MW Here's the next line in the sand for the S&P 500, according to Morgan Stanley

By Barbara Kollmeyer

The index needs to stay above 5,100 at the worst, says Mike Wilson

After the worst one-day slump since 2020 for the S&P 500, Wall Street strategists are drawing new lines in the sand for the index.

Morgan Stanley's chief U.S. equity strategist Mike Wilson said investors should now focus on 5,100 to 5,200 as the next levels of support for the S&P 500 SPX. Support levels serve as a floor for an asset, seen as the point at which an asset is perceived to be undervalued and will attract buyers.

Wilson had cautioned investors that if the index closed below 5,450/5500 on Thursday, that next level of support would kick in. President Donald Trump's tariff announcements sent the S&P 500 sliding 4.8% to 5,396.52, the largest percentage fall since June 11, 2020.

Read: A 'trade shock' sparked the biggest stock-market plunge since 2020. What investors need to know.

Wilson says that 5,500, a former support level is now a new resistance level. A resistance level is viewed as a ceiling for an asset, representing a point at which it's seen as overvalued and triggers selling.

"With the S&P 500 below 5500, we think first order tariff impacts are much more in the price than potential second order impacts (i.e., a more material hit to corporate confidence that raises the risk of an unemployment cycle/recession). Thus, the risk lies in the timeline of tariff negotiation and any potential responses," said Wilson.

If countries negotiate with the U.S. and those tariff rates come down, that would help stem pressure on investor confidence, while if those rates stay in place and negotiations become drawn out, he sees a higher risk of recession and the bank's bear case.

There are other headwinds that have been weighing on stocks - a less dovish Fed, federal workforce cuts and fears over a slowdown in artificial-intelligence capital expenditure growth.

"At this point, we think a near-term upward inflection in growth is unlikely to be the tactical catalyst for price appreciation at the index level. Upside would likely have to come from either a more dovish Fed than expected or near-term progress on tariff negotiations that clearly offers a path for lower tariff rates on key trading partners," said Wilson.

And given the "low probability" of a dovish Fed - Morgan Stanley's economists see no Fed cuts this year - and uncertainty around tariffs, "the likelihood of material, tactical upside (i.e., 3-5%+) at the index level has gone down since yesterday," said Wilson.

He added that if credit and funding markets, "remarkably stable in the face of slowing growth this year," were to meaningfully change, that would likely trigger a Fed response and help to put a floor under stocks and even a short-covering rally for lower quality names. "However, such an action would likely be accompanied by lower equity prices/multiples first," he added.

U.S. stock futures pointed to more selling on Friday as investors await nonfarm payrolls and a speech by Federal Reserve Chair Jerome Powell later.

The strategist is recommending investors keep buying quality and defensive equities, and cautioned that consumer discretionary goods remain clear underperformers due to tariff risk, with cyclicals and small-cap stocks also staying under pressure.

Morgan Stanley recently flagged a list of companies to mitigate tariff risks, including fast-food restaurants such as McDonald's $(MCD)$ and Domino's Pizza $(DPZ)$ .

Read: Here's how long Trump has to negotiate on tariffs - or risk serious damage to stocks and the U.S. economy

-Barbara Kollmeyer

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 04, 2025 04:11 ET (08:11 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.