Stock Market Outlook: Morgan Stanley’s Wilson Sees Tough Start to 2025

• Morgan Stanley predicts stocks will face a rough start amid soaring bond yields and a strong dollar.
• It says the market may get a boost later in the year as Trump’s pro-business policies kick in.
• The bank expects the S&P 500 to gain about 8% this year, about in line with Wall Street’s consensus.

Morgan Stanley’s Mike Wilson says this year will be a tale of two halves for stocks, with the market set for a difficult few months before policy changes are felt by investors.

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The bank’s chief investment officer and top stock strategist pointed to soaring bond yields and a stronger dollar, which he said would pose a risk to stocks in the first half of the year as breadth, or the proportion of stocks participating in the market’s rally, remains poor.

Bond yields have surged in recent weeks; the 10-year Treasury yield climbed above 4.5% amid hawkish commentary from the Federal Reserve. Wilson said that’s flipped the correlation between the S&P 500 and bond yields “decisively into negative territory,” a divergence not seen since last summer.

But Wilson added that that could change with improving breadth amid lower rates, a weaker dollar, stronger earnings revisions, and clarity on President-elect Donald Trump’s tariff policies and Cabinet confirmations.

The market is pricing in one or two more interest-rate cuts this year. Meanwhile, the dollar has remained strong in recent weeks, nearing levels that could hurt companies with large international exposure and thus posing a risk to the market more broadly, Wilson said.

The dollar dipped on Monday after a Washington Post report said Trump’s aides were reviewing plans to impose tariffs on every country but only on imports identified as critical to national or economic security, amounting to a watered-down version of Trump’s original proposals. Trump denied the report in a post on Truth Social, and the US currency regained some losses.

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Wilson said that with higher yields and a strong dollar, stocks would continue to face headwinds in the first half of the year.

“We think 2025 could be a year of two halves with the first half being more challenged,” he wrote.

He said that after that, Trump’s policy changes — like corporate tax cuts and government-efficiency measures — would most likely kick in to provide a boost to stocks.

Overall, Wall Street remains largely optimistic on market returns this year, with an average 2025 year-end price target of 6,539 for the S&P 500, implying a 9% gain from current levels after back-to-back years with gains of over 20%

Wilson’s team in November issued a 12-month target of 6,500 for the benchmark index, just below the Wall Street average.