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(Bloomberg) -- US equities could face a tough six months ahead as Treasury yields surge and the dollar advances on worries about inflation, according to Morgan Stanley strategists.
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The correlation between the S&P 500 Index and bond yields has turned “decisively negative” as the 10-year Treasury yield climbed above 4.5%, strategist Michael Wilson warned in a note. The 30-year yield hit its highest level since late 2023 on Monday.
The dollar is now approaching levels that could pressure companies with a large international exposure, and that could hurt stocks more broadly in the first half of the year given market breadth is already poor, Wilson said.
“We think 2025 could be a year of two halves,” the strategist wrote, with market-friendly policies such as potential tax cuts likely to shore up stocks later in the year.
The team in November issued a 12-month target of 6,500 points for the S&P 500, implying gains of about 9% from Friday’s close.
The rally in US stocks faltered in December on worries about economic growth and a more hawkish-than-expected policy outlook from the Federal Reserve. Technology stocks — which have driven the majority of the gains in the S&P 500 since October 2022 — were among the biggest laggards.
Wilson was among the biggest Wall Street bears until he turned more positive on stocks in mid-2024. While he expects the S&P 500 to rally this year, he has warned that it is not broad enough yet.
The gap between the benchmark index as a whole and its individual components, as measured by the 200-day moving average, is historically wide, Wilson said.
“This divergence can close in two ways — either breadth improves or the S&P 500 trades closer to its own 200-day moving average,” the strategist wrote. “The first scenario likely relies on a combination of lower rates, a weaker dollar, clarity on tariff policy/cabinet confirmations and stronger earnings revisions.”
--With assistance from Michael Msika.
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