- Stocks will face a rough start to 2025 amid soaring bond yields and a strong dollar, Morgan Stanley said.
- The market will get a boost later in the year, though, as Trump’s pro-business policies kick in.
- The bank expects the S&P 500 to gain around 8% this year, about in-line with Wall Street’s consensus.
This year will be a tale of two halves for stocks, with the market set for a difficult few months before policy changes are felt by investors, Morgan Stanley’s Mike Wilson said.
The bank’s chief investment officer and top stock strategist pointed to soaring bond yields and a stronger dollar, which he says will pose a risk to stocks in the first half of the year as breadth—or the proportion of stocks participating in the market’s rally—remains poor.
Bond yields have surged in recent weeks, with the 10-year Treasury yield climbing above 4.5% amid hawkish commentary from the Federal Reserve. That’s flipped the correlation between the S&P 500 and bond yields “decisively into negative territory,” a divergence not seen since last summer, Wilson said.
That could change, though, with improving breadth amid a combination of lower rates, a weaker dollar, stronger earnings revisions, and clarity on president-elect Donald Trump’s tariff policies and cabinet confirmations, Wilson added.
As of now, the market is pricing in just one or two more interest rate cuts this year. Meanwhile, the dollar has remained strong in recent weeks, nearing levels that could hurt companies with a large international exposure and thus posing a risk to the market more broadly, Wilson says.
The dollar dipped on Monday after the Washington Post reported that Trump’s aides are reviewing plans to impose tariffs on every country but only on imports identified as critical to national or economic security, amounting to a more watered-down version of Trump’s original proposals. Trump denied the report on a post on Truth Social, causing the US currency to regain some losses.
With higher yields and a strong dollar, stocks will continue to face headwinds in the first half of the year, Wilson said.
“[W]e think 2025 could be a year of two halves with the first half being more challenged,” he wrote.
After that period, Trump’s policy changes—like corporate tax cuts and government efficiency measures—will likely kick in to provide a boost to stocks, Wilson says.
Overall, Wall Street remains largely optimistic on market returns this year, with an average 2025 year-end price target of 6,539 for the S&P 500, implying 9% gains from current levels after back-to-back years with gains of over 20%
Wilson’s team issued a 12-month target of 6,500 for the benchmark index in November, just below the Wall Street average.