Morgan Stanley Forecasts 10% Stock Market Drop

stock market correction

Investors should prepare for a stock market correction as uncertainty surrounds the US presidential election, corporate earnings, and Federal Reserve policy, according to Morgan Stanley’s (NYSE:MS) Mike Wilson.

The experienced strategist has indicated that a stock market correction is not only possible but likely in the coming months.

US Election and Rate Outlook Among Mounting Risks

The US election, scheduled for November, is a significant risk factor, further compounded by the Federal Reserve’s policy direction.

“I think the chance of a 10% correction is highly likely sometime between now and the election,” Wilson stated in an interview with Bloomberg Television. He emphasized that the third quarter is expected to be particularly volatile, posing risks for unprepared investors.

Mike Wilson, Morgan Stanley’s chief US equity strategist, highlighted the challenges companies face in maintaining pricing power in the current economic climate. He noted the need for rate reductions to support corporate earnings, a sentiment he shared during an interview on “Bloomberg Open Interest.”

S&P 500 at All-Time Highs

Despite Wilson’s warnings, the S&P 500 Index has been performing strongly, opening the week at all-time highs. If it closes Monday in the green, it will mark the 35th closing record this year.

This surge has been driven by expectations of rate cuts by the Fed and growing enthusiasm around artificial intelligence, leading to a 17% gain this year after a 24% rise in 2023. Even Wilson, a long-time bear, has moderated his previously bearish stance in light of recent market performances.

Cautious Outlook Among Wall Street Pros

Other Wall Street experts have echoed Wilson’s cautious outlook. Scott Rubner from Goldman Sachs Group Inc. (NYSE:GS) warned of a potentially painful two-week stretch in August if corporate earnings fall short of expectations. Similarly, Andrew Tyler from JPMorgan Chase & Co. (NYSE:JPM) expressed bullish sentiment with reduced conviction due to weakening economic data. Citigroup Inc. (NYSE:C) strategist Scott Chronert also raised alarms about a possible market pullback.

Wilson shared a conservative view on the market’s potential upside, stating, “Your likelihood of upside from now until year-end is very low, much lower than normal.” He estimated the odds of stock prices ending the year higher than current levels at just 20% to 25%.

Opportunities in the Midst of Stock Market Correction

Despite the anticipated correction, Wilson is not overly concerned. He sees potential opportunities for investors if the market pulls back. With current valuations deemed “unexciting” after significant gains this year, a correction could offer a chance to buy at more attractive prices.

Wilson recommends focusing on individual stocks rather than indexes in the current market environment. He and his team at Morgan Stanley continue to favor high-quality growth stocks, particularly large-cap companies with strong balance sheets and reliable earnings performance. However, finding affordable shares in these categories remains challenging.

“If they were to come in 10%, then we’d probably get interested again,” Wilson remarked, indicating that a correction could renew interest in high-quality stocks that have become too expensive amid the recent rally.

In conclusion, while the prospect of a stock market correction looms large due to the upcoming US election and Federal Reserve policy uncertainty, it may present strategic buying opportunities. Investors should remain vigilant and consider focusing on high-quality individual stocks to navigate the anticipated volatility.