 5500-6100 points in the first half of the year, gradually moving towards the target price of 6500 points over the next 12 months. Morgan Stanley's target price is based on a 12-month forward earnings per share of $302 and a price-earnings ratio of 21.5 times. Despite the recent market pullback, Morgan Stanley has not made any adjustments to its target price. However, considering the decline in the first half of the year and the lagged impact of tariffs on earnings, the bank believes that the target price is more likely to be achieved in mid-2026. On the earnings side, Morgan Stanley expects EPS to be $259 in 2025 (a 7% increase year-on-year), $283 in 2026 (a 9% increase), and $321 in 2027 (a 13% increase). The bank stated that over the past three years, US stocks have experienced a "rolling earnings recession", alleviating year-on-year base pressure and laying the foundation for subsequent EPS recovery. Profit growth will also benefit from Fed rate cuts, a weak dollar, and AI-driven efficiency improvements. In terms of investment recommendations, Morgan Stanley advises sticking to "high-quality curves" in cyclical industries; being selective with defensive hedges, focusing on low leverage, and low valuation stocks. Additionally, they raised their rating on the industrial sector from "neutral" to "overweight", believing it will benefit from domestic infrastructure development; while lowering the rating on the utility sector from "overweight" to "neutral". Furthermore, they continue to recommend overweighting large-cap stocks, as they have stronger pricing power and bargaining ability and are less sensitive to back-end interest rates, and are optimistic about the US stock market outperforming international stock markets as the earnings revision for the S&P 500 index begins to exceed the MSCI ACWI index excluding the US.