The stock market in 2024 will offer a ‘richer opportunity set under the surface’ as earnings to rebound, Morgan Stanley says

• The stock market will offer investors a “richer opportunity” next year, Morgan Stanley said.
• That’s as the “market has been efficient in rewarding and punishing the right stocks for the right fundamental reasons.”
• Analysts predicted the S&P 500 will end 2024 at the 4,500 mark, up about 2% from current levels.

Morgan Stanley analysts see relatively muted stock market upside in 2024, but there are still gains to be had for discerning investors.

According to the bank’s 2024 equities outlook, analysts see the S&P 500 ending 2024 at the 4,500 mark, about 2% over the 4,400 it’s hovering at on Monday. And that’s not entirely bad news.

“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,” analysts wrote on Monday.

That’s amid an unusual cocktail of micro and macro factors, such as weaker corporate earnings and a strong-than-expected economy, according to Morgan Stanley.

That means that while the average stock has not done so well this year, especially compared to the so-called Magnificent Seven tech giants, some pockets of the market are riper for returns than others. 

“Stock specific risk has been on the rise all year, an indication the market has been efficient in rewarding and punishing the right stocks for the right fundamental reasons,” analysts said.

For Morgan Stanley, those rewards are to be reaped in two areas of the market. Analysts stuck to their mantra of investing in defensive growth stocks (healthcare, utilities and staples) and late-cycle cyclicals (industrials and energy). 

In the short-term, stocks face headwinds from a bifurcated market that has seen huge gains in tech and not much elsewhere, reflecting “challenging earnings dynamics.” With just seven stocks contributing the most to the S&P 500’s gains this year, analysts say the market’s performance has been the “narrowest on record.”

“We think these dynamics are likely to persist into early 2024 before a sustainable earnings recovery takes hold (we ultimately see +7% earnings growth next year),” analysts wrote.

“The question for investors at this stage is whether the leaders can drag the laggards up to their level of performance or if the laggards will eventually overwhelm the leaders’ ability to keep delivering in this challenging macro environment.”