Morgan Stanley sees the S&P 500 rising 9% next year with the ‘average’ stock doing even better

Published Mon, Nov 16 20209:57 AM EST

Jesse Pound @/in/jesse-pound @jesserpound

(This story is for CNBC Pro subscribers only). The stock market is on track for a solid gain by the end of 2021, but smart stock pickers have a prime opportunity to bring in an even larger haul, according to Morgan Stanley. Morgan Stanley strategists, led by chief investment officer Mike Wilson, set their S & P 500 target for the end of 2021 at 3,900, a roughly 9% increase from current levels. The firm said in a note on Monday that it also expects the average stock to outperform the index over that time period. The firm said the outperformance for the average stock is typical during this phase of an economic recovery, and suggested that investors look for stocks that are set up for earnings growth. "2020 was all about beta and understanding how equity markets trade in and around a recession that handed us the fattest pitch we've seen in a decade. 2021 will be much more about stock picking (alpha) and should favor those companies that can deliver earnings growth that isn't already expected or priced," the firm said in a note Monday. Morgan Stanley said it could be volatile to end this year. The firm's estimate for the end of 2020 is 3,350 , with a range of 3,150 to 3,550. The S & P 500 closed near the top end of that range on Friday. The rally in 2021 will have different leaders than 2020, the firm said, with the economic recovery boosting cyclical stocks. The U.S. market has seen a rotation out of tech and into stocks more dependent on an end to the pandemic in recent days after preliminary results showed the Pfizer-BioNTech and Moderna vaccine candidates were more than 90% effective against Covid-19 in phase three trials . "We think the combination of a robust macro/earnings growth trajectory next year and recent positive vaccine news argues for procyclical leadership, not the beneficiaries of the lockdown," the note said. For sectors, Morgan Stanley suggests an overweight rating on financials, health care, and materials and industrials. The firm has an equal weight on tech and consumer discretionary and an underweight for utilities and consumer staples. "We continue to lean cyclically in our recommendations. This means small > large (among our highest conviction views) and cyclicals > defensives," the note said. Morgan Stanley included a list of "mispriced reopening & recovery stocks." In the sectors that Morgan Stanley has as overweight, some of the names include Ally Financial in financials, Alaska Airlines in industrials and Freeport-McMoRan in materials. The S & P 500 is a market cap weighted index, meaning that the movements of the biggest stocks, such as Apple and Amazon, have a larger impact on the index level than smaller stocks. In 2020, the S & P 500 is up 11%, while the equal weight S & P 500 has gained just under 4%, meaning that the average stock has underperformed the index this year. The firm's stock market projection is based on the idea that interest rates will mover higher during 2021. "The conclusion for us is that real yields bottomed at the end of the August and we think it is a good sign the economic recovery is on track," the note said.

The headquarters of Morgan Stanley in New York.

Shannon Stapleton | Reuters

(This story is for CNBC Pro subscribers only).

The stock market is on track for a solid gain by the end of 2021, but smart stock pickers have a prime opportunity to bring in an even larger haul, according to Morgan Stanley.

Morgan Stanley strategists, led by chief investment officer Mike Wilson, set their S&P 500 target for the end of 2021 at 3,900, a roughly 9% increase from current levels. The firm said in a note on Monday that it also expects the average stock to outperform the index over that time period.