Donald Trump’s tariffs have triggered historic stock market volatility, comparable to past financial crises.
Morgan Stanley noted that the S&P 500 has been fluctuating between 5,000 and 5,500.
The firm listed three things that need to happen for the index to break out of that range.
Donald Trump’s tariffs have triggered historic stock market volatility.
The S&P 500 recently fell 11% in just two days, a drop only surpassed by the 2020 coronavirus outbreak, the 2008 global financial crisis, and the 1987 Black Monday stock market crash.
On the other hand, the index rose 10% in a single day last week, one of the largest gains in history, and just had its best weekly performance since 2023.
In its latest research, Morgan Stanley noted that during these wild swings, the S&P 500 has been fluctuating between 5,000 and 5,500.
“Until we have more certainty about the depth of the slowdown and the timing of the recovery, stocks are likely to remain in a wide trading range with significant volatility,” Mike Wilson, the firm’s chief investment officer, told clients in a note Monday.
He and his fellow strategists elaborated on this, highlighting three things that need to happen for the S&P 500 to break 5,500.
1. A more dovish Fed
Morgan Stanley economists say the Federal Reserve is likely to keep interest rates unchanged this year to counter rising inflation that could come from tariffs and an expected economic slowdown.
A shift in Fed policy toward aggressive rate cuts could ultimately boost stock prices, though it would likely incur some pain in the short term.
That’s because a dovish move would likely require weak jobs data or stress in credit markets.
“While both scenarios could initially be negative for stocks, the adverse reaction could be short-lived if the Fed responds aggressively and a recession is not imminent,” Wilson said.
Markets got a taste of possible Fed action last week when Boston Fed President Susan Collins told the Financial Times that the central bank was ready to help stabilize markets if stress arose.
“We have to deploy our tools quickly, especially during periods of market instability. We are absolutely ready to act as needed,” Collins told the Financial Times.
2. 10-year Treasury yields fall
The 10-year Treasury yield has risen 50 basis points to 4.49% since April 4.
Inflation concerns over Trump’s tariffs and foreign investors selling U.S. bonds have put upward pressure on yields.
But if the situation reverses, the stock market will be more welcoming.
“A 10-year yield retreating back to 4% would also be positive for stocks, as long as it’s not accompanied by recessionary growth data,” Wilson said.
3. A bigger trade deal with China
Trump has said he’s looking to make a trade deal.
If he can reach a deal with China, it could be a big surprise for the stock market.
“A bigger trade deal with China that significantly reduces tariffs that are still elevated is also not a price-boosting factor from an upside catalyst perspective,” Wilson said.
The Trump administration has signaled its willingness to make a deal with China.
“The president has made it clear that he’s willing to make a deal with China,” White House press secretary Carolyn Levitt said Friday.
The Trump administration’s decision to at least temporarily exempt smartphones, semiconductors and other consumer electronics from tariffs could be an olive branch to a potential deal.
Risks abound
Despite the upside potential for stocks, there are still a number of risks to consider.
Wilson said if the 10-year Treasury yield jumps above 5%, it could cause a collapse in the S&P 500, which could fall below 5,000 and retest its lows.
Earnings season also presents risks.
“On the downside, we think the main risk to the stock market is a further deterioration in corporate earnings and/or confidence, triggering a labor cycle,” Wilson said.
