Morgan Stanley warns of headwinds for U.S. stocks in 2025
Rising yields, strong dollar weigh on U.S. stocks
As Treasury yields surge and the dollar strengthens, Morgan Stanley strategists caution that U.S. equities may face significant challenges in the first half of 2025.
Concerns over inflation and limited market breadth add to the headwinds, potentially dampening investor optimism. The 10-year Treasury yield has climbed above 4.5%, while the 30-year yield recently reached its highest levels since late 2023, reports Bloomberg.
According to Michael Wilson, Morgan Stanley's chief equity strategist, this has caused the correlation between the S&P 500 Index and bond yields to turn "decisively negative." At the same time, the U.S. dollar has strengthened to levels that could weigh on multinational corporations, particularly those with significant international exposure. Wilson noted that this dynamic, combined with already narrow market participation, could pressure stocks in the coming months.
A year of two halves
Despite these short-term challenges, Wilson predicts a turnaround later in the year. He anticipates that market-friendly policies, including potential tax cuts, could support a recovery in the latter half of 2025.
In November, Morgan Stanley set a 12-month target of 6,500 points for the S&P 500, indicating a potential 9% increase from its recent close. However, the path to achieving these gains remains uncertain. The rally in U.S. equities lost momentum in December amid concerns about economic growth and a more hawkish Federal Reserve. Technology stocks, which have been the primary drivers of the S&P 500’s gains since October 2022, were among the hardest hit.
Diverging market performance
Wilson also highlighted a significant gap between the S&P 500's performance and that of its individual components, measured by the 200-day moving average. This divergence could resolve in one of two ways: either broader market participation improves, or the index pulls back closer to its moving average. Factors such as lower interest rates, a weaker dollar, and stronger corporate earnings revisions could play pivotal roles in improving market conditions.
Reminder, shares of Cambricon Technologies Corp., a Chinese AI chipmaker, have soared by 383% in 2024.
