Morgan Stanley's Wilson: Correction in Final Phase, But Hold Off on the Dip

Morgan Stanley says the S&P 500 correction that began in June is entering its final stage, and the bank expects the index to slide to 7,100–7,300 before rallying into year-end. Mike Wilson, the bank's chief investment strategist, and his team set that downside target range and argue the market is now closing in on it.

Futures tied to the S&P 500 currently point to a rise of 0.2%, implying an open at 7,417.50.

What is driving the correction?

The strategists identified two main forces behind the benchmark's decline. The first is the Federal Reserve's increasingly hawkish stance. The second is the peak rate of change in earnings-per-share and revenue growth outlooks.

Both factors have compressed the index since the correction started in June, according to the Morgan Stanley note. The bank had said earlier that the last phase of the sell-off would show up as a narrowing of the S&P 500's breadth — fewer stocks carrying the index. That narrowing is now in view, the strategists wrote, with breadth considerably off its lows as the index approaches the 7,100–7,300 target band.

When should investors add risk?

Wilson's team sees the S&P 500 potentially falling to the lower end of the bank's target range in the coming weeks. That dip, they argue, would offer a good opportunity to add risk before the market turns upward again at the end of the year.

Their recommendation is specific. "Rather than waiting for a perfect low, we recommend adding exposure over the next few weeks to quality cyclicals that have derated materially and are exhibiting strong EPS revisions," the strategists wrote.

In plain terms: buy well-rated cyclical stocks that have sold off hard and still enjoy upward revisions to earnings estimates. Do it over the next few weeks. Do not wait for an exact bottom.

What do the midterms and data centers change?

The strategists read last week's election results — Democratic victories in the Senate and the House — through the lens of market history. "Once again, the markets traded poorly into the midterms, as they typically do," they wrote. "This is one reason why they generally trade well in the 6–12 months after the midterms — buy the rumor, sell the news."

That pattern frames their year-end rally call. Markets tend to struggle ahead of midterm votes and recover in the six to twelve months after them.

On the artificial-intelligence trade, the bank put a number on data-center spending. For 2027, the strategists see data-center capital expenditure representing 5% of consensus revenue for the S&P 500. In 2028, they expect that figure to rise into the mid-single digits.

Even in a possible bear market scenario, where data-center capacity gets pushed beyond that timeline, the strategists predicted a marginal impact on the index's earnings and revenues.

What happens next?

The near-term path, in Morgan Stanley's telling, runs down first and up after. The index could still touch the bottom of the 7,100–7,300 range in the coming weeks, which the bank frames as the window to add exposure — not a reason to sell. If the midterm pattern holds, the six-to-twelve-month stretch after last week's vote favors the buyers who acted before the turn.