Morgan Stanley Strategist Sees 5%-10% S&P 500 Decline, Bull Market Ahead

The former prominent bear at Morgan Stanley has expressed that the U.S. stock market is forming a new bull market. However, the strategist believes that the S&P 500 index may face a short-term decline of 5% to 10% this quarter due to the impact of U.S. President Trump's trade policies on corporate balance sheets. This decline is expected to be brief and will provide an attractive entry point for investors. Ultimately, the improvement in corporate earnings growth expectations will drive the stock market higher.

The strategist emphasized that any pullback would be "short and shallow" and that he would "absolutely" buy during the pullback. The S&P 500 index recently hit a new all-time high, with its market capitalization increasing by approximately 11.5 trillion dollars in just a few months. In early April, the index was on the brink of a bear market following Trump's imposition of comprehensive tariffs on global trading partners. However, a week later, his decision to suspend the tariffs ignited the latest market rally.

During the market volatility, the strategist was one of the few on Wall Street who remained optimistic about U.S. stocks. Many of his peers had quickly downgraded their outlook, but as the market rebounded to new highs, they were forced to change their tune. The recent rally in the S&P 500 index comes as U.S. corporations and the economy have shown resilience in the face of the White House's ever-changing trade strategies. Additionally, the recently passed tax law has boosted market sentiment with its potential for earnings growth.

The strategist noted that earnings revisions are "broadening out," and corporations are adept at dealing with tariffs. The S&P 500 index's earnings revision trend has been improving since April. The strategist believes that the third quarter "could be a risk-concentrated quarter" as the impact of tariffs may begin to be reflected in product sales costs. However, he expects the market impact to be temporary, with investors quickly shifting their focus to growth expectations for 2026.

The June U.S. retail sales report, which showed strong performance, alleviated some concerns about consumer spending and supported this prediction. Early earnings reports indicate that corporations are experiencing mixed results as they navigate Trump's fluctuating trade plans. United Continental Holdings reported that the outlook for the second half of the year is more predictable, and the company may exceed its earnings targets due to passengers resuming flight bookings. Meanwhile, the largest aluminum producer in the U.S. reported a loss of 115 million dollars for the second quarter due to tariffs imposed on Canadian imports.

Despite the uncertainty surrounding the White House's trade plans, which could lead to short-term declines, the strategist remains confident that the market will continue to rise. The strategist stated that the market had already bottomed out in April, and all indicators they are tracking have shown significant improvement, even surpassing expectations.