Morgan Stanley’s Slimmon Predicts S&P 500 to Soar Beyond 11% Gains

Key Takeaway

• Morgan Stanley's Andrew Slimmon sees potential for further stock market gains, citing low investor conviction and high cash reserves.
• The S&P 500 is up 11% this year, driven by strong economic data and corporate earnings, with Nvidia playing a significant role.
• Slimmon believes the market is in the early bull stage, with FOMO likely to drive investors back into equities as returns rise.

Investors Cling to Cash

Despite the S&P 500 Index climbing 11% this year, investors are still holding onto their cash, signaling a potential for further market gains. According to Morgan Stanley’s Andrew Slimmon, the preference for a 5% to 6% yield from Treasury bills over equities suggests that markets are still in the "fear" stage of the cycle. "That is symptomatic of the early stage of a bull market," Slimmon noted in an interview with Bloomberg Television. He emphasized that in the later stages of a bull market, investors typically expect higher returns.

The S&P 500's rise has been supported by strong economic data and corporate earnings, with traders betting on the Federal Reserve to start cutting rates this year. However, investor conviction remains low, as evidenced by the $16 billion inflow into money markets in the week ending May 15, pushing total assets to over $6 trillion, according to the Investment Company Institute. Slimmon believes that the abundance of cash waiting to be deployed could drive further gains, as the fear of missing out (FOMO) becomes a powerful motivator if stocks continue to rise. "I am completely convinced that the only thing that is going to get people off of the sidelines is ever higher returns for stocks," he said.

Michael Wilson's Bullish Shift

In a notable reversal, Morgan Stanley’s Michael Wilson, previously a prominent bear on Wall Street, has turned bullish on US stocks. Wilson now forecasts the S&P 500 to rise by 2% by June 2025, setting a target of 5,400 points, up from his earlier prediction of a 15% decline by December. This shift positions his forecast among the most optimistic on Wall Street. "In the US, we forecast robust EPS growth alongside modest multiple compression," Wilson wrote in a note with his Morgan Stanley colleagues, discussing the firm’s second-half views across various assets.

Wilson’s previous bearish stance persisted even as the S&P 500 hit record highs, citing a lack of broad earnings growth. However, he now acknowledges a "sunny macro environment" that will support risk assets in the latter half of the year. Despite this optimism, Wilson cautions that economic outcomes are becoming harder to predict due to volatile data.

Broader Market Sentiment

Wilson’s upgrade leaves JPMorgan Chase & Co.’s Dubravko Lakos-Bujas as one of the few remaining prominent bears on Wall Street, with a forecast predicting a more than 20% slump in the S&P 500 by year-end. Meanwhile, Deutsche Bank AG strategists have also raised their end-2024 target for the index to 5,500 from 5,100, reflecting a more bullish outlook.

The Citigroup equity strategy team's Levkovich sentiment index has reached "euphoria" territory, a rare occurrence that has happened only six times in the past 34 years. This surge is attributed to increased trading volumes, particularly in retail and meme stocks, indicating a financial system "still awash in liquidity." Despite this, some market observers remain cautious. Jim Grant of "Grant's Interest Rate Observer" notes that the return of higher rates has not yet caused a recession, but warns that prolonged high rates could eventually lead to "substantial damage."

Investment Strategies

Wilson recommends a barbell approach, focusing on quality cyclical stocks and quality growth, while maintaining long exposure to defensive sectors such as consumer staples and utilities. This strategy aims to balance potential gains from economic growth with the stability of defensive stocks.

Walmart's recent performance offers additional insights into consumer behavior. The retail giant reported mid-single-digit sales growth, driven by increased sales at existing stores, and raised its profit growth target. The company's shares rose 7%, reaching an all-time high. However, the reasons behind Walmart's success are complex. It remains unclear whether the retailer is benefiting from a prospering customer base or from consumers under financial stress seeking value. Walmart CFO noted that "Many of the value-seeking behaviors we witnessed last year have continued," indicating a consistent trend rather than a sudden shift.

Street Views

• Andrew Slimmon, Morgan Stanley (Bullish on the market):

  "That is symptomatic of the early stage of a bull market. In the later stages of a bull market, people expect higher returns."
  "I am completely convinced that the only thing that is going to get people off of the sidelines is ever higher returns for stocks."