Morgan Stanley warns S&P 500 may drop up to 11% on trade war
Morgan Stanley's chief U.S. equity strategist Michael Wilson warned the S&P 500 could fall roughly 8% to 11% from last Friday's close if U.S.-China trade tensions and threatened tariffs continue into early November.
Wilson cautions that continued uncertainty and volatility around trade into early November could trigger a sharper market downturn than many anticipate. The surprise escalation on Friday caught consensus off guard, he notes, underscoring how fragile sentiment has become.
With valuations still elevated and investor positioning already stretched, the market’s cushion against negative shocks is thin—raising the likelihood that adverse headlines could translate into outsized price declines.
The S&P 500’s forward P/E sits near 22.8 – well above its 5- and 10-year averages – while earnings optimism has risen, a mix that can amplify disappointment. Options markets reflected that fragility on Friday as the VIX jumped above 20, and the S&P 500 and Nasdaq 100 logged their worst day since April.
With valuations still elevated and investor positioning already stretched, the market’s cushion against negative shocks is thin—raising the likelihood that adverse headlines could translate into outsized price declines.
The S&P 500’s forward P/E sits near 22.8 – well above its 5- and 10-year averages – while earnings optimism has risen, a mix that can amplify disappointment. Options markets reflected that fragility on Friday as the VIX jumped above 20, and the S&P 500 and Nasdaq 100 logged their worst day since April.
A new tariff regime would likely hit U.S. companies with high China revenue or component dependence – semiconductors, hardware, autos, machinery, apparel and retail—via cost inflation and potential demand loss. Moreover, rare earth metal companies' shares have already shown significant growth.
Wilson kept his base case that a rolling economic recovery would resume into 2026 once trade tensions subside. Morgan Stanley framed the potential drop as a tactical, calendar-linked risk tied to the Nov. 1 implementation date for tariffs and export controls.
Earlier, President Trump imposed an additional 100% tariff on Chinese imports and unveiled new export controls on certain U.S.-made software, both slated to take effect on Nov. 1. The S&P 500 fell 2.7% and the Nasdaq Composite slid 3.5% on Friday; index futures rebounded on Monday after the White House signalled openness to a deal with Beijing.
Wilson kept his base case that a rolling economic recovery would resume into 2026 once trade tensions subside. Morgan Stanley framed the potential drop as a tactical, calendar-linked risk tied to the Nov. 1 implementation date for tariffs and export controls.
Earlier, President Trump imposed an additional 100% tariff on Chinese imports and unveiled new export controls on certain U.S.-made software, both slated to take effect on Nov. 1. The S&P 500 fell 2.7% and the Nasdaq Composite slid 3.5% on Friday; index futures rebounded on Monday after the White House signalled openness to a deal with Beijing.
