Morgan Stanley predicts a possible 10% drop in US stocks in Q3 due to economic concerns

    by VT Markets
    /
    Aug 4, 2025
    Morgan Stanley predicts a drop in the US equity market this quarter, expecting it to fall by up to 10%. They link this downturn to tariffs impacting both consumers and company finances. Recent reports show rising inflation, slowing job growth, and decreasing consumer spending. Traditionally, August and September experience a downturn, with the S&P 500 losing an average of 0.7% in each month, unlike a 1.1% gain at other times.

    Stocks Are Overpriced

    Stocks appear to be overpriced, with the S&P 500’s 14-day relative strength index hitting 76. This indicates a risk of overheating in the market. We may see a 10% decline in the US equity market this quarter. The Consumer Price Index for July 2025 was 3.8%, higher than expected, and only 150,000 new jobs were reported recently, raising concerns. These signs suggest preparing for a downturn. In light of this, buying put options on broad market indices like SPY or QQQ is a wise move. This allows investors to gain directly if the market drops as expected. It also serves as a hedge against existing long positions or a way to bet on a decline. Right now, market volatility, measured by the VIX, is low at around 13, indicating investors are overly relaxed. Purchasing VIX call options is a smart strategy to take advantage of the fear that could arise during a market sell-off. The VIX jumped from 14 to over 26 during the market turbulence in fall 2023, highlighting how quickly sentiment can change.

    Technical Indicators And Seasonal Weakness

    The recent peak of the S&P 500’s 14-day relative strength index at 76 shows the market is technically overbought. This situation creates an opportunity to sell out-of-the-money call credit spreads on indices or overvalued stocks. This strategy generates income and profits if the underlying asset remains stable or declines. We should also consider the typical seasonal dips in August and September. Historically, the S&P 500 has lost value during these months, as demonstrated by a 4.9% decline in September 2023. This historical pattern reinforces the argument to take defensive positions now, before this tricky period begins. Create your live VT Markets account and start trading now.

    here to set up a live account on VT Markets now

    see more

    Back To Top
    Chatbots