2 Big Takeaways From Morgan Stanley’s Outlook for 2025
TradingKey - Normally, many asset and wealth managers will release 2025 outlooks with their expert forecasts for the upcoming year. They provide a good barometer for investors to understand the various scenarios that could play out in financial markets.
With president-elect Trump coming back into office in the US and markets close to all-time highs, it’s certainly set to be an interesting year. Morgan Stanley, a renowned wealth management firm, recently released its 2025 outlook and here are two big takeaways for investors.
- Navigating policy uncertainty
For the US, a loosening of regulatory requirements and changes in enforcement will likely bring about the most noticeable (positive) impacts on companies and markets. One possible outcome of this is that there could be a pickup in mergers and acquisitions (M&A) given the new power dynamic in Washington.
In terms of government policy, the Tax Cuts and Jobs Act (TCJA) provisions – that was set to expire at the end of 2025 – are now likely to be extended. This may lead to a marginal increase in the deficit but should avoid the tighter fiscal scenario if the tax cuts had disappeared.
One of the big unknowns is tariffs and immigration restrictions, which have the potential to restrain economic growth in the US. A lot of these policies will really depend on implementation and timing and Morgan Stanley economists emphasise that any tariffs can slow economic activity, but only with a lag of two to three quarters.
That means any unfavourable trade or immigration policies may only show up in the growth data in late 2025 or 2026. While major policy changes and announcements happen fast, their end goals are achieved much more slowly so the current positive macroeconomic conditions could last well in 2025.
Morgan Stanley’s Global Head of Fixed Income and Thematic Research, Michael Zezas, says: “There’s an array of alternative policy outcomes that could drive more positive or negative macroeconomic targets. We’re watching for signals from key policymakers.”
- Assessing stock market valuations
During Morgan Stanley’s mid-year investment outlook, they noted that equity valuations were already stretched. Since then, valuations have risen even further but for good reason.
In May of this year, global stocks’ valuations were just under the 80th percentile but with the MSCI All-Country World Index (ACWI) trading for a forward price-to-earnings (PE) multiple of 18.3x, that’s now pushed it above the 80th percentile mark. Tellingly, that marks a post-pandemic high.
Similar trends are also showing up in corporate credit, where investment grade (IG) and high yield (HY) spreads are the tightest they’ve been in 25 years.
Valuations are justified, though, on fundamentals that are better than average and if markets can be convinced that the US economy and company earnings’ fundamentals are sustained, then valuations could yet be higher six months from now.
How should investors position themselves?
In terms of positioning for the new year, Morgan Stanley recommends going overweight US equities and Japanese equities, with both central banks looking like they’ve pulled off soft landings for their respective economies.
Their take on European equities is positioned to neutral given the continent is growing more slowly than the US and is more exposed to tariff risks and a further slowdown in China. Meanwhile, emerging market stocks are still out of favour and are likely to remain so given any potential trade tensions would make them even less attractive.
