Has this round of bull market in US stocks paused?

Since hitting a low point in April, the S&P 500 index has rebounded by more than 26%. However, as the third quarter approaches, a combination of factors such as weak non-farm payroll data and inflation concerns caused by tariffs has left the market in a dilemma: will the bull market in US stocks hit the pause button? According to Wind Trade, Morgan Stanley's latest research report suggests that there may be a phased adjustment in the US stock market in the third quarter, with the core contradiction lying in the lagging impact of tariffs and the fluctuating US Federal Reserve policy. Despite this, Morgan Stanley still believes that this round of the bull market in US stocks is not yet over, and the adjustment in the third quarter is more likely to be a "pause" rather than an "end," with the market finding its bottom in bad news. Morgan Stanley recommends focusing on two types of targets: AI application-leading companies with high pricing power, and large-cap stocks that are less sensitive to interest rates, which can withstand short-term fluctuations and fully benefit from long-term growth dividends. The underlying logic of the bull market - earnings revision and cyclical inflection The starting point of this bull market can be traced back to April 2025. At that time, the Trump administration announced "equal tariffs," marking a peak in uncertainty in stock market growth. Data shows that in the months leading up to this announcement, the average decline of S&P 500 index components had reached 30%, indicating that the US stock market had already absorbed the soft trend shown in macroeconomic data. The core driving force supporting the bull market is the V-shaped recovery in Earnings Revision Breadth (ERB). Morgan Stanley data shows that ERB has rebounded from -25% in April to +10% currently, and this indicator moves in sync with the stock market and leads the surprise earnings data, becoming a key signal to confirm the market bottom. The report explicitly states that April marked the end of the bear market that started in 2024, and the current bull market, which is only four months old, is still in its early stages. Looking at the cyclical perspective, the "rolling profit recession" that began in early 2022 was coming to an end by April 2025. Companies paved the way for profit margin expansion through continued cost-cutting and labor expense reduction. In addition to new pro-growth tax policies, the proliferation of AI technology, and a weakening US dollar, the long-term drive for profit growth has been established. Lagging impact of tariffs and fluctuating US Federal Reserve policy... Despite the long-term positive trend, Morgan Stanley points out that there may be a phased adjustment in the third quarter, with the core contradiction lying in the lagging impact of tariffs and the fluctuating US Federal Reserve policy. Regarding tariffs, after the fading effect of low-cost old inventory, the rising raw material costs will be reflected in corporate financial reports in the third quarter. For industries with weak pricing power, this will directly squeeze profit margins, while industrial firms that can smoothly pass on costs will be less affected. Labor market data has exacerbated policy uncertainty. The latest data shows that the two-month revision of non-farm payroll data is the worst since the early days of the COVID-19 pandemic. The bond market has priced in an 88% probability of a September rate cut by the Federal Reserve, with the 2-year US bond yield 80 basis points lower than the federal funds rate. However, the report emphasizes that the Federal Reserve may delay rate cuts due to tariff-related inflation concerns. This combination of "weak growth + high rates" may trigger a 5%-10% pullback in the third quarter, which is traditionally a seasonally weak period. Other risks include: a slowdown in global US dollar liquidity growth, a pause in the breadth of earnings revisions, and a key breakthrough in the 10-year US bond yield above 4.5%, all of which could put pressure on the short-term market. Earnings + Rate Cuts, Firm Bullish View on a 12-Month Horizon While highlighting short-term risks, Morgan Stanley maintains a bullish view on a 12-month horizon, supported by three factors: Increased certainty in profit growth. Consensus expectations show that the EPS growth rate of the S&P 500 index will reach 9% in 2025 and rise to 14% in 2026. The Mag7, in particular, is expected to see a significant increase in net profit growth of 26% in the second quarter, far outpacing the 1% growth of the S&P 493 index. Companies are driving profit margin expansion through operational leverage, with the EBIT profit margin expected to rise from the current 17.6% to 18.9% in 2026. The Federal Reserve policy will eventually shift. While a short-term rate cut may be postponed, a rate cutting cycle in 2026 is likely as inflation moderates and the labor market cools off. Historical experience shows that the stock market often anticipates policy shifts in advance, and once the data supports rate cuts, the market may quickly recover lost ground from the adjustment. Valuation and resilience in the funding market remain intact. Although the dynamic P/E ratio of the S&P 500 index is high, with the 10-year US bond yield stable below 4.5%, the equity risk premium remains within a reasonable range, showing no signs of a significant bubble. This article was reprinted from "Wall Street News" and written by Shuqian Bu; edited by Wenqiang Xu.