Morgan Stanley is urging investors to watch a three-pronged framework it believes could ease the current spike in equity market volatility.
The firm’s strategy team, led by Chief Investment Officer Mike Wilson, outlined how a more dovish Federal Reserve, a reversal in rising bond yields, and a comprehensive U.S.-China trade agreement could help equities stabilize—and potentially break out above their current range.
Since President Trump’s latest round of tariffs, market volatility has surged to levels not seen since 2020. The S&P 500 experienced an 11% decline in just two trading sessions, a magnitude of downside only matched by previous market shocks like the COVID crash, the global financial crisis, and Black Monday.
Yet, the same market just posted a 10% single-day rally—its largest since the early pandemic response—and is coming off its best week since 2023. In this environment, financial advisors are increasingly challenged with navigating client concerns around risk, allocation, and timing.
Morgan Stanley notes that amid the back-and-forth moves, the S&P 500 has traded in a wide band between 5,000 and 5,500. According to Wilson, this range will likely hold until investors gain more clarity around the extent of the economic slowdown and the timeline for recovery.
In a recent note to clients, he emphasized that the path out of this volatility depends on three primary catalysts, each with its own set of implications for portfolio positioning and risk management.
First, Morgan Stanley believes a policy pivot at the Federal Reserve could create a constructive backdrop for equities. While the Fed is currently expected to hold rates steady through the remainder of the year, rising inflation pressures from tariffs and decelerating growth could eventually lead to a shift in stance.
Wilson cautions that any move toward lower interest rates would likely be triggered by either labor market weakness or growing credit market stress—both of which would initially spook markets. However, he believes such fears could be short-lived if the Fed reacts swiftly and recession risks remain muted.
There is some evidence that the Fed is already preparing contingency measures. Boston Fed President Susan Collins recently stated that the central bank remains ready to intervene should market conditions warrant support.
"We have had to deploy quite quickly, various tools," she told the Financial Times, referencing past episodes of financial instability. "We would absolutely be prepared to do that as needed."
For advisors, a pivot by the Fed could provide an important signaling mechanism—offering a potential entry point for rebalancing into risk assets. Yet, the underlying trigger for that shift, particularly if rooted in labor market deterioration, could still weigh on earnings estimates, justifying a cautious approach.
The second factor Morgan Stanley highlights is a reversal in 10-year Treasury yields, which have climbed sharply since early April, rising approximately 50 basis points to 4.49%. This move reflects concerns over inflation linked to tariffs and increased foreign selling of U.S. government bonds.
For equities, a decline in yields back toward 4% could ease valuation pressures and support broader market performance—assuming the drop isn’t accompanied by signs of recessionary weakness.
Wilson notes that falling yields, in isolation, would improve the relative attractiveness of equities. However, if lower yields emerge from concerns around declining economic activity, the short-term support may prove fleeting.
This nuance is important for wealth managers seeking to assess duration risk in balanced portfolios or contemplating shifts in equity versus fixed income exposures.
The third and potentially most significant catalyst Wilson identifies is the possibility of a substantial U.S.-China trade agreement that rolls back or removes existing tariffs.
President Trump has signaled openness to a deal, and White House press secretary Karoline Leavitt recently reinforced that willingness. As a potential overture, the administration has temporarily exempted smartphones, semiconductors, and other consumer electronics from new tariffs—at least for now.
While the market has priced in much of the tariff-related downside, Wilson argues that a comprehensive agreement with China would be an upside surprise not currently embedded in equity valuations. Such a development could trigger a relief rally, particularly in tariff-sensitive sectors such as technology, industrials, and consumer goods.
For advisors, this remains a key macro variable to monitor, especially for clients with international exposure or concentrated positions in global supply chain–dependent companies.
Still, Morgan Stanley warns that risks remain substantial. A further rise in the 10-year yield—specifically a move above 5%—could lead to a meaningful breakdown in the S&P 500.
Wilson suggests that such a scenario would likely push the index below 5,000, potentially initiating a new leg lower. In that case, investors could face renewed pressure on equity valuations, while high-yield and credit-sensitive asset classes could come under significant strain.
Additionally, corporate earnings pose another looming challenge. While recent results have generally exceeded expectations, Wilson cautions that a sustained deterioration in earnings or a decline in executive confidence could trigger a negative labor cycle.
“On the downside, we think the main risk to equities is a further deterioration in earnings and/or corporate confidence that leads to a labor cycle,” he wrote. Advisors may want to stay alert to forward guidance trends during the remainder of earnings season, particularly with regard to capital expenditures, hiring plans, and margin outlooks.
The implication for RIAs is that strategic positioning now requires a more tactical lens. Advisors must be prepared for a market that is headline-driven, macro-sensitive, and quick to reprice expectations. The potential for sharp reversals—both upward and downward—requires nimble risk management and an emphasis on scenario planning.
For clients with a long-term horizon, these crosscurrents might represent opportunity—but not without volatility. For those closer to retirement or more reliant on portfolio withdrawals, now may be the time to stress-test allocations under multiple outcomes, including scenarios with prolonged elevated inflation, geopolitical instability, and slower growth.
Wilson’s roadmap, while contingent on policy shifts that may not materialize immediately, offers a helpful framework for advisors seeking to separate signal from noise. Whether the market sees a breakout or a breakdown hinges on monetary policy, interest rate dynamics, and geopolitical resolution—factors that remain uncertain but are essential for shaping risk appetite in the coming quarters.
The bottom line for the advisory community is that volatility is no longer a passing phase—it is the new baseline. The historical analogues of the 1987 crash, 2008 financial crisis, and 2020 pandemic may each have their own causes, but the market's recent whipsaw action is a reminder that systemic policy shocks can now be absorbed and reflected in real time.
Advisors must be ready to recalibrate strategies with agility, backed by a solid understanding of macroeconomic levers and a clear communication plan for clients navigating uncertain terrain.
As wealth managers look ahead, Morgan Stanley’s view is that a meaningful recovery is possible, but only if the right policy ingredients come together. Until then, RIAs and financial advisors are being called to guide clients through a turbulent cycle defined less by fundamentals and more by the speed at which macro shifts reshape market expectations.
