US equities face volatility as growth risks mount: Morgan Stanley

US equities face a volatile path ahead as policy uncertainty, fiscal constraints, immigration enforcement, the lagged impact of interest rate hikes, and strong dollar combine to pressure earnings forecasts, according to Morgan Stanley.

The investment bank said these factors have led to downward earnings revisions and turbulent trading conditions. It, however, maintains its 2025 target of 6500 for the S&P 500 - up from the current level of circa 5600 - but cautioned that reaching this milestone will involve volatility, as markets continue grappling with persistent growth risks.

"This fits with our long-standing view that policy would likely be sequenced in a more growth-negative way to start the year before lower deficits/rates and less crowding out of the private economy benefit the market later in the year- no pain, no gain," the bank said.

In its bear-case scenario, Morgan Stanley said that if economic growth weakens significantly and the likelihood of recession increases, the S&P 500 could fall to around 4600. Although such an outcome isn't the firm's base case, Morgan Stanley cautioned investors to be mindful of downside risks, noting conditions can deteriorate rapidly.

Conversely, the bank's bull-case scenario assumes that current policies initially weigh on growth but ultimately produce beneficial outcomes later in the year. Morgan Stanley summarised this approach as "no pain, no gain," with potential market upside directly tied to how much near-term downside policymakers are prepared to tolerate.

BlackRock acknowledged that policy uncertainty could weigh on US economic growth and equity markets in the short term. However, the asset manager remains overweight US equities, arguing widespread adoption and investment in artificial intelligence will create opportunities across multiple sectors and support market strength over the next year.

"We tap into beneficiaries outside the tech sector. We see valuations for big tech backed by strong earnings, and less lofty valuations for other sectors," BlackRock said.