Fans of the US-China trade dispute are worried about what’s next for the stock market

Trade tensions between the United States and China are back, and things could get worse for investors before they get better, some on Wall Street say, with the potential for a major pullback in stocks and a pullback in some hot sectors.

Absent a near-term truce, according to analysts, the bull market that has been rising since April could be stopped in its tracks as investors grow increasingly concerned about how long momentum stocks can continue to rise and worry about rich valuations.

Recent market action has already indicated what could be coming: gold rose, volatility increased, and shares of technology stocks like Nvidia (NVDA) and Intel (INTC) showed weakness, weighing on broad market indices. However, investors haven’t let up: The S&P 500, Dow Jones Industrial Average, and Nasdaq all remain near record levels.

Friday’s trade escalation with China appears to mark the first tangible dip in that uptrend, according to Morgan Stanley equity strategist Michael Wilson. Without an easing of trade tensions between the world’s largest economies, stocks could see the S&P 500 fall by more than 15%, he wrote. (The index fell more than 11% from April 1, the day before Liberation Day, to its lowest closing level on April 8.)

The best hedges against near-term political uncertainty, according to Morgan Stanley, are quality – in short, companies with strong fundamental and financial characteristics – and health care, the “preferred” defensive sector. Semiconductors, quantum computing and bullish stocks have “the greatest downside risk,” he wrote. Given the risk of huge potential tariffs on China, the company is underweight in consumer discretionary stocks.

Economists at the Ned Davis Research Foundation do not expect a “quick fix” after the increase in the volume of China’s exports, which continue to rise in the face of high US tariffs.

“China has been able to offset weak U.S. demand with strong shipments almost everywhere else,” Alejandra Grindal, the company’s chief global economist, wrote in a recent note. China’s strength could lead to longer negotiations, she wrote.

Morgan Stanley’s Wilson said the market could withstand any trade escalation, especially if tensions subside in the next few weeks. But if an additional 100% tariff on China goes into effect on November 1 without any truce — a bearish case — that would negate the company’s market recovery hypothesis until 2026.

The company’s 12-month price target on the S&P 500 in a bear market is 4,900, more than 25% below current levels; The upside price target is 7200, an upside of just under 8%.