With the S&P 500 now down 9% from recent highs, Morgan Stanley is eyeing when investors could get some relief from selling.

The firm says the 5,500 level, about 2% below current levels, represents support for the benchmark index.

It's a threshold that's rapidly approaching as US indexes get whacked by a combination of tariff-driven recession fears and AI-trade exhaustion. Fresh off its worst week in six months, the S&P 500 fell 3%. The Nasdaq 100 index — already in a correction — fared even worse, dropping 4%.

Morgan Stanley cites tariff uncertainty, fiscal-policy drags, and a strong dollar as the main culprits driving the market slump, and says it largely expected the outcome.

"Price action supports our long-standing view that policy would likely be sequenced in a more growth-negative way to start the year before lower deficits/rates and less crowding out of the private economy benefit the market later in the year," wrote a team of analysts led by chief US equity strategist Mike Wilson.

Washington's on-and-off tariff threat has been leading concern among investors, spiking fears of higher inflation and a mounting recession. Immigration enforcement and the budget-cutting actions of the Department of Government Efficiency are also growth-negative pressure on earnings, the bank noted.

For those in the market, this has meant piling into risk-off assets. Bonds and gold have gained.

The 5,500 level would not be the end of the road. A combination of tailwinds suggests that the index should expect support at around the threshold, which could come later this month.

Positives include a shifting economic surprise index, which could start to turn higher in a matter of weeks. The bank also cited a slipping dollar, and the fact that earnings revisions and equity performance will seasonally improve in March.

Morgan Stanley still expects the benchmark to reach 6,500 by the end of 2025, though it warned that the path to that goal will remain choppy.

"In the bear case where growth falls off more significantly and recession becomes likely, the S&P 500 is likely to trade toward our bear case target of 4,600. We are not there, but things can change quickly and so it's useful to know the downside in the bear case to manage one's risk," Wilson wrote.

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