Morgan Stanley Warns Of 3 ‘Profound’ Disconnects As Equities Rally Post US-China Tariff Pause

Morgan Stanley’s chief investment officer, Lisa Shalett, has flagged three “profound” disconnects between the economic environment and the rally in U.S. equities following the tariff pause announcement with China earlier in May.

Shalett argued that the surge in U.S. equity markets has been “breathtaking” after President Donald Trump announced a 90-day tariff pause on most countries.

Since Trump’s announcement on April 9, the S&P 500 has surged more than 19% and is now hovering at a level higher than Jan. 1. The index is now positive for the year.

Trump’s surprise de-escalation with China also gave the S&P 500 a notable boost—the index is up 5% since the Trump administration announced a 90-day tariff pause with China, dialing down levies to 30%.

Shalett underscored “unequivocal confidence” among equity investors amid “still deteriorating estimates,” which could spell trouble in the future via three assets.

First up, bonds. “While rising front-end U.S. Treasury yields appear to confirm confidence in economic growth, the 10-year yield’s grind toward 4.5% is noteworthy, as wider term premiums and higher real rates indicate a keen focus on U.S debt and the upcoming tax, debt ceiling, and budget bills,” she said.

Shalett also highlighted weakness in the U.S. dollar, and noted that the greenback has declined 8% against major currencies since its Jan. 8 peak.

“How odd that both oil and the dollar are now positively correlated, as opposed to the reverse,” she said, adding that a weaker dollar could spook foreign investors.

Shalett also highlighted that gold could be another blind spot.

“Strength in gold, disconnected from its role as a ‘safe haven,’ indicates likely shifts in central bank foreign reserve diversification, another reminder that risk premiums in other asset classes may not be providing much shelter from potential storms,” she explained.

Shalett’s warning comes at a time when big bank CEOs have expressed similar concerns. JPMorgan Chase CEO Jamie Dimon maintained that Trump’s tariffs are still “pretty extreme.”

He also warned of “extraordinary” complacency in U.S. equity markets, which have recouped their “Liberation Day” losses.

Citigroup CEO Jane Fraser warned that investors looking to equities for clarity could be in for a disappointment, but said that there are signals “everywhere.”

“Treasury yields rose even as equity markets wobbled. The U.S. dollar, typically a safe haven, has weakened at moments when it used to rally. That tells us something deeper is going on,” she said.

Meanwhile, the SPDR S&P 500 ETF Trust (SPY) was down by 0.52%, while Invesco QQQ Trust (QQQ) fell 0.43%.

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