Optimism about the resumption of US-China trade negotiations has driven up US stocks, but Morgan Stanley warns of economic risks.
On May 2, 2025, the U.S. stock market saw gains across the board due to strong employment data and optimism over the resumption of U.S.-China trade talks. The Dow Jones rose by 564.47 points, the S&P 500 and Nasdaq rose by 82.53 and 266.99 points respectively, and the Philadelphia Semiconductor Index rose by 149.40 points. Morgan Stanley warned that stagflation and high U.S. debt may pose risks.
Key Updates
05/02 23:02
Optimism about the resumption of US-China trade negotiations has driven up US stocks, but Morgan Stanley warns of economic risks.
On May 2, 2025, the U.S. stock market saw gains across the board due to strong employment data and optimism over the resumption of U.S.-China trade talks. The Dow Jones rose by 564.47 points, the S&P 500 and Nasdaq rose by 82.53 and 266.99 points respectively, and the Philadelphia Semiconductor Index rose by 149.40 points. Morgan Stanley warned that stagflation and high U.S. debt may pose risks.
Positive Signals Emerge from US-China Trade Talks
In early April, US President Trump announced tariffs as high as 145% on Chinese imports, causing significant turmoil in global markets. However, recently, China's stance has shifted. On May 2, the Chinese Ministry of Commerce stated that it is evaluating the US proposal to restart trade talks and emphasized that if the US shows sincerity and cancels unilateral tariffs, China is willing to engage in dialogue.
The market interpreted this statement as a sign of potential improvement in relations between the two sides. According to The Wall Street Journal, the Chinese government is considering using the fentanyl issue as a starting point to pave the way for negotiations and may send senior officials to the US for meetings. These developments have boosted investor sentiment, driving major US stock indices higher.
Strong Employment Data Supports Market Confidence
The US Bureau of Labor Statistics released the April non-farm employment report, showing an addition of 177,000 jobs, significantly higher than the market expectation of 138,000. The unemployment rate remained at 4.2%, with average hourly earnings rising by 0.2% month-on-month, slightly below the previous value of 0.3%. Although the first-quarter GDP contracted by 0.3% on an annualized basis, marking the first contraction in three years, the resilience of the job market has alleviated concerns about an economic recession.
Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, noted, "The employment data exceeded expectations, allowing the market to finally breathe a sigh of relief. Although concerns about a recession have not completely dissipated, the momentum of 'buying on dips' is expected to continue, at least until the tariff suspension period ends."
Stock Market Shines with Technology and Semiconductors Leading
Driven by the aforementioned positive news, all four major US stock indices closed higher. The Dow Jones Industrial Average rose 564.47 points, or 1.39%, to close at 41,317.43 points; the S&P 500 Index increased by 82.53 points, or 1.47%, to close at 5,686.67 points; the Nasdaq Index climbed 266.99 points, or 1.51%, to close at 17,977.73 points; and the Philadelphia Semiconductor Index surged 149.396 points, or 3.52%, to close at 4,397.055 points.
Technology and semiconductor stocks performed particularly well. Meta gained 4.34%, Microsoft rose 2.32%, and semiconductor stocks such as Nvidia, Applied Materials, and Micron all gained more than 2%. TSMC's ADR also rose by 3.80%, reflecting the market's continued optimism about AI and chip demand.
Morgan Stanley Warns: Stagflation and Debt Risks Cannot Be Ignored
Despite the short-term improvement in market sentiment, Morgan Stanley issued a warning, urging investors to focus on two major potential risks: stagflation and the US government debt issue.
Firstly, if economic growth slows while inflation continues to rise, it will squeeze corporate profits, putting pressure on both the stock and bond markets. Morgan Stanley pointed out that the risk of stagflation is rising, especially in the context of tariff policies potentially driving up import prices.
Secondly, the level of US government debt has reached a historic high. If a new round of tax cuts or expansionary fiscal policies is introduced in the future, it could further increase the debt scale. Morgan Stanley estimates that at the current interest rate level, US annual interest payments could double from the current $1 trillion, posing long-term pressure on capital markets and economic growth.
Additionally, Morgan Stanley also noted that China holds about one-sixth of US Treasury bonds, and if China uses this leverage in negotiations, it could impact the US bond market. Although there are currently no signs of China massively selling US Treasuries, the recent active gold purchases by the Chinese central bank and the reduction of dollar asset proportions indicate that global central banks are gradually de-dollarizing.
Market Remains in a Highly Uncertain Environment
Despite the positive signals from US-China trade talks, the market still faces multiple uncertainties. Morgan Stanley believes that even if the Trump administration reaches agreements with major trading partners, if the high reciprocal tariffs announced in April are not significantly reduced, the market may still be disappointed.
Furthermore, Morgan Stanley also reminded that the current market remains highly sensitive to Federal Reserve policy directions, tax policies, and global geopolitical risks. Investors should continue to monitor macroeconomic data and policy trends and respond cautiously to potential market volatility.
