Morgan Stanley CIO and Chief U.S. Equity Strategist Mike Wilson says U.S. equities may be nearing the end of their current correction as markets digest months of economic and geopolitical concerns.
In a new episode of the Thoughts on the Market podcast from Morgan Stanley, Wilson argues that the sell-off in stocks began well before recent headlines intensified market volatility.
“The key point is that before the attacks in Iran two weeks ago, the correction in equities was already very well advanced in both time and price. In fact, 50 percent of all stocks in the Russell 3000 are now down 20 percent from their 52-week highs.”
Wilson notes that markets have been grappling with several risks for months, including concerns about artificial intelligence disrupting labor markets, private credit stress and tightening liquidity conditions. More recently, geopolitical tensions and rising oil prices have added further pressure to equities.
According to Wilson, corrections often reach their final phase when market leaders and major indices begin to fall sharply, triggering capitulation among investors.
Despite the volatility, he believes the current downturn may prove less severe than last year’s drawdown due to stronger economic growth, improving earnings conditions and greater fiscal support. Wilson also points to more accommodative monetary policy from the Federal Reserve compared with the previous year.
“Bottom line, equity markets have been digesting many of the concerns for months that are now hitting the headlines. We think this means that we are closer to the end of this correction rather than the beginning and investors should be getting ready to buy any final capitulation that may occur on the next bad headline.”
Wilson adds that potential catalysts for a final market downdraft could include a more hawkish tone from the Federal Reserve or heightened volatility around the upcoming triple-witching options expiration. However, he says investors should be prepared to add exposure if markets experience a final bout of selling, noting that market bottoms often occur faster than peaks.
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