Wall Street just made two bullish predictions for the next year

  • S&P Global Market Intelligence raises its one-year S&P 500 target to 2,575.
  • Morgan Stanley reiterates its 2,700 target, highlighting its fondness for S&P 500 call options despite what it says is a potentially challenging backdrop heading into 2018.

Two of Wall Street's biggest firms published bold calls about the stock market in the coming year.

S&P Global Market Intelligence on Monday raised its one-year S&P 500 target to 2,575. On Sunday evening, Morgan Stanley reiterated its 2,700 target, highlighting its fondness for S&P 500 call options despite what it says is a potentially challenging backdrop heading into 2018.

The S&P target implies nearly 6 percent upside from current levels, while Morgan Stanley's is 11 percent higher.

S&P Global's new 12-month target is considerably higher than the 2,340 it had set in October.

"In summary, we believe that existing macro-fundamentals that include sustained moderate U.S. and global GDP growth, against an environment of low global inflation, will continue to drive attractive total-returns across multiple asset classes," S&P Global strategists wrote in its outlook report.

While bullish on the solid gains made this year, the strategists highlight a clear fissure between value- and growth-oriented stocks' performance year to date; growth stocks have risen 12 percent while value stocks have risen just under 6 percent.

Sectors like information technology, which is trading at a higher price-to-earnings ratio than the broader market and contains growth stocks like the so-called FANG quartet of tech stocks, are seeing stretched valuations, said S&P Global portfolio manager Erin Gibbs. But value stocks remain at historically reasonable valuations.

"I think if we see investors switch from these really high-valuation [growth stocks] into your value [stocks], not only do you have some decent valuations that are reasonable, but you actually have better growth," Gibbs, one of the authors of the report, said Friday on CNBC's "Power Lunch."

Furthermore, stocks are forecasted to see double-digit earnings growth next year.

"For 18 months [out] we're looking solid, but we may suggest that investors want to switch from these very popular momentum stocks and start taking a look at value again," she said.

Improving economic growth, in addition to expectations of continued inflation, gives Morgan Stanley its cautiously bullish view.

"Synchronous self-sustaining growth, contained inflation and well-telegraphed, gradual withdrawal of policy should drive more animal spirits" in the second half of this year, wrote strategist Andrew Sheets.

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At the same time, they are not raising their target in part because many assets are historically expensive, the rate of improving growth may slow, and low volatility across asset classes "hints strongly that a benign outlook is already the market's expectation."

The trade the strategists recommend in this environment is a long position in S&P 500 calls. The confluence of low volatility and a steep skew in the options market make S&P 500 calls a particularly attractive way to capitalize on double-digit-percentage rally potential in the market, strategists wrote.

"We think that this is putting too much weight on valuations, and not enough on the combination of growing earnings, easy money and animal spirits," Sheets wrote.


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Sara Eisen

Sara Eisen joined CNBC in December 2013 as a correspondent, focusing on the global consumer. She is co-anchor of the 10AM ET hour of CNBC's "Squawk on the Street" (M-F, 9AM-11AM ET), broadcast from Post 9 at the New York Stock Exchange.

In March 2018, Eisen was named co-anchor of CNBC's "Power Lunch" (M-F, 1PM-3PM ET), which broadcasts from CNBC Global Headquarters in Englewood Cliffs, N.J.

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