Morgan Stanley strategists believe the current U.S. stock market correction is nearing its end, despite the potential for one final period of selling.
Michael Wilson, Morgan Stanley’s chief U.S. equity strategist, told CNBC that the four-month market downturn is entering its final phase. He suggested the S&P 500 could still experience a temporary decline before a sustained recovery begins. Wilson noted that last week’s selloff was the moment the S&P 500 began catching up to weakness that had already been present across much of the wider market.
S&P 500 downside targets
The bank’s tactical downside forecast places the S&P 500 between 7,100 and 7,300, Yahoo Finance UK reported. Wilson believes the index could drop by about 9% from its previous peak to reach the 7,100 level due to liquidity constraints, concerns over artificial intelligence spending, and the U.S. midterm elections.
According to Yahoo Finance, Wilson sees the S&P 500 potentially bottoming between 7,100 and 7,300. He expects the index to rally toward 8,000 by year-end once the correction concludes. Morgan Stanley also maintains a further projection of 8,300 for the index by mid-2027.
This is the final innings,
Mike Wilson, Morgan Stanley chief U.S. equity strategist
Wilson’s team suggests adding exposure in increments over the coming weeks rather than waiting to find a perfect bottom, Business Insider reported.
Semiconductor sector opportunities
While the broader market faces volatility, Wilson views the recent selloff in semiconductor stocks as a buying opportunity.
The iShares Semiconductor ETF (SOXX) gained 4.5% during the following Monday morning recovery.
Addressing concerns regarding capital increases and initial public offerings (IPOs) from firms like Anthropic, SpaceX, and Meta Platforms, Wilson noted that the U.S. real economy is absorbing massive amounts of funds as nominal gross domestic product (GDP) growth reaches 7.5%. He stated that the current market is capable of financing AI companies and that these companies are making actual expenditures on infrastructure.
Midterm elections drive potential market returns
Wilson argues that clarity regarding congressional control could remove market uncertainty. He noted that while midterm elections are often an initial headwind, they usually lead to very strong returns in the 6 to 12 months following the event.
Yahoo Finance Singapore noted that since 1982, large-cap stocks have gained about 15% on average in the six months following midterm elections. Additionally, Matt Cerminaro, founder of the financial-adviser platform Exhibit A, stated that the S&P 500 has averaged a 15.5% gain from Election Day through June 30 of the following year since 1950.
Ryan Detrick, chief market strategist at Carson Investment Research, noted that the S&P 500 has risen during every November-April period following midterm elections since 1950. Detrick also observed that November has historically been the strongest month in midterm years, with stocks gaining 78.9% of the time.
Liquidity may also provide support as the Treasury Department manages its cash reserves. Wilson sees potential relief as the Treasury’s cash balance falls from approximately $1.05 trillion toward $850 billion by year-end, WTVB reported. Morgan Stanley considers reduced liquidity to be the most significant threat to equities, noting that higher Federal Reserve interest rates, slower expansion of the central bank’s balance sheet, and elevated energy costs have contributed to tighter financial conditions.
MORGAN STANLEY SEES S&P 500 CORRECTION NEARING ITS END Morgan Stanley's chief US equity strategist Mike Wilson believes the market correction is entering its final phase, potentially setting up a year-end rally. Wilson expects the S&P 500 to approach his 7,100–7,300 downside…
Regarding the Federal Reserve, Wilson noted that Fed Chair Kevin Warsh entered office with a focus on returning inflation to 2%, though the central bank has only implemented one rate increase during his tenure. Warsh has suggested that tightening financial conditions have already assisted the central bank’s efforts.
Market target comparisons
While Morgan Stanley maintains a bullish year-end outlook, other firms hold differing projections for the S&P 500 index.
| Organization | S&P 500 Year-End Target |
|---|---|
| Morgan Stanley | 8,000 |
| Wells Fargo | 7,700 |
| Yardeni Research | 7,900 |
| Seaport Global | 8,200 |
| Fundstrat (Tom Lee) | 8,400 |
Investment shifts toward cyclicals
To position for a potential rebound, Morgan Stanley recommends looking at quality cyclical stocks that have de-rated significantly,
Business Insider reported. The quality factor refers to companies with high. The bank’s argument is that much of the market has already experienced its own bear market, even while major indexes hid the damage.
Industrials stocks on the Morgan Stanley Fresh Money Buy List
include Delta Air Lines (DAL), Knight-Swift Transportation (KNX), and Northrop Grumman (NOC), Business Insider reported. These stocks have upside potential to Morgan Stanley’s price targets of 55%, 64%, and 38%, respectively. For diversified exposure, the bank pointed to the Vanguard Industrials ETF (VIS) and the iShares MSCI USA Quality Factor ETF (QUAL).
Ongoing risks
Morgan Stanley identified several challenges that could limit the timing or strength of a recovery, including persistent inflation, trade-policy uncertainty, geopolitical tensions, and concentrated exposure to technology stocks. Specific risks include renewed military escalation involving Iran or the introduction of new tariffs. A Democratic victory by a wide margin could lead to increased regulation or restrictions on the expansion of data centers.
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