Strategist Mike Wilson advises investors to prepare for the S&P 500 to potentially drop another 7% to 8%, unless there’s a shift in U.S. tariff policies or a change in Federal Reserve strategy.
Wilson, leading a team of strategists at Morgan Stanley, told clients in a note on Monday that the next support level for the index — where buyers may step in — is at 4,700. He highlighted that this level offers stronger support, coinciding with the 200-week moving average, a key technical indicator.
Last week, the S&P 500 closed at 5,074.08, marking a 9% drop — its largest weekly decline since March 2020 — following a sharp two-day selloff triggered by President Trump’s announcement of global tariffs. Morgan Stanley had initially set 5,100 as a key support level, but the new forecast reflects ongoing selling pressure, with S&P 500 futures indicating a more than 3% loss and Dow Jones futures down over 1,200 points.
Trump’s administration has shown no signs of backing off its tariff plans, while Federal Reserve Chairman Jerome Powell indicated the Fed would wait and assess how the economy responds to the tariffs.
Wilson’s team noted that many stocks have performed poorly this year, even though major indexes were stable until mid-February. They attributed this weakness to the broad trend of negative earnings revisions. More downward earnings adjustments are expected as tariffs undermine investor confidence and sentiment.
“The key question is how much of this weakness is already priced in and which sectors or stocks may be attractive or vulnerable,” said Wilson. Cyclical stocks, which are sensitive to economic cycles, have underperformed defensive stocks by more than 40% over the past year, especially between April and September of last year.
For Morgan Stanley, this signals a longer-term concern about economic growth, suggesting that large-cap, quality stocks have dominated, particularly in defensive sectors. The strategists highlighted that Friday’s sell-off in defensive stocks indicates forced selling and possible exhaustion in the ongoing correction.
Morgan Stanley remains bullish on high-quality, large-cap, and defensive stocks, emphasizing their preference for stability in this environment. One such addition is American Tower REIT, which was upgraded to overweight and added to their Fresh Money Buy list, replacing Eaton Corp. They view American Tower as a defensive name with potential for growth, especially as interest rates are expected to fall, in line with their forecast.
Other stocks on their list include CenterPoint Energy, Coca-Cola, Colgate-Palmolive, McDonald’s, Northrop Grumman, Progressive Corp., Public Service Enterprise, and Walmart.
The Morgan Stanley team also expects small-cap stocks to continue underperforming due to their greater exposure to economic uncertainty, weak earnings estimates, and historical trends during later stages of market cycles. While there may be “rich” opportunities in the small-cap sector, the team believes it’s too early to start bottom-picking. Among small-cap stocks, they favor high-quality names in financial services, software, telecom services, biotech, and household products.
