Key Takeaways
• Stocks have recouped their losses since April 2, but Morgan Stanley‘s Lisa Shalett says tariff-related hurdles remain.
• She thinks another year of blockbuster returns in the stock market is unlikely.
• Shalett advises investors to look to equal-weighted products or active stock picking to capture idiosyncratic gains.
Stocks may be rallying on the hopes of tariff relief, but Lisa Shalett, chief investment officer for Morgan Stanley‘s Wealth Management division, isn’t convinced the coast is clear.
Financial markets have staged a dramatic turnaround over the past month, with the market recouping the double-digit losses it sustained in the wake of President Donald Trump’s April 2 tariff announcement. Newfound optimism surrounding trade deals and solid first-quarter earnings have helped push stocks higher.
For Shalett, that’s not the full picture. She thinks the market may be dismissing tariff concerns too hastily, and she’s still attentive to the risks. Another bull run in stocks is by no means guaranteed. “Folks seem to be looking through all things tariffs,” she says, while they look past signs of an economic slowdown. “Everyone’s back into buying the genAI story. I just don’t think it’s going to be that simple.”
Even if tariffs are reduced to a 10% universal level, Shalett says they’ll amount to a regressive tax of $300 billion. “The more you’re spending on just paying the tax, the less money you have to spend on everything else,” she explains, meaning total consumption falls. “Economic growth goes down and inflation goes up.”
Further down the line, a ballooning federal deficit could put send long interest rates higher and put pressure on stock valuations. And with earnings growth likely more subdued in the face of tariffs, Shalett says another year of double-digit stock returns is probably not in the cards. “You’re not going to go to an all-time high this year, and it’s very unlikely that you actually have anything better than very low-single-digit gains.”
Bull or Bear Case?
Some market watchers appear to have taken the view that short-term tariff pain will be offset by the Trump administration’s other fiscal priorities in the months ahead.
“The bull case rests on this idea that we’re going to get this massively stimulative tax bill,” Shalett says. “That tax bill is going to support capital spending, and next year US economic growth rebounds and we’re off to the races. That is absolutely possible, especially if it’s combined with financial market deregulation.”
But Shalett thinks a more likely scenario is one wherein countervailing forces are in play. “Interest rates remain high because you have a debt and deficit problem,” she says. “Inflation doesn’t go down, so the Fed doesn’t cut because you have a pricing problem, which you’ve perpetuated through tariffs. You continue to have a weak dollar, which perpetuates inflationary pressures.” There’s also the loss of goodwill between the US and the rest of the world, which could limit the scope of possible trade deals.
Shalett adds that the megacap tech companies that have driven the lion’s share of the stock market’s return over the past few years are especially vulnerable to headwinds from changes in the global trade landscape. “50% of their sales and revenue come from outside the United States,” she explains. Hypothetically, a global boycott of one of those firms is “not impossible to fathom” and could weigh heavily on the entire US market.
“For every action, there’s a reaction,” she says. “And I don’t think it’s a one-way equation.” Shalett doesn’t characterize the outlook as “fully bearish,” and notes that the S&P 500 Index’s levels around 4,900 in mid-April were likely too low. But on the other hand, she says, “I’m pretty sure that 5,700 isn’t the right number either.” The S&P 500 peaked above 6,100 in February, and was hovering around 5,700 in March and today.
Opportunity for Stock Pickers
In this kind of environment, Shalett says investors would be better served by active stock picking or equal-weighted investment vehicles than by more traditional indexes. “You have to really do the homework,” she says. “You have to say to yourself, ‘What are the companies that are going to idiosyncratically benefit from the very specific policies of this administration? Which companies are going to be protected by his tariff approach?’”
She thinks we’re already seeing some hints, and points to the increase in defense spending in Trump’s budget proposals. “That’s an example of an industry that’s likely going to benefit.” Pharmaceuticals, on the other hand, are likely to face a much higher tax burden thanks to new tariffs.
Shalett says she’s looking for firms that are best-positioned to weather policy changes in the months ahead. That means more stable recurring revenue models rather than cyclical ones, good pricing power, disproportionately domestic operations, and low debt. That will be especially important if interest rates remain elevated. “You have to go company by company, industry by industry, and be a stock picker and see who’s on the right side of this,” she says.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar's editorial policies.
