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 the prospect of a
recession in the US
helped wipe away about $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. But Morgan Stanley and Citi analysts said the market may have found a bottom.
Morgan Stanley analysts said there are five reasons the sell-off appears to be over and stocks should start to recover.
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 indexes
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's chief investment officer, Mike Wilson, wrote on Monday.
Citi seemed to agree.
Analysts said the latest sell-off had taken the S&P 500 to a healthier valuation. Meanwhile, the Magnificent Seven tech stocks also appear more "rationally valued," the bank said. The group of top tech stocks now accounts for about 9 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 record 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," they 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," they added.
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 Chinese equities to "overweight."
Morgan Stanley and Citi analysts are sticking to year-end price targets of 6,500 for the benchmark index. That would be a gain of 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 thought the S&P 500 could fall as low as 5,100, assuming that policy uncertainty and growth fears would continue to weigh on sentiment.
Morgan Stanley, meanwhile, thinks the index could drop as low as 4,600 in the event of a recession, 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," analysts said.
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 it isn't focused on markets, with Treasury Secretary Scott Bessent saying 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 came a week after Trump refused to rule out a US recession as a result of the administration's policies.
