Morgan Stanley sounds the alarm on the S&P 5500 point virtual break: In times of volatility, one should stick to investing in quality assets
Morgan Stanley warns that although the S&P 500 index briefly broke through 5,500 points, the breakout rally is fragile. Analysts point out that four catalysts are needed to sustain a breakthrough of 5,600-5,650 points, including tariff reductions and a dovish shift from the Federal Reserve. The volatility of the 10-year U.S. Treasury yield is crucial for market direction; if the yield falls below 4%, it could drive the stock market up, while the opposite could trigger a flight to safety. Morgan Stanley advises investors to focus on high-quality stocks with strong earnings resilience that are undervalued, especially in the U.S. stock market
The Zhitong Finance APP noted that last week, the S&P 500 index briefly broke through the 5,500-point resistance set by Morgan Stanley, mainly driven by optimistic sentiment regarding potential tariff reductions between China and the U.S. and a shift in Federal Reserve policy. However, analysts warned that this breakout trend remains fragile.
Michael Wilson, Chief U.S. Equity Strategist and Chief Investment Officer at Morgan Stanley, pointed out in a report: "To sustain a breakout in the 5,600-5,650 point range, four catalysts need to make substantial progress: significant tariff reductions, a dovish shift from the Federal Reserve, long-term interest rates below 4% without accompanying recession signals, and upward revisions in earnings expectations."
The changing correlation between bonds and stocks makes the trend of yields crucial for market direction, and the recent fluctuations in the 10-year U.S. Treasury yield highlight the risks at the end of the cycle. Morgan Stanley analysts noted: "If the 10-year yield falls below 4% due to a compression of term premiums, it could drive the stock market up, but if yields exceed 4.5%, it could trigger risk-averse behavior."
The report also emphasized that a stable labor market is key to avoiding Morgan Stanley's pessimistic scenario (a 200 basis point spike in unemployment). Although the April ISM manufacturing data may affect market sentiment, Wilson stressed: "The stock market has not yet priced in a true labor market recession—we need to see non-farm payrolls exceed 100,000 for several consecutive months and initial jobless claims remain stable to reduce the current 40% probability of recession."
In an uncertain environment, Morgan Stanley recommends doubling down on high-quality stocks with earnings resilience that are undervalued by the market. Wilson stated: "This is not a bet on cyclical industries—but rather to choose companies whose pricing has already reflected an ISM below 44 level and whose historical drawdowns are smaller than during past recession periods."
Morgan Stanley analysts suggest overweighting U.S. stocks rather than international stocks, especially European and Japanese stocks that are susceptible to dollar movements. Wilson concluded: "The stability of U.S. corporate earnings, the quality factor advantage, and potential favorable exchange rates create a relative advantage in this increasingly volatile end of the cycle."
He reiterated: "Investors should use market volatility to increase allocations to quality assets—including defensive stocks and selected cyclical stocks—rather than chasing breakout trends that lack fundamental confirmation."
