Banking giant Morgan Stanley expects the current S&P 500 losses to play out in the first half of 2025, with the benchmark index hampered by policy uncertainty, fiscal headwinds, and earnings pressure.
At the time of reporting, the index had lost the 5,700 support, dropping 1.3% to 5,696. Over the past week, the S&P 500 has also been in the red, plunging almost 2%.
S&P 500 one-week chart. Source: Google Finance
According to the bank’s chief U.S. equity strategist, Michael Wilson, the index could drop further and find support around 5,500 in the first six months of 2025.
Wilson noted that the S&P 500 has struggled to break above 6,100, which he previously identified as a key resistance, while downside risks appear contained at 5,500.
“Our work on the tariff risk to earnings and fiscal headwinds suggest that the low end of the first half range is ~5,500,” the analyst said.
S&P 500 to hit new high in 2025
Interestingly, he expects the benchmark to recover in 2025 and maintain a year-end target of 6,500, though he warned of continued volatility.
“Price action at the lower end of the aforementioned range (toward ~5,500) is likely an attractive entry point assuming one is willing to tolerate continued volatility over the next several months,” he noted.
Wilson added that several factors could support a near-term rebound, including a 50-basis-point decline in the 10-year Treasury yield since mid-January and a 6% weakening of the U.S. dollar, which could ease pressure on multinational earnings.
Additionally, the analyst emphasized that market conditions will remain challenging until fiscal and monetary policies shift, with earnings revisions still under pressure. He also acknowledged a recent market rotation into defensive sectors but suggested cyclical equities could regain leadership once economic data strengthens.
However, the firm warned that the index could drop by a massive 20% in a recession.
It’s worth noting that U.S. stocks have largely been impacted by uncertainty stemming from Donald Trump-initiated tariffs, which have plunged the country into a trade war with key partners. Although some tariffs have been paused, investor interest remains low.
U.S. stocks downgraded
Interestingly, more analysts are sounding cautious regarding the U.S. market outlook, with HSBC recommending that investors take a pause. On March 10, HSBC downgraded U.S. stocks to ‘Neutral’ while upgrading European equities (excluding the UK) to ‘Overweight,’ citing shifting market dynamics.
The bank’s strategists believe U.S. markets are already pricing in a “mini earnings recession” in early 2025, limiting further upside potential. Meanwhile, Europe is witnessing a boost from fiscal stimulus, particularly in Germany, alongside changing global trade trends.
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