Two top strategists on Wall Street have become more optimistic about the U.S. stock market, citing signs of a strong labor market, resilient economy, and falling interest rates.
Michael Wilson of Morgan Stanley, who was one of the most bearish strategists on Wall Street until mid-2024, said last Friday's explosive job growth data and expectations of further rate cuts by the Federal Reserve have improved his view on so-called cyclical stocks relative to safer defensive stocks.
Meanwhile, Goldman Sachs CEO David Kostin also raised his earnings growth forecast for S&P 500 companies next year, as a robust macro outlook drives profit margin expansion. The strategist raised the benchmark index's 12-month target from 6,000 to 6,300 points, implying a roughly 10% rise from current levels.
Wilson wrote in a report: "In terms of the stock market's reaction to employment/economic growth data, we still believe we are in a 'good is good' environment. The bond market's skepticism about a soft landing outcome is diminishing, which is an important signal for equity investors."
U.S. stocks have continued to rebound after a summer sell-off, as concerns about a recession have eased and the Federal Reserve has eased policy. According to swap data, traders expect the Fed to cut rates by another 100 basis points before next May. Last Friday's job data, which was much stronger than expected, also boosted market sentiment.
Wilson said this is a good sign for U.S. small-cap stocks, which will benefit from improved business activity and sentiment, as well as reduced investor positioning. The strategist reduced his long-term bets on large-cap stocks, citing diminishing risk-reward in the short term.
Among sectors, Wilson upgraded financial stocks to "overweight" and downgraded healthcare and consumer staples.
JPMorgan Chase (JPM.US) is expected to report earnings on Friday, providing the latest picture of bank profitability and officially kicking off the earnings season.