Morgan Stanley's well-known short seller turns bullish: S&P 500 may soar to 7,400 points next year!

Perhaps being late is better than missing out entirely. Morgan Stanley's well-known short seller has joined the bullish camp for U.S. stocks—raising its rating on U.S. stocks to overweight, expecting the S&P 500 index to reach 6,500 points by the end of 2025, with a target price of 5,400 points for June 2025.

In fact, the investment bank's benchmark target price for the S&P 500 index by the end of next year is already higher than its previous "bull market" scenario of 6,350 points. Now, its target price for the index under the "bull market" scenario next year has risen to as high as 7,400 points.

Why did Morgan Stanley change its mind? The company stated in its 2025 outlook that it still believes stock valuations are high—actually higher than before. "Valuations should be higher than six months ago because the market is increasingly convinced of solid fundamentals. When investors see robust macroeconomic support for the fundamentals, valuations may be even higher in the next six months."

Morgan Stanley believes that the U.S. exceptionalism will continue. "The price-to-earnings ratio of the S&P 500 index will slightly narrow from 22.2 times to 21.5 times over the next 12 months, but still above the 10-year average. Our research shows that significant valuation compression is rarely seen during periods of above-average earnings growth and monetary policy easing," wrote the U.S. team led by Mike Wilson, who has been known for his bearish stance on U.S. stocks in recent years.

They expect earnings per share to grow by 13% in 2025 and another 12% in 2026. "We anticipate that as the Federal Reserve cuts interest rates next year, business cycle indicators will continue to improve, and recent earnings growth will expand further in 2025. The potential rise of corporate animal spirits after the election (as we saw after the 2016 election) could promote a more balanced earnings situation across the market in 2025," the team said.

The Morgan Stanley team also has interesting views on the Department of Government Efficiency and its leaders Elon Musk and Vivek Ramaswamy.

The team stated, "While many doubt whether they can truly cut spending by improving efficiency, we believe it makes sense to take a more open-minded approach given the individuals involved and that this seems to be the focus of Trump's second term. Since the final outcome is still uncertain, we believe the term premium will indicate how the bond market views this issue." They refer to the excess return required by investors to take on interest rate risk.

Morgan Stanley is also bullish on Japanese stocks, while considering tariff risks, the company has downgraded its rating on European stocks to neutral. Trade tensions have made emerging market stocks its least favored market The investment bank expects the 10-year U.S. Treasury yield to drop to 3.55% next year, down from the previous 3.75%, as they anticipate that the Federal Reserve's rate cuts will exceed market expectations.

In terms of commodities, due to supply growth from OPEC and non-OPEC countries, they set a target price of $66 per barrel for Brent crude oil in 2025. They also expect limited upside for gold, as they set a target price of $2,600 per ounce for gold in 2025