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(Bloomberg) -- Sentiment toward the US stock market is improving but it’s too early for investors to sound the all-clear, according to Morgan Stanley strategists.
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The team led by Michael Wilson identified four factors needed to sustain a more durable rally, but saw progress in just two: “Optimism around a trade deal with China and stabilizing earnings revisions,” they wrote in a note on Monday.
“The other two items on our checklist — a more dovish Fed and the 10-year yield below 4% without recessionary data — have yet to materialize.”
Federal Reserve chair Jerome Powell reiterated the central bank’s wait-and-see approach to easing monetary policy last week, while the 10-year yield is now exceeding 4.4%. “In our view, a 10-year yield above 4.5% is a headwind for valuation,” they added.
S&P 500 stock futures jumped and risk assets rallied on Monday, after China and the US agreed to temporarily lower tariffs on each others products. The move to cool trade tensions gives both sides three months to resolve their differences.
After falling nearly 19% since a peak in February amid fears of a global trade war, the S&P 500 has now recouped about half of these losses, as the US administration started trade talks with partners.
Tariffs have been at the forefront of company concerns during reporting season, with mentions spiking to a record in earnings calls, according to Morgan Stanley analysis.
About 30 firms pulled or paused guidance amid tariff uncertainty, especially within sectors including autos, durables and industrials. Still, the strategists noted that these stocks moved higher on average since reporting earnings.
For Wilson, now that the S&P 500 has climbed above its prior resistance at 5,500 and is back into the pre-“Liberation Day” range of 5,500-6,100, more meaningful upside will also depend on a trade deal with China and a re-acceleration in earnings revisions.
“The next and most important technical test for the S&P 500 since this rally began roughly a month ago comes at the convergence of the 200-day and 100-day moving averages (5,750-5,800),” the strategists said.
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