Morgan Stanley (MS, Financial) says the S&P 500's recent pop above 5,500 is promising but precarious, warning that only four concrete catalysts—real tariff relief from China, a dovish Fed shift, 10-year yields below 4% without recession signals, and a rebound in earnings revisions—can secure a sustained move past 5,600–5,650.

In a note timed to last week's 0.13% gain in the S&P, Chief U.S. Equity Strategist Michel J. Wilson flagged the renewed volatility in the 10-year Treasury yield as a late-cycle risk: “A drop below 4% driven by term-premium compression could propel equities higher, but a move above 4.5% would likely trigger risk-off behavior.”

That balance hinges on the U.S. labor market, too: Morgan Stanley pegs a 40% recession probability unless payrolls run over 100,000 for several months and initial jobless claims remain steady, underscoring that “equities haven't priced a true labor downturn.”

Given those headwinds, Morgan Stanley advocates doubling down on quality stocks via its QUAL index, spotlighting companies with resilient earnings profiles that have historically weathered ISM readings below 44 with shallower drawdowns than during past recessions.

The bank's analysts recommend U.S. benchmarks including SPX, DJI, IND over international peers like Europe's VGK and Japan's EWJ, citing dollar strength and differential earnings stability as tailwinds for American names. “This isn't a simple sector bet,” Wilson writes. “It's about selecting firms that can hold up when growth slows.”

Investors should care because chasing breakouts without these four catalysts or ignoring the looming 4.5% yield threshold could backfire quickly, Morgan Stanley warns. With Federal Reserve minutes due Wednesday and April payrolls on May 2, Morgan Stanley says those data releases—and any tangible progress on China tariffs—will be the next real test for whether the market can shift from fragile rallies to a durable uptrend.