Morgan Stanley
Wealth Management

The Obstacles to a New Bull Market

Apr 29, 2025

Tariff-related volatility has eased somewhat, but stagflation and U.S. debt concerns mean a new bull run may still be out of reach.

Author
Lisa Shalett
Lisa Shalett

Key Takeaways

  • Although the U.S. Treasury secretary’s recent assurances on trade and Fed independence may have forestalled a deeper bear market, investor anxiety remains high.
  • Stagflation is still a risk that could squeeze corporate profitability and weigh on stocks and bonds alike.
  • Unsustainably high U.S. debt is another concern, portending increased borrowing costs and slower economic growth.
  • The White House’s talks with key trading partners may also disappoint, with major tariff rollbacks appearing unlikely.
  • Investors should maintain maximum portfolio diversification by asset class, sector and region, while favoring quality growth names. 

Market volatility has reached historic levels in April, driven by on-again, off-again statements from the White House around tariff policy, as well as President Donald Trump’s comments about his desire for new leadership at the U.S. Federal Reserve, which called into question the Fed’s historic ability to operate without political interference. However, the turbulence appeared to ease in recent days after U.S. Treasury Secretary Scott Bessent stepped in to assure markets that trade deals are near, de-escalation with China is imminent and the Fed’s independence is secure. 

 

Morgan Stanley’s Global Investment Committee shares the market’s relief at these messages, to some degree. The timing of this reassurance has helped to forestall a more prolonged bear market. However, we are less convinced that the obstacles to a new bull market have been fully removed. Here’s why.

Wealth Management

Tell ’Em What They Need to Hear

Market volatility has eased a bit, but investor anxiety remains. Here’s why resolution of tariff uncertainties alone may not be enough to catalyze a new bull market.

Worries Linger about Stagflation and U.S. Debt

Market dynamics suggest that investor anxiety remains high. Consider the unusual simultaneous weakness among U.S. stocks, U.S. Treasury bonds and the U.S. dollar since the tariff announcements in early April. These assets typically diversify one another, so when they decline in tandem, it suggests that investors globally are shifting money away from U.S. assets.

 

In the extreme, such a dynamic calls into question the historic “safe haven” status of the dollar and Treasuries and the durability of “American exceptionalism” – investors’ belief that the U.S. economy and stock market are uniquely strong. What’s more likely, however, is that markets are growing increasingly worried about two big issues:

  • The near-term prospect of “stagflation”: This dangerous combination of weak economic growth and persistent inflation could squeeze company margins and dent stocks and bonds alike.
  • The U.S. government’s unsustainably high debt load: Investors know that new tax legislation, for example, could include increasing the U.S. debt pile by trillions of dollars over the next decade. Such an outcome, at current interest rates, could cause annual interest costs for the government to double from about $1 trillion today. High government debt levels are a concern for investors because they can lead to increased costs of capital and potentially weaker economic growth, among other issues.

Uncertainty Looms in Tariff Negotiations

Even if the current administration can reach deals with key trading partners, those deals are likely to be disappointing for markets unless they include significant rollbacks of the steep reciprocal tariffs the White House announced (and then paused) in April.

 

Consider that while the White House has said it is “close” to agreements with Japan and India, final bilateral deals are likely still months away.

 

Meanwhile, China, which the administration hit with by far the steepest tariffs, has multiple strategic cards to play in negotiations. For one, it holds about one-sixth of foreign-owned U.S. Treasuries. If China sells them, it could cause U.S. borrowing costs to rise – a concern during recent Treasury market turmoil. To be sure, there is no evidence that such a sell-off is underway. However, China has been actively buying gold for its reserves – part of a broader trend among central banks seeking to diversify their portfolios away from the dollar, which potentially erodes its dominance as a global reserve currency. Also, in the very short term, China is experiencing deflation and therefore can afford to take aggressive monetary action that stimulates its currently weak consumer economy while it waits out U.S. negotiators.

Considerations for Investors

Given these dynamics, the current market environment may be more favorable to traders who seek to profit from short-term price fluctuations than for investors pursuing long-term risk-adjusted returns.

 

At this time, investors should consider maintaining maximum portfolio diversification by asset class, sector and region.

 

Long-term investors seeking exposure to the S&P 500 should consider index levels between 5100 and 5500 as acceptable entry points, provided recession remains at bay. We prefer equal-weighted investments in the index or active stock-picking over passive cap-weighted exposure. Investors should focus on quality growth stocks with achievable earnings estimates.

 

There also is value among intermediate-term fixed income assets in the so-called belly of the yield curve. Consider scouring the municipal bond market for opportunities.

 

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from April 28, 2025, “Tell ‘Em What They Need to Hear.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report. 

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Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation.

Interest on municipal bonds is generally exempt from federal income tax; however, some bonds may be subject to the alternative minimum tax (AMT). Also, municipal bonds acquired in the secondary market at a discount may be subject to the market discount tax provisions, and therefore could give rise to taxable income.  Typically, state tax-exemption applies if securities are issued within one’s state of residence and, if applicable, local tax-exemption applies if securities are issued within one’s city of residence. The tax-exempt status of municipal securities may be changed by legislative process, which could affect their value and marketability.

Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision. 

Investing in foreign markets entails greater risks than those normally associated with domestic markets, such as political, currency, economic and market risks. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies. Technology stocks may be especially volatile. Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an AI-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias.  You should always verify the results of any AI-generated output.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

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