S&P 500 Could Drop 11% If US-China Trade War Escalates, Says Morgan Stanley

Morgan Stanley’s chief US equity strategist Michael Wilson has warned that US stock markets could face a significant selloff if trade tensions between the US and China are not resolved before November. He estimates a possible decline of 8% to 11% in the S&P 500.

Why the Market is Vulnerable

Wilson highlighted two main reasons why the market is at risk:

High investor exposure: Many investors are heavily invested in US stocks.
Elevated valuations: Stock prices are currently high compared to historical averages.

Recent events escalated the risk. On Friday, President Trump announced a threat of 100% tariffs on China and export controls on critical software starting November 1. This caused:

S&P 500 to drop 2.7%
Nasdaq 100 to fall 3.5%, ending its AI-driven record bull run.

Worst-Case Scenario Forecast

In a worst-case scenario, Wilson predicts the S&P 500 could fall to a range of 5,800 to 6,027 points. Despite this, he remains optimistic about a gradual economic recovery in 2026 if trade tensions eventually ease.

Market Recovery Outlook

Wilson emphasized that the recovery thesis is strong enough to withstand short-term trade escalations, as long as tensions gradually de-escalate. On Monday, index futures rebounded after the White House indicated openness to a deal with Beijing, providing hope for a potential resolution.