How Sustainable Is the Current Stock Market Rally?

The S&P 500 ticked higher on Monday amid a broad rally as investors look to recover from the index’s first correction in more than a year. 

The S&P 500 rose 0.6% on Monday after surging 2.1% on Friday, its best daily performance since the day after Donald Trump won re-election. For a second consecutive day, more than 90% of the S&P 500’s components closed higher. 

Notably, big tech largely missed out on Monday’s rally. Shares of Tesla (TSLA) tumbled nearly 5%, while Nvidia (NVDA) slid almost 2%. Alphabet (GOOG), Amazon (AMZN) and Meta (META) also closed in the red, while Apple (AAPL) and Microsoft (MSFT) eked out tiny gains. 

The S&P 500 slipped into a correction for the first time since 2023 last week. Investors have grown concerned that the Trump administration’s aggressive tariff policies could raise prices, slow growth, and discourage investment and hiring in the near term. Tariff headlines have struck consumer confidence, which by one measure fell in early March to its lowest level since 2022. Consumers are now expecting prices to rise faster in the coming year, a potential headwind for the Federal Reserve in its effort to return inflation to 2%.

Treasury Secretary Scott Bessent on Sunday made the case for Trump’s tariffs despite the market turmoil they’ve caused. “I’ve been in the investment business for 35 years, and I can tell you that corrections are healthy, they are normal,” Bessent told NBC’s Meet the Press on Sunday. Bessent suggested that Trump’s tax and deregulatory proposals would stabilize and boost the market in the long run. 

What’s Needed For The Rally To Persist

Morgan Stanley analysts gave a similar assessment in a note on Monday. “We ultimately think the market will focus on the positive aspects of the Trump policy agenda,” the analysts wrote, “but the path is going to take time and is unlikely to be smooth.” 

The analysts called a rally from last week’s correction level “likely” considering stocks became as oversold as they’ve been since 2022 last week. They also pointed to improving sentiment signals and seasonal strength in the second half of March as reasons for optimism about the market’s immediate prospects. Over the longer term, a weakened U.S. dollar and lower Treasury yields should lend some support to corporate earnings over the next couple of quarters. 

Volatility, however, is likely to persist throughout the year as markets acclimate to Trump 2.0, and Morgan Stanley’s analysts aren’t confident about a sustained rally out of this correction.

“It will take more than just an oversold market to get more than a tradable rally,” they wrote. “We firmly believe that earnings revisions breadth is the most important variable, and while we could see some seasonal strength/stabilization in revisions, we believe it will take a few quarters for this factor to resume a positive uptrend.”