Morgan Stanley
Investment Management

Stock Market Outlook: Bull Market May Not Be Finished

Apr 29, 2025

Amid volatility in stocks, signs of investor euphoria have been washed out of the market, setting up possible gains for the full year.

Andrew Slimmon
Head of Applied Equity Advisors Team, Morgan Stanley Investment Management

Key Takeaways

  • The bull market probably isn’t finished, and the S&P 500 may yet end the year with single-digit gains.
  • Further declines in the S&P 500 are possible and may create attractive entry points.
  • Historically, when stocks drop 15%, average returns one year later are attractive—and they are even more so when a 20% drop is the entry point.
  • Hints of investor euphoria that began to appear have been washed out of the market, creating the possibility that the bull run for stocks may stretch out longer.
  • The biggest risk to the equity market could be a resurgence of inflation and the Fed potentially raising rates, alongside tariff impacts.

It's too soon to declare that the bull market is over.

 

After recent big swings in stocks, the outlook for the market may be in some ways better than it was at the beginning of the year. Investor enthusiasm has been tamped down, which often signals an attractive opportunity to buy as the bullish side of the boat is less full than it was just a month ago.

 

Overall, Morgan Stanley Investment Management’s Applied Equity Team maintains that 2025 is likely to be a “pause” year for the S&P 500, delivering single-digit gains for investors. This is consistent with our outlook at the beginning of the year, which suggested that the third year of a bull market usually will produce mediocre—but still positive—returns, along with greater volatility. 

 

The volatility has certainly been evident. In early April, the S&P 500 plunged following the Trump administration’s announcement of planned global tariffs, getting close to the decline of 20% from its peak that would meet the definition of a bear market. Then the index climbed almost 10% on April 9, when President Trump pulled back some of the tariffs he had announced a week earlier.

 

This episode suggests there is some version of a “Trump put” that might create a floor under the market. In an analysis of the 12 times since 1950 that the S&P 500 dropped at least 20% from its peak, the market move was accompanied by a recession in nine of those instances. In this instance, some combination of the market selloff or the talk of a recession seemed to be enough to spur a policy response.

 

Attractive Market Entry Points

 

Still, making investment decisions by forecasting political or macroeconomic events is difficult, and it’s often better to let patterns in investor behavior be the guide.

 

  • When stocks fall 15%, as they did in early April, it can be a good time for investors to increase their commitment to equities. The S&P 500 has fallen at least 15% from its peak on 18 occasions since 1950, and the average subsequent one-year return for stocks bought at that level is 14%. Yes, stocks will often keep falling for a time, but the subsequent one-year returns are often attractive when using a 15% decline as an entry point.

 

  • Stocks could certainly retest their early April lows. Although the base case outlook is for gains in 2025, the market is open 251 days in a year. Should stocks drop 20% or more, we believe investors would do well to consider increasing equity allocations even more aggressively. In the 12 times since 1950 that the S&P 500 dropped 20%, the average subsequent one-year return with that decline as the entry point is 19%. There are two instances in that data set with negative one-year returns after a 20% drop: during the great financial crisis in 2008-2009 and during an oil shock in the 1970s.

 

Bull Market Cycles and Investor Optimism

 

One of the concerns at the start of the year was that stock investors were beginning to flirt with euphoria—which can kill bull markets. The advice that investor Sir John Templeton offered in 1966 remains relevant: “Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.”

 

The current bull market was born in the fall of 2022, and it has closely followed Templeton’s script for investor behavior. Despite pessimism and skepticism among retail investors and Wall Street strategists alike, returns for the S&P 500 topped 25% in both 2023 and 2024. In the first several months of this year, retail investor fund flows were notching records and Wall Street started the year with bullish forecasts—a mature bull market characterized by optimism.

 

Now, however, the progression from optimism to euphoria has been derailed—which, contrarily, may extend the bull market. Investor sentiment in early April was the most negative it has been in three decades, according to the global fund manager survey run by Bank of America, for example. Another indicator, an economic policy uncertainty index , has spiked, and in the past a rise in this index has been associated with higher three-month and six-month returns.

 

It's not that there aren’t plenty of things that could potentially upset the economy and push stocks down more sharply, such as a potential resurgence of inflation that would cause the Federal Reserve to adopt a more restrictive monetary policy, delaying further rate cuts. Higher rates at the same time as tariff impacts might be the biggest risk to equities. 

 

In a pause year, which is what this year may look like after the strong bull run in 2023 and 2024, there can be significant opportunities in the equity market. But investors must be willing to tack against the headlines. When the market goes down a lot, the odds get better that it’s a good time to invest, though there are no guarantees, of course. And investing in equities during a downdraft requires the ability to act in the face of considerable anxiety and trepidation.

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