Morgan Stanley has boosted its S&P 500 target — but here’s where it sees the real opportunities

The global equities team at Goldman Sachs on Monday put out a note saying markets will still be stuck in a “fat and flat” range — that is, there may be fairly large swings in equity markets, the fat part, but not a whole lot of actual progress, i.e., flat.

Perhaps more notable are the signs of optimism coming from Morgan Stanley. The team lifted its S&P 500
SPX
target to 4,500 for the end of 2024 from 4,200 (although the latter number only extended to June 2024).

The end of rate hikes, and the beginning of rate cuts, means that high-grade bonds will outperform, the dollar
DXY
will stay strong and emerging markets will lag, they say.

Granted, the team aren’t exactly ecstatic. “Financial conditions are tight. Rate cuts generally aren’t expected until later in 2024. Downside risks to global growth are high. An earnings recession is still in train. Bond supply continues to be a market concern. EM fundamentals face headwinds. Cross-asset correlations have not budged from extremes. Finesse will be needed to find openings in markets which can generate positive returns,” the team say.

They’re expecting cuts from both the U.S. Federal Reserve and the European Central Bank in June next year, and they’re also expecting China to find its footing.

What will work? “2024 will once again be a good year for income investing. Even if rates don’t fall as much as we expect, for yield-focused investors U.S. core bonds at 6%+ yields are the most attractive since 2009. Valuations for high-quality fixed income look attractive outright,” they say.

As for stocks, they (and Goldman, incidentally) love Japan. “For Japanese stocks, we’ve long argued that the market is supported by secular factors, lifting [return on equities] to converge with global stocks. This is playing out. The region is also more insulated from downside risks to Asia growth and geopolitical risks,” they say.

They also recommend a barbell approach of defensive growth and late-cycle cyclicals, citing data showing average returns of 8% when the Conference Board’s leading economic index contracts from peaks of at least 3%, outside of recession. “This is historically a supportive performance backdrop for (1) traditional defensives (healthcare, staples and utilities), (2) select growth opportunities (lower volatility growth, in particular, along with stocks levered to secular themes that can outweigh cyclical risks), and (3) late cycle cyclicals (industrials and energy.)”

Among their traditional defensive picks: Costco
COST,
-0.58%,
US Foods
USFD,
-0.78%,
Walmart
WMT,
-0.02%,
Keurig Dr Pepper
KDP,
+0.87%
and Philip Morris International
PM,
-0.03%.
More defensive/lower volatility growth stocks that are overweight include Nike
NKE,
-1.55%,
McDonald’s
MCD,
+0.04%,
Hilton
HLT,
-0.09%,
Marriott
MAR,
-0.09%
and Yum Brands
YUM,
-0.52%.
Late-cycle cyclicals include Northrop Grumman
NOC,
-0.07%,
ConocoPhillips
COP,
+0.44%,
Marathon Oil
MRO,
+0.42%
and Delta Airlines
DAL,
+0.01%.

The market

U.S. stock futures
ES00,
-0.46%

NQ00,
-0.62%
were perched a slight bit lower ahead of CPI data on Tuesday. Bitcoin
BTCUSD,
-1.12%
was weaker, having surged 39% over the last month.

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The buzz

Moody’s late Friday lowered the outlook on the U.S. credit rating to negative ahead of what could be another government shutdown, though the main reason cited was rising interest rates and the lack of fiscal measures to offset them.

Boeing
BA,
+3.75%
shares rose after a report from Bloomberg that China may lift a commercial freeze on the 737 Max, when XI Jinping visits San Francisco for the APEC summit. Separately, Emirates made a $52 billion purchase of Boeing aircraft.

Novo Nordisk
NVO,
-2.40%
released the full results of a heart trial of its popular weight-loss drug for people without diabetes.

Exxon Mobil
XOM,
+0.71%
said it will start producing lithium for electric vehicle batteries by 2027.

A U.K. Cabinet reshuffle saw the Rishi Sunak fire controversial Home Secretary Suella Braverman, as former Prime Minister David Cameron returned as foreign secretary.

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