Morgan Stanley Predicts Further S&P 500 Losses
Mike Wilson, the lead strategist at Morgan Stanley, is warning investors to prepare for a potential 7% to 8% further drop in the S&P 500 unless there’s a reversal in the White House’s tariff plans or a change in the Federal Reserve’s stance.
Wilson’s team, in a note sent to clients on Monday, stated that the next major support level for the S&P 500 — where buyers may step in — is at 4,700. This level aligns with the 200-week moving average, a key long-term technical indicator, which they believe offers strong support.
The S&P 500 closed last week at 5,074.08, experiencing a 9% decline, its steepest weekly drop since March 2020. This was sparked by a sharp two-day selloff after President Trump announced global reciprocal tariffs. While Morgan Stanley had previously set 5,100 as a critical support level, they adjusted it to 4,700 given the continued downward pressure on the market, with S&P 500 futures showing a potential 3% loss and Dow futures dropping over 1,200 points.
Trump’s administration has not shown any signs of backing down on the tariffs, and Federal Reserve Chairman Jerome Powell suggested the central bank would adopt a “wait and see” approach, assessing the economic impact of the tariffs.
Wilson’s team pointed out that many stocks have struggled throughout the year, despite the broader indexes holding up until mid-February. This underperformance has been primarily driven by the broad trend of negative earnings revisions, with more companies lowering earnings expectations than those raising them. As the tariffs weigh on market sentiment, further negative earnings revisions are expected.
“The question now is how much of this has been priced in, and which sectors and stocks are either attractive or at risk,” said Wilson. Cyclical stocks, which are closely tied to the economy, have underperformed defensive stocks by over 40% in the past year, particularly from April to September last year.
For Morgan Stanley, this suggests that concerns over economic growth have persisted for some time, reinforcing their view that the economy has been in a prolonged struggle. The strong performance of defensive stocks has highlighted their dominance, and Wilson’s team believes the recent selloff in these stocks signals forced liquidation and signs of exhaustion in the correction.
The strategists are sticking with their preference for high-quality, large-cap, and defensive stocks, emphasizing that these are the types of investments that are likely to weather the current environment best. One such stock is American Tower REIT, which has been upgraded to overweight and added to their Fresh Money Buy list, replacing Eaton Corp. Wilson’s team sees American Tower as a defensive stock with growth potential, particularly as interest rates are expected to decrease, in line with their forecast.
Also on the list are CenterPoint Energy, Coca-Cola, Colgate-Palmolive, McDonald’s, Northrop Grumman, Progressive Corp., Public Service Enterprise, and Walmart.
Wilson’s team also expects small-cap stocks to continue underperforming due to their greater exposure to economic uncertainty, weakening earnings projections, and historical trends of underperformance in later market cycles. While there are opportunities beneath the surface in the small-cap sector, they believe it’s too early to start picking bottoms. Among small-caps, they favor high-quality stocks in financial services, software, telecom services, biotech, and household products.
