Wealth Management

New Bull Market Is on Shaky Ground

Jun 11, 2025

Investors are turning a blind eye to risks that could derail the bull market. Here’s why more caution is warranted.

Author

Lisa Shalett

Key Takeaways

Geopolitical tensions and legislative uncertainties, including debates on bank regulations and the U.S. tax bill, pose risks to the equity rally.
The market’s optimism on earnings and growth lacks evidence, as CEO confidence drops, cost pressures rise and capital spending wanes.
Active stock-picking and diversifying into international stocks, commodities and bonds may help investors mitigate risks.

It often seems the stock market has no lasting memory. It is a heat-seeking missile aimed at what comes next, often with seemingly no regard for what already happened.

Since the April tariff trauma and market selloff, both the S&P 500 Index and the NASDAQ Composite Index have rallied more than 20%, putting them, by definition, in a new bull market. It now appears that no matter what actually happens with tariffs, the market is viewing them as old and manageable news. Investors are instead focused on the positives:

relative resilience in corporate earnings
a “soft landing” of steady economic growth and muted inflation
the prospects of government stimulus, U.S. Federal Reserve rate cuts, a capital spending boom and earnings growth acceleration in 2026.

While this optimism is understandable, Morgan Stanley’s Global Investment Committee still thinks it is somewhat premature and may be resting on a shaky foundation.

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Wealth Management

The “New” Bull Case

Stocks are technically in a new bull market, but the underlying narrative may be premature. Wealth Management Chief Investment Officer Lisa Shalett explains why the new rally may be on shaky ground.

Geopolitical and Policy Uncertainty

First of all, there is uncertainty not only about tariff policy, but also from the contentious legislative debates that are likely to unfold this summer around the tax bill, raising the debt ceiling and bank regulation.

And then there is the market’s apparent blind eye to increasingly unstable geopolitics. In the last few weeks, Israeli Prime Minister Benjamin Netanyahu’s leadership has been jeopardized by fractures in his governing coalition, calling into question peace in Gaza; Ukraine executed an audacious drone attack on military aircraft deep inside Russian territory and Russia retaliated; and progress on the Iranian nuclear deal has stalled.

Hope Without Evidence

Beyond those developments, there are reasons to question the markets’ bullish assumptions on earnings growth, profit margins, capital spending and productivity gains. On these matters, the Global Investment Committee sees a lot of investor hope, without hard evidence.

Business leaders are not echoing investors’ confidence about the future. The second-quarter Conference Board CEO survey showed the biggest quarter-over-quarter sentiment drop in the survey’s history, dropping 26 points to score a 34 on a scale of 0 to 100. This runs counter to the idea that businesses are looking through 2025 to a reacceleration in 2026.

Company margins appear to be facing pressure from weak productivity readings in the first quarter and higher unit labor costs. The latest Institute for Supply Management (ISM) surveys on manufacturing and service-sector activity show surprising jumps in input costs, with rises in “prices paid” (the costs businesses incur for raw material and services) outpacing those of “prices received” (their selling prices).

Finally, current dynamics on capital spending are not encouraging, with durable goods orders running negative, and with ISM “new orders” indexes for both manufacturing and services in contraction. Equally concerning is that earnings linked to services and the U.S. consumer don’t look likely to strengthen, given signs of consumer stress including rising credit delinquencies, low job quit rates, rising savings rates and weak demand for new credit.

Portfolio Moves to Consider

As the old investing adage goes, “markets don’t discount the same event twice” – meaning they typically do not react as strongly to an event, such as tariffs, once it has been priced in. That said, the current rally still seems to be struggling with a credible forward-looking narrative.

Against this backdrop, investors should pay attention to valuation multiples, which are again expanding, and consider active stock-picking rather than relying on passive exposure to an index.

Consider rebalancing portfolios and positioning for average U.S. equity returns around 5%-10%, in an environment of more volatility; higher inflation-adjusted, or “real,” rates; and a weaker U.S. dollar.

Investors may also want to add diversifying positions in international equities, commodities, energy infrastructure and hedge funds.

Lastly, think about maintaining higher-than-normal exposure to investment-grade and municipal bonds with short to neutral durations.

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from June 9, 2025, “The ‘New’ Bull Case.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast(opens in a new tab) based on this report.

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Index Definitions

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

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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.

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. Investing in currency involves additional special risks such as credit, interest rate fluctuations, derivative investment risk, and domestic and foreign inflation rates, which can be volatile and may be less liquid than other securities and more sensitive to the effect of varied economic conditions. In addition, international investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets, since these countries may have relatively unstable governments and less established markets and economies.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii) governmental programs and policies, (iii) national and international political and economic events, war and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other disruptions due to various factors, including lack of liquidity, participation of speculators and government intervention.

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.

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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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