Is the Bull Market Broken?

Apr 2, 2025

Recent shifts in Fed policy and tech-stock performance suggest it’s time to rethink investment strategies.

Author
Lisa Shalett

Key Takeaways

  • Coming off a 10% correction, many investors wonder if it’s a good time to “buy the dip” in the broad-based S&P 500.
  • However, the Fed’s shift to a pause in rate cuts, waning Magnificent 7 performance and extreme policy uncertainty have undercut the case for a resumption of the last bull market.
  • Despite market challenges, there could still be a “soft landing” with steady growth and opportunities in select sectors like health care, financials, industrials and consumer media.
  • Investors may want to consider active strategies in equities and credit while making sure to have exposure to real assets.

The U.S. equity market’s recent 10% correction, followed by only a partial recovery, have many investors asking – once again – whether they should “buy the dip.”

 

For most of the post-COVID market cycle, that strategy worked for investors seeking passive exposure to the S&P 500 Index as it was propelled higher by richly valued mega-cap tech stocks.

 

However, Morgan Stanley’s Global Investment Committee believes that approach may no longer be effective. The events and data from the last 90 days suggest the market’s previous bullish narrative – premised on Federal Reserve interest rate cuts, U.S. tech dominance and the post-election “Trump bump” – has been broken. Here’s why.

Seeing the Forest for the Trees

“Buying the dip” in the S&P 500 may have worked well in the past, but market dynamics have changed, undermining the strategy. Learn where opportunity may be found instead.

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  1. 1
    The Fed has shifted to a “patient pause.”

    After a full percentage point of rate cuts late last year, the U.S. central bank has shifted focus away from monetary easing. Instead, it is taking what some are calling a “patient policy pause,” as inflation risks remain in the spotlight. The Fed now forecasts only two cuts this year.

     

    Additionally, consider the Fed’s recent surprise announcement that it is slowing the pace at which it is shrinking the portfolio of assets it accumulated during past stimulus campaigns. When the Fed slows its balance-sheet “runoff,” it is essentially withdrawing less money from the financial system, thereby leaving more available for lending and investment. This action may support the Trump administration’s efforts to keep a lid on the 10-year Treasury yield (which could raise questions about the Fed’s independence). However, it likely does very little to curb inflation or help the majority of consumers and small businesses that are highly sensitive to interest rates.

  2. 2
    The “Magnificent 7” are losing their luster.

    Investors are also rethinking their belief in the exclusive dominance of the so-called Magnificent 7 mega-cap tech stocks, which drove much of the U.S. equity market’s gains in recent years.

     

    Not only have shares of these companies been underperforming broader equity indices for several months now, but they also are seeing slowing growth, negative revisions in analysts’ earnings forecasts and increasing questions from investors about how profitable their surging capital spending will prove to be.

     

    What’s more, these companies earn more than 52% of their profits from outside the U.S. As such, they face challenges from not only potential tariffs, which can raise their costs and reduce their competitiveness abroad, but also from recent volatility in the U.S. dollar, which can cause profitability to fluctuate and add uncertainty to the earnings outlook. 

  3. 3
    Policy uncertainty remains extreme.

    Investors continue to grapple with extreme uncertainty around tariffs and other policy shifts coming out of Washington, D.C. This puts pressure on “risk premiums,” or the extra return investors expect for taking additional risk, potentially bringing down expected equity-market returns and therefore limiting the attractiveness of broad-based market indices. 

Reasons for Optimism

Despite these challenges, the Global Investment Committee continues to expect an economic “soft landing” of slower-but-steady growth and relatively subdued inflation this year, and we remain focused on individual companies’ ability to achieve earnings targets.

 

Consider that fourth-quarter final gross domestic product (GDP) readings were solid, with consumption still growing at 4% in inflation-adjusted terms. Labor markets remain stable, and data such as durable-goods orders and industrial production suggest positive economic activity. While it’s possible such activity partly reflects a pickup in imports ahead of anticipated tariff costs, there are still reasons to believe the economy is growing. Such conditions may create opportunities among fairly valued stocks—especially in health care, financials, industrials and consumer media.

How to Invest

Entering the second quarter, we recommend maximum portfolio diversification, active risk management and security selection.

 

Instead of “buying the dip” in benchmark indices, consider using recent market volatility to rebalance portfolios across all asset classes, regions and sectors.

 

Passive exposure to equal-weighted indices (which allocate the same amount to each stock) may provide relatively strong risk-adjusted returns for now, in contrast to market-cap weighted indices, which could more acutely feel the effects of declines among mega-cap tech stocks. However, active strategies, including hedge funds, are preferred in equities and credit. Also, make sure to have exposure to real assets.

 

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from March 31, 2025, “Seeing the Forest for the Trees.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report. 

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