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A person walks past the New York Stock Exchange at Wall Street in New York on Feb. 3, 2025.
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According to a recent investment strategy report from Morgan Stanley Wealth Management, the S&P 500 has experienced a remarkable rise of approximately 70% over the past two years. However, this upward momentum appears to be losing steam.
This shift signals the decline of the “set-it-and-forget-it” investment tactic that allowed many individual investors to achieve significant gains merely by investing in an S&P 500 index fund, which had benefited greatly from the so-called Magnificent Seven tech stocks. Lisa Shalett, the chief investment officer at Morgan Stanley Wealth Management, emphasized that this era of passive investing is over: “We can’t set it and forget it because there’s new considerations every morning when you walk in the door.”
The investment landscape is entering what Morgan Stanley describes as “The Great Normalization.” In this new phase, factors such as interest rates and market valuations may stabilize, equity performance could begin to rely more on individual earnings growth, and there may be a decrease in concentration within major indices.
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The recent development of a robust artificial intelligence model by the China-based company DeepSeek could challenge the dominant position of U.S. firms in this rapidly evolving field, as noted in Morgan Stanley’s latest research.
Furthermore, Shalett pointed out that the Federal Reserve has adopted a patient approach, indicating that there is “no hurry to cut rates any further.”
Although there is currently a 30-day pause on tariffs affecting Canada and Mexico, the uncertainty surrounding potential outcomes once this period concludes remains significant. Shalett remarked, “When you have rising uncertainty, you need to price in risk.”
Time to ‘demand higher returns’ for risk
In this shifting environment, Shalett emphasizes the necessity for investors to diversify their portfolios and acknowledge the increasing risk premiums in the market. “They should demand higher returns for the risk that they’re taking,” she advised.
As investors seek value in this new era, looking for undervalued stocks that have not yet reflected market expectations could be a wise strategy. Additionally, in what may become a more unpredictable market, alternatives such as commodities or hedge funds could perform better than traditional investments.
Early market reactions to tariff announcements saw significant declines, although the news of a temporary 30-day pause with Mexico led to a rebound. This volatility serves as a crucial reminder for individual investors, as pointed out by financial advisors. In light of ongoing developments regarding tariffs and other market influences, it is essential for investors to assess their equity exposure to ensure they are comfortable with their risk levels.
Furthermore, it is vital to reassess the structure of equity investments. “People should always diversify their investments,” stated Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management. “Now you see that more.”
Despite the current turbulence, projections from Wall Street still anticipate a positive year-end for the S&P 500. Shalett reported, “We’re not bearish,” but she expressed concern regarding the unpredictable political landscape in Washington, which adds complexity to forecasting future market conditions.
Source
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