Bullish signal flashing! Will the US stock market see a big rebound? Morgan Stanley pours cold water: Don't be too optimistic, the foundation of the rebound is not solid.

Due to concerns about the global trade war, the S&P 500 index has dropped nearly 19% from its peak in February. As the US government begins trade negotiations with its partners, the index has now regained about half of its lost ground. After China and the US agreed to temporarily lower tariffs on each other's products, the S&P 500 index futures surged on Monday, with risk assets rising. In this context, multiple market breadth indicators suggest that investors' confidence in companies of all sizes is increasing. However, Morgan Stanley analyst Michael Wilson stated that it is still too early to sound the all-clear, as the US stock market has not fully recovered from the difficulties. Market breadth indicators sending positive signals The equal-weighted S&P 500 index has outperformed the market-cap weighted S&P 500 index for six consecutive trading days, the longest streak since January 2023, indicating optimism about the ability of more companies to drive profits, the economy, and the US stock market. Since Trump suspended the strictest tariffs on April 9th, all sectors of the S&P 500 index have seen gains, with the information technology, industrial, and non-essential consumer goods sectors leading the way. Strong earnings have supported large tech stocks, while smaller defensive companies have become attractive investments in an unpredictable macro environment. Chief Market Technician Craig Johnson of Piper Sandler & Co. stated, "It's like building a house - the more stocks participating in the rise, the stronger the market. Why is breadth important? It tells me how many stocks are participating." An internal indicator tracked by Johnson measuring market breadth is about to trigger a buy signal - this indicator known as the 40-week technical indicator tracks the number of stocks trading above the 40-week moving average and 10-week moving average. Additionally, Johnson noted that the S&P 500 index's cumulative advance-decline line (another market breadth indicator) has reached a new high, which typically occurs before the index rises in the coming weeks and months. Last week, Ned Davis Research's strategists increased their allocation to stocks after previously selling off stock asset classes during last month's market volatility, as some of the company's market breadth data provided positive clues. This included the ratio of 10-day advances to declines, triggering the first bullish signal since February 2023. In a report to clients, the team led by the company's Chief US Strategist Ed Clissold stated, "The concept behind breadth is that a rally is strongest when the majority of stocks participate. If some stocks are struggling, many others are still trending up to drive the index higher." Morgan Stanley sounds the alarm Despite the improving sentiment among investors towards the US stock market, Morgan Stanley strategists believe it is still too early to sound the all-clear. The research team led by Michael Wilson identified four factors necessary for a longer-lasting uptrend, but they believe only two factors have made progress: "optimism surrounding a trade deal between the US and China, and robust earnings revisions." Wilson added, "The other two items on our list - a more dovish Fed and the US 10-year Treasury yield below 4% without economic recession data - have yet to materialize." Fed Chairman Powell last week reiterated the Fed's cautious stance on easing monetary policy, while the US 10-year Treasury yield has now surpassed 4.4%. They added, "In our view, a US 10-year Treasury yield over 4.5% would be unfavorable for valuations." According to Morgan Stanley's analysis, tariffs have been the top concern for companies during earnings season, with mentions of tariffs on earnings calls reaching record levels. Due to the uncertainty of tariffs, around 30 companies have either canceled or suspended their earnings forecasts, especially in industries such as automotive, durable goods, and industrial sectors. However, strategists point out that since the earnings reports were released, the average gains of these stocks have increased. Meanwhile, Kevin Gordon, Senior Investment Strategist at J.P. Morgan Asset Management, stated that while market participation has improved with the acceleration of the rebound, it disproportionately favors industries further from the center of the trade war. He said, "Consumer-facing, transportation, and energy sectors have seen the weakest rebound, which aligns with the current economic backdrop. I believe the next phase of the rebound needs to include these sectors of the market in order to transition from the recovery phase to a sustainable rebound phase." In Wilson's view, as the S&P 500 index has climbed above the previous resistance level at 5500 points, returning to the range of 5500-6100 points before the "Liberation Day," a more meaningful climb will depend on the completion of the US-China trade agreement and a reacceleration of earnings revisions. Morgan Stanley strategists stated, "The next and most important technical test for the S&P 500 index since the start of the uptrend about a month ago is at the intersection of the 200-day and 100-day moving averages (5750-5800 points)."