“We expect US earnings growth to trough in early 2024 and rebound thereafter,” strategists including Serena Tang and Vishwanath Tirupattur wrote. US growth may stay strong relative to other regions, with emerging markets growth likely to disappoint, they said.

Morgan Stanley recommends a “barbell of defensive growth and late-cycle cyclicals” and sees the S&P 500 Index at 4,500 at the end of next year. It closed at 4,415.24 on Friday. It also added that legislators will need to get the balance correct between “tightening just enough and easing quickly enough”.

The optimistic outlook for next year would mark a turnaround in the bearish view of US stocks as investors fret about the impact of higher-for-longer interest rates. Until recently Morgan Stanley’s Michael Wilson — one of Wall Street’s most prominent bearish voices — maintained the bank’s longstanding target for the S&P 500 at 3,900 for this year-end.

“Unlike the prior two years where we had a strong RoW > US preference, 2024 is different,” the note said about next year’s asset allocations, referring to the US versus the rest of the world. “Risk-off sentiment in the first half also drives safe-haven demand for US dollar and US dollar-denominated assets.”

The strategists also see the likelihood of US bonds turning more attractive than a year ago on the back of “easier” policies. Yields may fall through 2024 — with those on the 10-year Treasury reaching 3.95% — as markets prices rise at the start of rate-cut cycles. They forecast the Federal Reserve to make its first rate cut in June. 

Meanwhile, Morgan Stanley is cautious on emerging markets’ fixed income and sees limited prospects for a recovery in EM local bonds without a recovery in Treasuries.

“EM returns look less than compelling across stocks, credit, and local rates,” the strategists wrote. “Geopolitics will weigh on some countries. And the potential for China entering a debt-deflation loop remains a headwind to EM outperformance.”