Morgan Stanley’s Chief Investment Officer, Lisa Shalett, said that it is too early to sound the “all-clear” for markets, even though there’s been a short-term rebound. Speaking to CNBC, she explained that sectors like financials (XLF) have bounced back mainly because they were oversold, not because the economic outlook has meaningfully improved. While the market is behaving more rationally in the short term, she warned that the major risks are still present.
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One of those risks is weaker corporate earnings. Indeed, Morgan Stanley’s Mike Wilson lowered his 2025 earnings estimate for the S&P 500 (SPX) to $257 from $271 and cut his 2026 forecast from $303 to $281. Shalett also pointed out that stocks are still trading at over 20 times expected earnings, which is pricey. She said that investors should be cautious and not get ahead of themselves, even though a soft landing remains Morgan Stanley’s base case. However, it is worth noting that the firm does see a 40% chance of a recession.
Furthermore, Shalett is worried about the instability in the U.S. Treasury market. She noted that investors are watching the growing U.S. deficit and changes in global demand for long-term bonds. On top of that, risky hedge fund trades known as “basis trades,” which exploit small price differences between Treasury futures and actual Treasury bonds and often use a lot of borrowed money to increase profits, could unwind and cause further disruptions. In addition, for sectors with tariff risks, she recommended focusing on high-quality companies with pricing power.
Is SPY a Buy Right Now?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on the SPDR S&P 500 ETF Trust (SPY) based on 411 Buys, 85 Holds, and eight Sells assigned in the past three months, as indicated by the graphic below. Furthermore, the average SPY price target of $665.16 per share implies 23.5% upside potential.
