Morgan Stanley expects the Japanese equity market to outperform in 2024, benefitting from reflation and ROE improvement, which are considered secular positives.
On the other hand, their strategists suggest that Europe and emerging markets may experience disappointing growth. As far as the U.S. is concerned, the banking giant anticipates a recovery in U.S. earnings, with expectations of a trough in early 2024 followed by a rebound.
Morgan Stanley strategists see the S&P 500 ending the year at 4,500, which offers an upside of just 2% compared to current levels.
“For December 2024, we forecast a 17.0x P/E multiple on 12-month forward EPS (2025) of $266, which equates to a 4,500 price target ~12 months from today. Our 2024 earnings forecast of $229 (+7%Y) assumes 4-5%Y topline growth in addition to modest margin expansion as labor cost pressures ease,” the analysts wrote.
The recommended investment strategy for 2024 involves adopting a barbell approach, combining defensive growth and late-cycle cyclicals.
“We see stock specific risk remaining elevated, which should be supportive of a stock-picking environment and indicative of a richer opportunity set under the surface of the market where valuations are more compelling than they are at the cap-weighted index level.”
The near-term outlook for earnings faces challenges despite a positive medium-term perspective. Earnings revisions breadth, a leading indicator, has declined to its lowest level since March, the analysts noted.
This trend is supported by cautious corporate commentary, often focused on macroeconomic factors. Key indicators such as the ISM PMIs and the Conference Board Consumer Confidence Index have recently decreased due to rising cyclical and geopolitical risks.
The prolonged period of 'higher for longer' interest rates is increasingly impacting both corporate and consumer sentiment.
“In our view, the combination of these factors suggests that earnings headwinds will likely persist into early next year before a durable recovery takes hold,” the analysts concluded.