This is the next key level for investors to watch in the stock market's historic rout
Reuters
- Watch 4,700 as the next level for support for the S&P 500, Morgan Stanley says.
- Valuations will be more attractive at this level, which is near the index's 200-week moving average.
- But Wall Street is also bracing for more pain, with forecasts as low as 4,450.
With US indexes reeling from tariff pain, the market's descent might have a way to go before investors catch a lasting break.
According to Morgan Stanley, the S&P 500's next support is at the 4,700 mark, or about 6% below the benchmark index's level on Monday around midday.
The broad index has declined dramatically since President Donald Trump set off a global trade war last Wednesday, announcing a torrent of tariffs on US trading partners that were far beyond what markets expected. A broad cross-asset sell-off engulfed the market, dragging the S&P 500 to a bear market at Monday's intraday low.
The 4,700 level is just above the index's 200-week moving average. Valuations will offer greater support at that level, as the market correction has pulled them down from pre-tariff highs.
This is worth pointing out, as negative earnings revisions may be the main factor in the market rout, which tariffs have only exacerbated, the bank said.
"Many stocks have traded poorly all year even if the major indices held up until mid February. In most cases, the weakness was directly related to negative earnings revisions breadth, which had little to do with tariffs," analysts led by Mike Wilson wrote.
Morgan Stanley
Still, there's no guarantee that the 200-week average will hold in a recession scenario.
"Nevertheless, it's a good level to think about for a real support should markets decide to test the President's position on tariffs or the Fed's leaning toward its inflation mandate in the face of slowing growth and market disruption," Wilson wrote.
Others are more certain about more stock pain to come.
As Wilson noted, part of this will depend on whether the US falls into a tariff-induced recession, and chances of this happening have risen steeply.
"Historically, post the sharp VIX spikes, equities tended to be up 85% of the time, outside recessions," JPMorgan wrote in its own note, referring to a massive jump in the market's volatility gauge: "Here, the last point is key, and we believe we will not be in the clear for a while yet."
Peter Berezin, BCA Research chief global investment strategist, has long-maintained expectations for tariff chaos to slash the S&P 500 to 4,450 by year-end. He doubled down on this projection in a Friday interview with Bloomberg TV, though also noted that the forecast doesn't account for a recession.
"If anything, I might be too bullish," he said.
Lori Calvasina, head of US equity strategy at RBC Capital Markets, told Bloomberg that the median drawdown for the S&P 500 in a recession is between 27% and 32%. With growth fears rising, RBC has lowered its target for the benchmark inddex to 5,550 from 6,200.