The S&P 500 will climb 8% in 2021 – and investors picking unloved stocks will profit the most, Morgan Stanley says

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  • A Morgan Stanley team led by Michael Wilson expects the S&P 500 to reach 3,900 by December 2021, implying an 8% rally from current levels.
  • Stock-picking will play an increasingly important role in separating winning investors from those trailing the market in 2021, Morgan Stanley strategists said Monday.
  • Investors should seek out companies that can deliver earnings growth that hasn’t yet been priced in, the bank said.
  • Last week’s rotation to value stocks suggests Treasury yields bottomed in August, and is a good sign the US economic recovery is on track, the team added.
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The ongoing equity bull market will remain intact over the next year, says Morgan Stanley. The firm expects the S&P 500 to rally to 3,900 by December 2021, implying an 8% climb from current levels.

Morgan Stanley also says stock-picking will play an increasingly important role in separating winning investors from the rest. With interest rates set to rise as the economy recovers in 2021, investors who can find hidden gems in the market will be best positioned to outperform, the team wrote.

“2021 will be much more about stock picking and should favor those companies that can deliver earnings growth that isn’t already expected or priced,” the team said.

Read more: GOLDMAN SACHS: Buy these 20 deeply underpriced stocks now before the recovery helps them rebound and crush Wall Street’s low expectations in 2021

To that end, the strategists recommend looking for underappreciated stocks in cyclical sectors and across value names as the economy gradually recovers and a vaccine nears distribution. Companies with their earnings closely tied to reopening and gross domestic product growth will also outperform, they said.

Supporting Morgan Stanley’s bull call is recent progress towards a COVID-19 vaccine and signals that an economic recovery is underway. 

Last week’s positive vaccine update from Pfizer and a market-friendly election outcome drove swaths of investor cash from bonds to value stocks and cyclicals. The recent outperformance of small caps and rising yields suggest Treasurys “bottomed at the end of August,” the strategists said, adding that “we think it is a good sign the economic recovery is on track.”

Read more: Goldman Sachs unveils the top 10 themes it expects to drive the markets in 2021 – and shares where to invest your money

Morgan Stanley’s S&P 500 bullishness matches optimism elsewhere on Wall Street.

Goldman Sachs sees the index hitting 4,100 by mid-2021 as a divided government and vaccine advancements lift investor sentiments. And JPMorgan strategists said in a November 9 note that the S&P 500 will hit 4,000 in early 2021, adding the aforementioned factors make for a “market nirvana.”

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