- The stock market will offer investors a "richer opportunity" next year, Morgan Stanley said.
- This is because "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 moderate upside for the stock market in 2024, but gains remain for discerning investors.
Based on the bank's 2024 stock outlook, analysts predict the S&P 500 will end 2024 at the 4,500 mark, about 2% above the 4,400 it hovered around on Monday. And that's not all bad news.
"We see stock-specific risk remaining elevated, which should support a stock-picking environment and indicative of a richer opportunity beneath the market surface where valuations are more compelling than at the cap-weighted index level. "the analysts wrote on Monday.
This comes amid an unusual cocktail of micro and macro factors, such as weaker corporate earnings and a stronger-than-expected economy, according to Morgan Stanley.
That means that while average stocks haven't fared as well this year, especially compared to the so-called Magnificent Seven tech giants, some sectors of the market are more ripe for returns than others.
"Stock-specific risk has been rising all year, an indication that the market has been efficient in rewarding and punishing the right stocks for the right fundamental reasons," the analysts said.
For Morgan Stanley, those rewards will come in two areas of the market. Analysts stuck to their mantra of investing in defensive growth stocks (healthcare, utilities and commodities) and late-cycle cyclical stocks (industrials and energy).
In the near term, stocks face headwinds from a bifurcated market that has seen huge gains in technology and not much elsewhere, reflecting a "challenging earnings dynamic." 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 "closest on record."
"We think this dynamic is likely to persist into early 2024, before a sustainable earnings recovery takes hold (ultimately, we'll see +7% earnings growth next year)," the analysts wrote.
"The question for investors at this stage is whether the leaders can drag the laggards to their level of performance or whether the laggards will eventually overwhelm the leaders' ability to continue to deliver in this challenging macro environment."
