US LNG exports surge but will buyers in China turn up?
Investing.com -- The S&P 500’s path forward depends on either a more dovish Federal Reserve or meaningful progress on tariff negotiations, according to Morgan Stanley (NYSE:MS).
The firm said in a note that Wednesday’s tariff announcement was “clearly more hawkish than expected,” though exemptions for Mexico and Canada under the USMCA provide some relief.
“With the S&P 500 below 5500, we think first order tariff impacts are much more in the price than potential second order impacts,” Morgan Stanley wrote.
However, the firm warned that extended negotiations or additional trade measures could increase the risk of a recession.
“If high tariff rates stay in place, negotiations are drawn out over a multi-month period and additional measures are taken with key trading partners, the risk of a recession/our bear case is likely to rise more materially.”
Morgan Stanley sees earnings revisions and labor market data as key indicators to monitor in the near term.
The firm also highlighted that Consumer Discretionary Goods likely remains the clear underperformer from tariff risk, while cyclicals and small caps with less pricing power could face further pressure.
Instead, Morgan Stanley favors “quality + defensive equities under the surface of the market.”
On the broader market outlook, the firm sees limited upside at current levels.
“Upside would likely have to come from either a more dovish Fed than expected or near-term progress on tariff negotiations,” Morgan Stanley said.
However, with its economists now forecasting no Fed rate cuts this year and uncertainty around trade talks, the firm believes the likelihood of a material rally has diminished. If the S&P 500 closes below 5450-5500, Morgan Stanley identified 5100-5200 as the next support level.