The Narrow Path to a New Bull Market

May 14, 2025

Stimulative tax reform, deregulation and low inflation could pave the way for an enduring market rally, but bringing those developments to pass will take both luck and skill.

Author
Lisa Shalett

Key Takeaways

  • Investors are optimistic about a new bull market, based on the potential for corporate tax cuts, financial services deregulation and the U.S. economy avoiding stagflation.
  • However, such developments are far from certain and would come amid investor concerns about U.S. debt, political uncertainty and global instability.
  • Investors should maintain maximum portfolio diversification, while considering equal-weighted S&P 500 exposure and intermediate-term bonds.

U.S. equities have surged back from their post-“Liberation Day” plummet in April – a testament to investors’ eagerness to move on from tariff worries and their willingness to hope for the best. Investor optimism got a boost in recent days from decent first-quarter 2025 company earnings, resilient economic data and a belief that tariffs will stay around 10%.

 

Federal Reserve Chair Jerome Powell indicated last week that interest rate cuts are unlikely in the near term. Nonetheless, investors remained sanguine, hanging their hopes for a new bull market on at least three potential developments. Morgan Stanley’s Global Investment Committee believes these moves are possible – but far from certain. 

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Wealth Management

Grasping at Straws?

Markets seem to have moved on from tariff worries to hoping for positive catalysts. Tax reform, deregulation and improved growth prospects may help the bullish thesis, but success will require more than hope.

  1. 1
    A tax bill that stimulates growth

    White House guidelines for tax legislation have focused mostly on extending the administration’s 2017 Tax Cuts and Jobs Act provisions for individuals and providing certain tax breaks. While the Global Investment Committee has been skeptical that such programs will be economically powerful, the potential for a corporate-stimulus section of the tax bill is encouraging. This could include:

    • immediate write-offs of capital investment;
    • full expensing of research and development; and
    • restoring the deductibility of interest costs up to 30% of a company’s earnings before interest, taxes, depreciation and amortization.

     

    These provisions would incentivize capital investment, the “onshoring” of business back to the U.S. and the active use of credit to support growth. What’s more, they would only add about $30 billion to the U.S. government’s debt over 10 years, according to the Congressional Budget Office.

  2. 2
    Deregulation

    A pickup in the administration’s deregulation efforts could support credit markets and stimulate the financial services sector. Morgan Stanley Research believes potential reforms, such as a reassessment of “Basel III endgame” capital requirements for banks, could be enacted by late 2025 or early 2026, likely freeing up lending capacity in the traditional banking sector.

     

    This could also help re-open deal pipelines for initial public offerings, mergers and acquisitions, and other private equity activity.

  3. 3
    No ‘stagflation’

    Recently, markets have appeared increasingly worried about “stagflation” – a dangerous combination of slow economic growth and persistent inflation that can sap corporate profitability and weigh on both stocks and bonds. However, there’s a possibility that sustained low energy prices could hold inflation in check, while strategic U.S. wins in trade negotiations could stimulate U.S. growth.

All three of these are possible, but achieving these measures is going to take both luck and skill. And all of these possibilities still need to co-exist against a challenging backdrop of outsized U.S. government debt and deficits, geopolitical instability and rising U.S. political uncertainty. 

How to position your portfolio

In markets, U.S. equity valuations and stock-specific risks are high. Investors should hold tight to their financial plans and consider maintaining maximum portfolio diversification by asset class, sector and region.

 

S&P 500 levels of 5,100-5,500 are an acceptable range for long-term investors considering adding exposure to the capitalization-weighted index. However, the Global Investment Committee prefers approaches that allocate the same amount to each stock in the index, known as “equal weighting,” or involve actively picking securities with attractive qualities, such as quality growth stocks with achievable earnings targets.

 

In bonds, investors may find value in intermediate-term maturities and should consider looking at the municipal sector for opportunities.

 

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from May 12, 2025, “Grasping at Straws?” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report. 

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