Morgan Stanley IM: Equity Market Commentary - January 2025

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After two years of the S&P 500 index generating over +20% returns annually, I sense much more optimism than I did in 2023 and 2024.¹

This is a shame since the peak to trough -25% SPX decline in 2022 offered such a great buying opportunity.²

Given the sense that I am no longer an out-of-consensus bull, it is emotionally tempting to remain contrarian and turn bearish.

However, the third year of a bull market, while producing only a mediocre return on average, is typically not negative.³

In my opinion, it’s too early for a down year, considering there still remains too much cash clamoring into equities from the sidelines.

Gone are the days of the consensus skeptics when daily I would hear, “why would I buy equities when I can get 5% risk-free.” Not anymore.

Instead, now I hear, “when is the pullback coming to allow cash to be put to work?" (By the way, we got one on Monday.)

Part of me could see a 2025 scenario where:

1. 2025 earnings per share growth exceeds market returns, pulling the market's overall P/E valuation down.
2. With enough negatives out there to cause a subpar year, the recently minted optimists could revert to being skeptics.
3. Only to have the market roar again in 2026.
4. Thereby marking 2025 more of a pause year than anything more sinister.

^{RISK CONSIDERATIONS
Diversification does not eliminate the risk of loss. There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and may therefore be less that what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this portfolio may be subject to certain additional risks. In general, equities securities’ values also fluctuate in response to activities specific to a company. Stocks of small- and medium-capitalization companies entail special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. Investments in foreign markets entail special risks such as currency, political, economic, market and liquidity risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risks). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility.}