Why Morgan Stanley's S&P 500 target forecasts a 19% gain for this top ASX ETF

Morgan Stanley expects the bull run on the S&P 500 Index is only getting started. Let's see why.

| More on:
bull market model with a bull looking at a rising chart

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • The S&P 500 dropped 1.6% amid concerns over diminishing hopes for a US Fed interest rate cut in 2025 and a potential AI bubble, yet it still has outperformed the ASX 200 year to date.
  • Morgan Stanley anticipates a significant surge for the S&P 500, driven by expected earnings growth and broadening economic recovery.
  • To capitalise on the forecasted gains, investors might consider a top ASX ETF offering exposure to major US firms like Nvidia, Microsoft, Apple, and Amazon.

The S&P 500 Index (SP: .INX) took a tumble overnight.

Amid diminishing hopes for another US Fed interest rate cut in 2025, and mounting concerns over a potential AI bubble, the S&P 500 closed down 1.6% on Thursday, ending the day at 6,539 points.

This sees the benchmark US stock market index down 5.1% since notching its record closing high of 6,891 points on 28 October.

Taking a step back, however, the US index has still materially outperformed the S&P/ASX 200 Index (ASX: XJO).

Year to date, the ASX 200 is up 2.9% while the S&P 500 has gained 11.2% over this same period.

As for the year ahead, the team at Morgan Stanley forecasts a big uplift for the US markets.

We'll look at one ASX ETF (exchange-traded fund) that stands to benefit from that bullish forecast below.

But first…

Why Morgan Stanley expects the S&P 500 to surge in 2026

"We believe a new bull market began in April with the end of a rolling recession and bear market," Morgan Stanley chief US equity strategist Mike Wilson said on Wednesday. "Remember the S&P 500 was down 20% and the average S&P stock was down more than 30% into April."

According to Wilson:

This narrative remains underappreciated, and we think there is significant upside in earnings over the next year as the recovery broadens and operating leverage returns with better volumes and pricing in many parts of the economy.

Our forecasts reflect this upside to earnings which is another reason why many stocks are not as expensive as they appear despite our acknowledgement that some areas of the market may appear somewhat frothy.

And Morgan Stanley expects the US index, and by extension, the ASX ETF we'll examine below, to come roaring back.

"For the S&P 500, our 12-month target is now 7,800, which assumes 17% earnings growth next year and a very modest contraction in valuation from today's levels," Wilson said.

That target represents a 19.3% upside from current levels.

As for which stocks could lead the charge, Wilson added:

Our favourite sectors include Financials, Industrials, and Healthcare. We are also upgrading Consumer Discretionary to overweight and prefer Goods over Services for the first time since 2021.

How to mirror those outsized potential gains with one ASX ETF

If you're looking to mimic the potential 19% plus gains Morgan Stanley expects from the S&P 500, you might want to have a look at the SPDR S&P 500 ETF Trust (ASX: SPY).

The ASX ETF provides you with exposure to 500 of the largest US-listed companies, with the goal of tracking the performance of the benchmark US index.

The ASX ETF's largest four holdings are Nvidia Corp (NASDAQ: NVDA), Microsoft Corp (NASDAQ: MSFT), Apple Inc (NASDAQ: AAPL), and Amazon.com Inc (NASDAQ: AMZN).

Motley Fool contributor Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, Apple, Microsoft, and Nvidia. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Amazon, Apple, Microsoft, and Nvidia. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ETFs

A trendy woman wearing sunglasses splashes cash notes from her hands.
ETFs

Could this undervalued ASX stock be your ticket to millionaire status?

This investment could deliver almost everything an investor could want to reach $1 million.

Read more »

Young Female investor gazes out window at cityscape
ETFs

3 high-quality ASX ETFs to buy in December

Want to invest in the best stocks? Here's an easy way to do it.

Read more »

Two men look excited on the trading floor as they hold telephones to their ears and one points upwards.
ETFs

3 explosive ASX ETFs to buy and hold

These funds could be destined for big things in the future. Let's find out why.

Read more »

Miner with thumbs up at mine
ETFs

Expert names 2 preferred ASX ETFs reaping the rewards of surging mining shares

Mining-focused ASX ETFs have been boosted by rising commodity prices and higher mining share prices in 2025.

Read more »

Australian dollar notes in the pocket of a man's jeans, symbolising dividends.
ETFs

This new ETF aims to pay high monthly dividends, helped along by gearing

A new ETF from Betashares aims to deliver a strong monthly dividend yield without excess volatility.

Read more »

A man points at a paper as he holds an alarm clock, indicating the ex-dividend date is approaching.
ETFs

3 ASX ETFs I'd buy right now to build wealth

Here's why these funds could be destined to deliver big returns over the next decade.

Read more »

Three happy construction workers on an infrastructure site have a chat.
ETFs

Meet the newest ASX ETF from Betashares

Meet the new kid on the block.

Read more »

An accountant gleefully makes corrections and calculations on his abacus with a pile of papers next to him.
ETFs

Which of the most popular ASX ETFs has brought the best returns this year?

Do you have exposure to these funds?

Read more »