S&P 500 risks 11% drop on trade war: Morgan Stanley’s chief US equity strategist

Michael Wilson says the market was poised for a pullback, given elevated investor exposure and high valuations

US STOCKS are at risk of sinking as much as 11 per cent if trade tensions between the US and China aren’t resolved before a November deadline, according to Morgan Stanley’s Michael Wilson.

The bank’s chief US equity strategist said the market was poised for a pullback given elevated investor exposure and high valuations, while Friday’s trade-war escalation “was unexpected by the consensus, and us”. Wilson has maintained a bullish view on US stocks this year, and was among the few strategists who correctly predicted a robust recovery following April’s tariffs-fueled sell-off.

“If associated trade uncertainty/volatility continue into early November, we could see a larger correction than most are expecting,” Wilson wrote in a note. He forecast that the S&P 500 Index could drop to between 6,027 and 5,800 points in a bear-case scenario. That implies a sell-off of between 8 and 11 per cent from Friday’s close.

US equities were roiled on Friday after Trump threatened an additional 100 per cent tariff on China as well as export controls on critical software beginning Nov 1. The S&P 500 sank 2.7 per cent, while the Nasdaq 100 slumped 3.5 per cent, halting a record-breaking bull run that was fuelled by bets on artificial intelligence.

Index futures rebounded on Monday as the White House signalled openness to a deal with Beijing. Wilson reiterated in the note that his base case is for a rolling economic recovery to resume into 2026 once trade tensions subside.

This thesis “is strong enough to withstand this type of tactical trade escalation in the near-term as long as it eventually de-escalates”, he said. BLOOMBERG