- Stocks have been crushed in recent weeks, but Wall Street forecasters think the worst may be over.
- Morgan Stanley and Citi said they see 5,500 as the floor for S&P 500.
- Both banks are sticking to their year-end price target of 6,500, implying about 15% upside.
The worst of the stock market sell-off looks like it’s just about over.
That’s according to top Wall Street forecasters who say they expect a more positive trajectory for stocks after the latest tariff-induced decline.
Concerns surrounding President Donald Trump’s trade war and a potential recession in the US helped wipe away around $5 trillion in market cap in the S&P 500 in recent weeks, taking the benchmark index solidly into correctional territory. Stocks capped off their worst weekly performance in two years last Friday. However, Morgan Stanley and Citi analysts said the market may have found a bottom.
Morgan Stanley analysts said there are five reasons the sell-off is over and stocks should start to recover from here.
First, the bank said major stock averages entered oversold territory last week. The S&P 500 traded close to 5,500 on Thursday, at the low end of the bank’s expected trading range for the index in the first half of 2025.
Second, sentiment and positioning gauges for the benchmark index have started to “lighten up considerably,” a sign more upside is on the way.
Third, seasonal indicators look like they’ve improved going into the second half of the month.
Fourth, the US dollar has weakened in recent weeks, which could spark a wave of positive corporate earnings revisions as companies log stronger sales in overseas markets.
Finally, lower interest rates this year could help boost economic surprise indices in the US, which could also help send stocks higher, the bank said.
“We stand by our call from last week that 5,500 should provide support for a tradable rally led by cyclical, lower quality, and expensive growth stocks that have been hit the hardest and where the short base is the greatest. Friday’s price action seems to support that call,” Morgan Stanley CIO Mike Wilson wrote on Monday.
Citi seems to agree.
Analysts said the latest sell-off has taken the S&P 500 to a healthier valuation. Meanwhile, the Magnificent Seven tech stocks also appear to be more “rationally valued,” the bank said. The group of top tech stocks now accounts for around nine percentage points of the S&P 500’s total return since December 2023, down significantly from last year’s highs.
The S&P 500 is also down 10% from its all-time high in February. The decline is balancing the risk-reward of stocks “to the upside,” analysts said.
“This past week, we drew a line in the sand at 5,500 as a level where the risk-reward begins to skew more favorably,” the bank wrote.
“Longer-term, we remain fundamentally constructive on the S&P 500 setup as productivity improvement, AI promise, operating leverage, shareholder influences, and ongoing business model maturation elements better describe our view of US exceptionalism.”
Citi’s positive outlook is notable given that the bank recently also recalibrated its view of US stocks, downgrading the market to “neutral,” while boosting its view of China equities to “overweight.”
Morgan Stanley and Citi analysts are sticking to year-end price targets of 6,500 for the benchmark index. That implies stocks will gain about 15% by the end of 2025.
The bear case
Some pessimism, though, is still percolating on Wall Street as traders eye the potential for a growth slowdown in the US.
In recent days, Goldman Sachs and RBC have downgraded their price targets for the S&P 500 to 6,200.
While not its base case, Citi said it thinks the S&P 500 could fall as low as 5,100, assuming that policy uncertainty and growth fears continue to weigh on sentiment.
Morgan Stanley, meanwhile, thinks the index could drop as low as 4,600 in the event of a recession, implying an 18% decline from Monday’s levels.
“We also think it’s important for the S&P 500 to respond to the ~5500 level given the fundamental and technical support there. If it doesn’t, that’s a potential sign that growth could be deteriorating faster than expected, and recession risk could be increasing along with the odds of our bear case outcome,” they added.
One thing seems clear: markets shouldn’t expect the Trump administration to swoop in and save stocks anytime soon. The president’s team has repeatedly indicated that they aren’t focused on markets, with Treasury Secretary Scott Bessent noting that he was “not at all” concerned about the recent drop in stocks.
“I’ve been in the investment business for 35 years, and I can tell you that corrections are healthy. They’re normal. What’s not healthy is straight up,” Bessent told NBC over the weekend, adding that he believed the market would perform “great” over the long term.
His remarks come a week after Trump refused to rule out a US recession as a result of the administration’s policies.