Morgan Stanley strategists, led by Mike Wilson, are advising investors to prepare for a further 7% to 8% decline in the S&P 500, setting the next support level at 4,700, citing valuation support near the 200-week moving average, according to MarketWatch.
Last week, the S&P 500 closed at 5,074.08, marking a 9% drop—the largest since March 2020—following President Trump’s tariff announcements; this prompted Morgan Stanley to revise its support level from 5,100 amidst ongoing selling pressure, with futures indicating significant losses for both the S&P 500 and the Dow Jones Industrial Average.
Wilson’s team pointed out that many stocks had already been underperforming, even before mid-February, which they attribute to a higher number of analysts issuing negative earnings revisions. They anticipate that tariffs will exacerbate this trend by negatively impacting confidence and sentiment.
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The strategists highlighted that cyclical stocks have significantly lagged defensive stocks, underperforming by over 40% over the past year, a trend that emerged primarily between April and September, signaling long-standing concerns about economic growth and supporting a preference for large-cap quality stocks. They noted that the recent sell-off in defensive stocks suggests potential forced selling and exhaustion in the correction.
Morgan Stanley is reinforcing its preference for high-quality, large-cap, and defensive stocks, adding American Tower REIT to their Fresh Money Buy list and upgrading it to overweight, replacing Eaton Corp. They view American Tower as a defensive asset with growth potential, offering stability as interest rates potentially decrease.
Other companies on the Fresh Money Buy list include CenterPoint Energy, Coca-Cola, Colgate-Palmolive, McDonald’s, Northrop Grumman, Progressive Corp., Public Service Enterprise, and Walmart.
The Morgan Stanley team anticipates continued underperformance from small-cap stocks due to their greater vulnerability to economic uncertainties and weakening earnings per share estimates. They advise against bottom picking in the small-cap sector for now, while noting potentially “rich” opportunities within high-quality names, like financial services, software, telecom services, biotech, and household and personal products.
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