MS-2025 US Equities Outlook

Key Points 1. Market Outlook and Leadership Changes: * The report emphasizes the importance of remaining nimble amidst changing market leadership due to potential uncertainty introduced by the recent election outcome. * The market has shifted from pricing a reflationary outcome in the spring, to a growth risk scenario in the summer, and now to a reaccelerating growth backdrop. * The report maintains a wider than normal bull versus bear case skew, with base case: 6,500; bull case 7,400; bear case 4,600. 2. Base Case Outlook: * The base case forecasts a 21.5x P/E multiple on 12-month forward (2026) EPS of $303, equating to a 6,500 forward 12-month price target. * A healthy mix of mid-single-digit revenue growth and margin expansion drives 2025 and 2026 EPS growth forecasts of 13% and 12%, respectively. * The report expects the recent broadening in earnings growth to continue in 2025 as the Fed cuts rates into next year and business cycle indicators continue to improve. 3. Investment Recommendations: * The report remains long quality cyclicals, as Fed rate cuts and stabilizing macro indicators are supportive of relative outperformance of this cohort. * The report prefers Financials and quality cyclicals, as the outcome of the US election raises the likelihood of a lighter regulatory environment and a potential rebound in animal spirits. 4. Sector Analysis: * Financials: The report upgrades Financials to overweight, driven by de-risked set-up into earnings season, accelerating capital markets activity, and compelling relative valuation and positioning. * Tech: The report prefers Software over Semis, as Software relative earnings revisions point to a catch up in relative performance. * Consumer Discretionary: The report remains underweight, as the combination of potential incremental tariffs and limited pricing power is likely to continue to weigh on Consumer Discretionary Goods stocks. * Consumer Staples: The report remains underweight, as leadership continues to skew away from defensives. 5. Risks: * Higher rates/term premium * Stronger dollar against easy compares * Y/Y price momentum vs. earnings revision breadth * Potential growth risk scenario leading to multiple compression * Excess liquidity waning and potentially weighing on valuations 6. Bull/Bear Case Scenarios: * Bull Case 1: Policy changes reduce crowding out and private economy blossoms. * Bull Case 2: Rebound in animal spirits drives organic growth reacceleration. * Bear Case 1: Hard landing/recession. * Bear Case 2: Higher rates pressure valuation – inflation surprises to the upside and the Fed is forced to consider hiking again or fiscal sustainability concerns drive the term premium materially higher. 7. Stock Screens: * The report includes several stock screens for idea generation, including Quality Cyclicals, Potential M&A Targets, Potential Election Beneficiaries within Industrials, High Quality SMID Caps with Lower Interest Rate Exposure, and others. 8. Consumer Outlook: * The report expects a little more holiday cheer this year but spending isn't likely to increase across all categories as consumers remain selective. * Higher-income consumers will likely still drive the strength, with three trends to consider: reacceleration in goods spending, bifurcation by income among consumers, and real growth in holiday spending potentially outpacing that of last year. 9. Sector Preferences Summary: * Overweight: Utilities, Financials, Industrials, Energy, Comm. Services, Health Care, Tech * Neutral: Materials, Real Estate, Consumer Services * Underweight: Consumer Discretionary Goods, Staples