The year 2025 is poised to be a tale of two halves for the stock market, according to Morgan Stanley. Initial headwinds are expected due to rising bond yields and a strong dollar, potentially creating a challenging environment for equities in the first half of the year. However, the bank anticipates a market boost later in the year as the impact of pro-business policies takes hold.
Mike Wilson, Morgan Stanley’s Chief Investment Officer and leading stock strategist, highlights the surge in bond yields and the strength of the dollar as key risk factors for stocks in the near term. The 10-year Treasury yield recently surpassed 4.5% following hawkish statements from the Federal Reserve. This rise in yields has negatively impacted the correlation between the S&P 500 and bond yields, a divergence not observed since the previous summer. Furthermore, the dollar’s persistent strength could potentially harm companies with significant international operations, posing a broader risk to the market.
Wilson suggests that this dynamic could shift with improving market breadth, potentially driven by lower interest rates, a weaker dollar, stronger earnings revisions, and greater clarity on trade policies and cabinet appointments. Current market expectations include one or two interest rate cuts this year. Recent reports indicated potential revisions to tariff plans, focusing on imports deemed critical for national or economic security. While these reports initially caused a dip in the dollar, subsequent denials led to a recovery in the US currency.
Despite the initial challenges, Morgan Stanley remains optimistic about the long-term outlook. The bank believes that the second half of 2025 will likely see a positive impact from pro-business policies, such as corporate tax cuts and government efficiency measures. These initiatives are expected to provide a much-needed boost to the stock market.
While the first half of the year may present difficulties for investors, Morgan Stanley’s analysis suggests that the latter half holds promise for market growth. Wall Street generally maintains a positive outlook for market returns in 2025, with an average year-end S&P 500 price target of 6,539, representing a potential 9% increase from current levels. This projection follows two consecutive years of substantial market gains exceeding 20%. The bank expects the S&P 500 to gain approximately 8% this year, aligning with the general consensus on Wall Street. While challenges are expected initially, the long-term outlook remains positive, driven by anticipated policy changes and potential improvements in market conditions.
