The tariff panic subsides, is the rebound of the US stock market determined? Morgan Stanley's Wilson warns: it is too early to be optimistic now

Wall Street's famous short sellers have issued a warning that, despite an improvement in sentiment in the U.S. stock market, it is still too early to sound the all-clear.

On Monday, according to the team of Morgan Stanley strategist Michael Wilson, the four key factors supporting the ongoing rebound in U.S. stocks include: optimism about a trade agreement with China, stable earnings expectations, a more dovish stance from the Federal Reserve, and ten-year Treasury yields below 4% with no signs of economic recession.

However, the latter two factors have yet to materialize. Last week, Federal Reserve Chairman Jerome Powell reiterated the central bank's "wait-and-see" attitude regarding easing monetary policy, while the ten-year Treasury yield has now exceeded 4.4%. Morgan Stanley believes that a ten-year Treasury yield above 4.5% will pose a headwind to valuations.

Previously, due to concerns over a global trade war, the S&P 500 index fell nearly 19% from its peak in February. However, as the U.S. government began trade negotiations with its partners, the index has recovered about half of its losses.

The Ministry of Commerce announced on Monday afternoon that China and the U.S. have each canceled a total of 91% of the additional tariffs and suspended the implementation of 24% of counter-tariffs. The two countries agreed to temporarily reduce tariffs on each other's goods, providing both sides with three months to resolve their differences, which boosted S&P 500 futures and risk assets.

Morgan Stanley's research shows that during earnings season, tariff issues have been a focal point for companies, with record mentions in earnings call conferences. About 30 companies have withdrawn or suspended their earnings guidance due to tariff uncertainties, particularly in the automotive, durable goods, and industrial sectors. Nevertheless, strategists noted that the average price of these stocks has increased since the release of earnings reports.

The next focus is on technical resistance levels. Michael Wilson believes that the S&P 500 index has now broken through the previous resistance level of 5500 and has returned to the 5500-6100 range prior to the tariff announcement. He believes that the more significant upside potential will depend on the acceleration of trade agreements and earnings revisions. Strategists stated:

Since the start of this rally about a month ago, the next and most important technical test for the S&P 500 index will be the convergence of the 200-day and 100-day moving averages (5750-5800).