Morgan Stanley CIO and Chief U.S. Equity Strategist Mike Wilson believes that a bottom for U.S. equities will be confirmed when one key event occurs.
In a new episode of the Thoughts on the Market podcast from Morgan Stanley, Wilson says that when investors further reduce their exposure to several popular investment positions it would signal an end to the ongoing market correction.
“The S&P 500 bounced last week off the 6,300 to 6,500 range of support that I’ve been highlighting. Could we retest those levels? Sure, especially if rates push higher or geopolitical risks escalate further. However, I don’t see a meaningful breakdown.
If anything, we’re still missing, and what I’d actually like to see is, a bit more de-risking in crowded trades like semiconductors and memory stocks in particular. That kind of repositioning reset is often required to seal a durable bottom.”
At time of writing, the S&P 500 is trading at 6,616.
Next up, the analyst says that there are four sectors well-positioned to surge once a market bottom is in.
“If we’re in the later innings, the next question is, where do you want to be? For me, it’s about balance, and I think the right approach is a barbell of cyclicals and quality growth. On the cyclical side, I like financials, consumer discretionary and industrials. These are the areas where earnings momentum remains strong and valuations have come down meaningfully. It’s also what was leading prior to the start of the Iran conflict and reflects our core view that we are still in the early stages of a recovery from the rolling recession. Last week’s jobs report supports that view with private payrolls increasing by 186,000, one of the largest rises in three years.
On the growth side, I’m focused on the hyperscalers as a very good risk-reward at this point. These companies are trading at roughly the same multiple as defensive sectors like staples, but with more than three times the earnings growth. Meanwhile, the sentiment positioning is as bad as it’s been since 2022’s bear market when these companies were showing negative earnings growth.”
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