Morgan Stanley sets end-2022 S&P 500 target at 4,400

Morgan Stanley analysts see the S&P 500 (.SPX) moving lower in 2022, with equity markets more volatile as earnings growth slows, bond yields climb and companies try to manage supply chain disruptions and higher input costs.

In a note on Sunday, the firm said it was underweight the benchmark S&P index due to slower earnings per share growth and higher starting valuations versus its global peers, and its base-case target of 4,400 implied downside potential of 5%.

On an earnings per share (EPS) view, Morgan Stanley sees the best growth next year in Europe and Japan, while the firm is neutral on emerging markets.

While the firm still expects solid EPS growth next year, “uncertainty around that expectation goes up materially given cost pressures, supply issues, along with tax and policy uncertainty that is unique to the U.S.,” the analysts wrote in the note. With the rest of the world having lagged the U.S. recovery, the firm sees more “catch up” potential elsewhere and less earnings volatility over the next 12 months.

While Morgan Stanley does expect earnings for the S&P 500 overall to be solid, chief U.S. equity strategist Michael Wilson expects “significant” earnings dispersion at the stock level, making the year more about stocks than sectors or styles.

Still, even with the expectation that sectors and styles will be more volatile, the firm is overweight healthcare (.SPXHC), real estate (.SPLRCR) and financials (.SPSY). Consumer discretionary (.SPLRCD), more specifically stocks that are good-oriented, are an underweight, as is tech hardware.