Morgan Stanley: US stocks may see a short-term rebound, but long-term recovery needs to overcome numerous obstacles
Morgan Stanley's strategy team pointed out that after a significant decline, the U.S. stock market has recently shown signs of a short-term rebound. Market sentiment and positioning indicators are oversold, and seasonal trading recovery along with a weaker dollar may boost corporate earnings. However, there are still technical concerns, as major indices have fallen below the 200-day moving average, and the small-cap benchmark has dropped below the 200-week moving average for the first time. Although a short-term rebound is possible, the long-term recovery faces multiple pressures, including high valuations, rising interest rates, and policy uncertainty
According to the Zhitong Finance APP, Morgan Stanley's strategy team pointed out last Sunday that after a significant decline since February, U.S. stocks have recently shown signs of a short-term rebound. Their analysis indicates that current market sentiment and positioning indicators are both in an oversold state since 2022, combined with expectations of seasonal trading recovery in late March and a weaker dollar potentially boosting corporate earnings in the first quarter, the market is expected to welcome a technical recovery.
However, despite the short-term rebound momentum, there are still technical concerns. The S&P 500 index, Nasdaq 100 index, and Russell 1000 growth/value index have all fallen below the 200-day moving average, which has shifted from a support level to a resistance level.
Notably, the small-cap benchmark Russell 2000 index has fallen below the 200-week moving average for the first time since the 2022-2023 bear market, indicating a degree of technical damage.
As of last Thursday, the S&P 500 index had reached the bank's predicted lower bound of 5,500 points for the first half of the year (actual closing at 5,505 points). Last Friday's market performance showed that the rebound was led by previously oversold low-quality, high-volatility stocks, but Morgan Stanley warned that the core contradictions driving this round of adjustments have not yet been resolved.
Multiple Pressures Restrain Long-term Trends
In fact, the main reason for the current market volatility is not just the new tariff policies of the Trump administration; deeper pressures stem from last year's excessively high valuations, the rise of the dollar and long-term interest rates after the Federal Reserve paused interest rate cuts, and new challenges facing the technology sector.
Additionally, the growth rate of capital expenditures in artificial intelligence is expected to slow down by 2025, which may impact the performance of tech giants. Meanwhile, the U.S. fiscal deficit for the fourth quarter of 2024 has surged 40% year-on-year, and the continuously expanding fiscal gap will become a drag on economic growth.
Policy uncertainty is also a concern. The newly established Department of Government Efficiency (DOGE) by the Trump administration, combined with tightened immigration policies and unexpected tariff measures, is pressuring stock market valuations by lowering price-to-earnings ratios.
Although a short-term rebound window may have opened, Morgan Stanley remains cautious about a long-term recovery. Downgrades in economic growth expectations are pressuring stock valuations; although quarterly earnings may see seasonal rebounds, sustained improvement will require time to validate.
From a policy perspective, the likelihood of stimulus measures such as tax cuts and deregulation being implemented in the short term is low. If the Federal Reserve is to restart easing, it needs to see significant deterioration in the labor market or credit market, and neither of these scenarios is a positive signal for the stock market.
Morgan Stanley strategist Michael Wilson summarized: "The current rebound is more likely to be a low-level fluctuation within the 5,500-6,100 range; to break new highs, significant easing of economic growth resistance or a shift in monetary policy is required."