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Key Takeaways
- The S&P 500 advanced on Monday, building on the big gains posted on Friday, its best session since November.
- The benchmark index entered a correction for the first time since 2023 last week, a pullback that Treasury Secretary Scott Bessent on Sunday called "healthy" and "normal."
- Morgan Stanley analysts predict a strong short-term rally but warn that volatility is likely to remain high in this year. They are also skeptical about a sustained market recovery.
The S&P 500 ticked higher on Monday amid a broad rally as investors look to recover from the index’s first correction in more than a year.
The S&P 500 rose 0.6% on Monday after surging 2.1% on Friday, its best daily performance since the day after Donald Trump won re-election. For a second consecutive day, more than 90% of the S&P 500’s components closed higher.
Big tech missed out on the rally of Monday. Tesla (TSLA), Nvidia (NVDA), and Apple (AAPL) all saw their shares fall by almost 5%. Alphabet, Amazon (AMZN), and Meta (META), as well as Apple (AAPL), and Microsoft (MSFT), closed in the red.
The S&P 500 slipped into a correction for the first time since 2023 last week. Investors are worried that the Trump Administration’s aggressive policies on tariffs could increase prices and slow growth in the short term, as well as discourage investment and hiring. Tariff headlines hit consumer confidence which, by one measure, fell to its lowest point since 2022 in early March. Consumers expect prices to rise faster over the next year, which could be a problem for the Federal Reserve’s efforts to return inflation below 2%.
Treasury Secretary Scott Bessent made the case on Sunday for Trump’s trade tariffs, despite their market turmoil. Bessent said on Sunday that corrections in the market are normal and healthy. He has been in the investment industry for 35 years. Bessent suggested Trump’s tax and regulatory proposals would stabilize the markets and boost them in the end.
What's Needed For The Rally To Persist
Morgan Stanley analysts also made a similar conclusion in a Monday note. The analysts wrote that “we think the market is going to focus on positive aspects of Trump’s policy agenda” but that it will take time and not be easy.
Analysts called a rally above last week’s correction “likely”, considering that stocks were as oversold last week as they have been since 2022. The analysts also cited improving sentiment signals as well as seasonal strength in the second quarter of March to be optimistic about the market’s near-term prospects. Over the longer-term, a weaker U.S. currency and lower Treasury rates should support corporate earnings for the next two quarters.
Morgan Stanley analysts are not confident about a sustained recovery from this correction.
They wrote: “It takes more than an oversold stock market to get a tradable rise.” “We firmly believe that earnings revisions breadth is the most important variable, and while we could see some seasonal strength/stabilization in revisions, we believe it will take a few quarters for this factor to resume a positive uptrend.”
