Strategist Mike Wilson says stick to says 4,700 is the next level of support

The board of the New York Stock Exchange (NYSE) is pictured at the closing bell in New York City, on April 4, 2025. Morgan Stanley is bracing clients for more selling.

Barring the White House backing down on its tariff plans or signs of easing from the Federal Reserve, investors should brace for the S&P 500 to slide another 7% to 8%.

That’s according to a Morgan Stanley team of strategists led by Mike Wilson, who told clients in a note early Monday that the next level of support for the index — the point at which buyers will step in — now sits at 4,700. They add that valuations offer better support at that level, which is close to the 200-week moving average, a longer-term indicator of technical trends.

The S&P 500 finished at 5,074.08 last week, falling 9% — its biggest weekly percentage drop since March 2020 — in a brutal two-day selloff after President Donald Trump’s global reciprocal tariffs were announced.

Morgan Stanley offered up 5,100 as a line in the sand last Thursday, but offered the new support level in part due to the fact stock futures were showing no letup in selling on Monday. S&P 500 futures indicated a more than 3% loss, with Dow Jones Industrial Average futures slumping over 1,200 points.

Trump and his administration showed no signs of backing off in comments on Sunday, while the Federal Reserve Chair Jerome Powell said Friday that the central bank would take a wait-and-see approach on how the economy reacts to tariffs.

Wilson and his team noted that many stocks have “traded poorly all year even if the major indexes held up until mid-February.” They attributed the weakness mostly to negative earnings revisions breadth — that is, more analysts revising down earnings versus positive revisions. More negative revisions should be expected as tariffs hit confidence and sentiment, they said.

“The question is how much of this has been priced and which sectors/stocks look attractive or vulnerable,” said the strategists. Cyclical names, whose performances are closely linked to the economy, have underperformed defensives by over 40% in the past year — largely between April and September last year, they noted.

To Morgan Stanley, this is a sign growth has been a worry for some time, and confirms their fears that the economy has been in a years-long struggle. That has led to large-cap quality dominance for stocks and indexes. “With the dramatic outperformance of defensives YTD [year to date], Friday’s sell off in these names suggests forced selling/liquidation and signs of exhaustion in the correction,” they said.

The strategists are doubling down on their preference for high quality/large cap and more defensive stocks and indexes.

One large-cap name they are adding is American Tower REIT to their Fresh Money Buy list, upgraded it to overweight and replacing Eaton Corp last week. “This is a defensive name with offensive properties that can offer a good balance in this kind of environment, especially as rates come down in line with our rates team’s forecast,” said Wilson and his team.

Also on that list: CenterPoint Energy, Coca-Cola, Colgate-Palmolive, McDonald’s, Northrop Grumman, Progressive Corp., Public Service Enterprise and Walmart.

The Morgan Stanley team expect small-cap stocks to continue underperforming due to closer exposure to economic uncertainty, weakening earnings per share estimates and underperformance often seen in late cycles.

The sector has “rich” opportunities under the surface, but it’s still too early for bottom picking, they say. Within small-caps, they like high quality names — financial services, software, telecom services, biotech and household and personal products.