Here’s the stock market playbook for 2025, according to Morgan Stanley’s top stock strategist

Wall Street is expecting another positive year for the stock market in 2025 — but there’s one investment strategy traders should follow, as the outlook for stocks is more mixed than it appears, according to Morgan Stanley’s top stock strategist.

Mike Wilson, the bank’s CIO and chief US equity strategist, said investors should adopt a barbell investment strategy. The approach refers to a portfolio mix that balances a high concentration of high- and low-risk assets.

That strategy is ideal for investors looking to capture gains in riskier areas in the market while hedging against potential losses — and the approach should be on investors’ radars amid uncertainty looming over the market into next year, Wilson said in a recent episode of Morgan Stanley’s “Thoughts on the Market” podcast.

Wilson pointed to the mixed dynamic in markets this year, with gains spread across high-quality, large-cap, and cyclical stocks, as well as lower-quality stocks. Given shifting expectations for inflation, economic growth, and Fed rate cuts, the groups have performed well at different times.

“Going into next year, I think this pattern continues, and it currently makes sense to have a barbell of large-cap high-quality cyclicals and growth stocks,” Wilson said.

Wilson also highlighted a mix of potential catalysts and risks for stocks next year, which a barbell strategy could be well-suited to handle.

Among the positive catalysts, Wall Street is eyeing deregulation and corporate tax cuts under Trump’s second term, which could fuel corporate earnings growth. The earnings outlook is particularly bright for large-cap quality stocks, Wilson added.

On the other hand, economic risks are swirling around some of Trump’s other proposed policies.

For instance, while Trump levied tariffs during his first term as president without a significant inflation increase, experts have said his tariff plan this time around is far more sweeping, which could lead to a potential surge in inflation next year.

Near-term risks also lie in Trump’s plan to deport millions of immigrants, which economists have said could hit the labor market. Proposed job cuts by the Department of Government Efficiency could also provide a near-term “growth negative,” Wilson said.

“Given the uncertainty around policy sequencing and implementation on tariffs, immigration and how much the Fed can cut rates next year, we suspect equity markets will tread a bit more conservatively in the first quarter than what we observed this fall,” he added.

The risk of a US recession also hasn’t completely gone away, Wilson said, speaking in a recent interview with Bloomberg. He noted that the US was in a late-cycle expansion, with the economy still pressured by higher interest rates and some signs of strain among small businesses and consumers.

“I don’t think the risk of a hard landing has been extinguished,” Wilson said. “Which is why we’re trading narrow again. People are going for the large-cap quality stocks. Which is why we don’t want to go full overweight on small-caps or low-quality … We are not of the view that this is going to be some big ramp into next year, that everything’s changed.”

Market forecasters are generally expecting a more muted year of gains for the S&P 500 in 2025, given the benchmark index’s second consecutive year of double-digit returns in 2024.

Wilson, who was a prominent bear on Wall Street in 2022 and 2023, has relaxed his outlook and raised his outlook for stocks. In 2025, Morgan Stanley is predicting the S&P 500 will end next year at around 6,500, implying an increase of over 7% from current levels.