Wilson’s roadmap (posted earlier this week) implies near-term downside for semiconductors and AI-linked credit, alongside a buy-the-dip setup for early-cycle sectors once the catalysts clear. That makes AI-linked debt issuance and data centre credit spreads key gauges to watch over the coming weeks. There’s also a possible two-stage dollar trade, though this is editorial interpretation rather than Morgan Stanley’s view. A final risk-off shock could lift the US dollar on safe-haven demand. If that stress pushes the Fed toward easing, it could also mark a peak in dollar strength. Higher energy prices tied to the Iran conflict remain a risk to the timeline, since they add to the tightening pressure Wilson describes.
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Morgan Stanley thinks the stock correction has one more leg down in it, and that the stress which delivers it may also bring the Fed to the rescue.
Summary:
- Wilson says the equity correction that began in June is in its final stages
- He sees tactical S&P 500 downside to 7,100-7,200, then a year-end target of 8,000
- AI concerns are expected to peak in three to four weeks as debt supply is absorbed, and chips could fall another 10% to 15%
- Morgan Stanley sees the midterms as a hurdle that markets typically benefit from clearing
- Wilson calls liquidity the key catalyst: financial conditions are near 2018 levels and close to 2022 severity, which risks forcing a Fed reversal
- Chips, financials, consumer cyclicals and autos are seen leading any recovery
Morgan Stanley’s Mike Wilson believes the US equity correction that began in June is in its final stages. He expects markets may need one last sell-off before a sustained recovery, with three catalysts set to determine when the bottom arrives.
Wilson, the bank’s chief US equity strategist, sees tactical downside for the S&P 500 to between 7,100 and 7,200, slightly below its 200-day moving average, before a rebound towards his year-end target of 8,000. He argues that much of the damage has already been done beneath the surface of the headline index. About 60% of Russell 3000 stocks are down more than 20% since the correction began, and in semiconductors the figure is 96%.
The first catalyst is artificial intelligence. Morgan Stanley expects investor concerns over AI to peak over the next three to four weeks as markets absorb a sharp increase in related debt issuance. Those concerns include returns on capital, funding needs, widening credit spreads on data centre bonds and local opposition to new facilities. The bank’s strategists said semiconductors could fall a further 10% to 15% before finding support around mid-November.
The second is the US midterm elections. Morgan Stanley sees the vote as a hurdle that markets benefit from clearing, rather than a lasting threat. It notes that the S&P 500 has historically gained about 17% on average in the 12 months after a midterm election.
Wilson regards the third catalyst, liquidity, as the most important. The Federal Reserve has resumed rate increases and roughly halved the pace of its balance sheet growth, while higher energy prices add further pressure. In Wilson’s view, markets are effectively tightening financial conditions on the Fed’s behalf, and those conditions have now tightened to a degree comparable with 2018 and nearly as severe as 2022. That could slow growth and help bring inflation down. He warned, however, that it may also generate enough financial stress to force the Fed to reverse course before inflation is fully contained.
Wilson sees opportunities as these catalysts resolve. Sentiment is neutral and third-quarter earnings growth is running near 27%. He expects early-cycle groups that have lagged, including chips, financials, consumer cyclicals and autos, to lead any recovery, with semiconductors offering the most rebound potential. The main risk to the view is timing: a slower resolution of any catalyst would push the expected bottom further out.
This article was written by Eamonn Sheridan at investinglive.com.