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Morgan Stanley's Wilson: Market correction is nearing its end, but there will still be some pain in the final stage.
Morgan Stanley has signaled that the correction in the US stock market is coming to an end, but the final hurdle may not be easy to overcome.
On Sunday, April 12th, Mike Wilson, the chief equity strategist at Morgan Stanley, stated in his latest weekly report that the current market correction is deeper than most investors realize. The S&P 500 is bottoming out, but the market still faces the risk of a retest until the issues of interest rates and bond volatility are completely resolved.
Wilson believes that the current market sentiment remains fragile. He clearly stated that this round of adjustment began in October last year, with the forward price-to-earnings ratio of the S&P 500 having dropped by 18% from its peak - a decline that historically has typically only occurred during economic recessions or when the Federal Reserve actively tightens its monetary policy cycle. "But neither of these scenarios exists in our base forecast."
A correction in a bull market, not a bear market.
Wilson insists that this is a normal adjustment within the new bull market that began in April last year after the bottoming out of the "rolling recession from 2022 to 2025", rather than a trend reversal.
The key lies in profits. The S&P 500 has fallen less than 10%, while more than half of the stocks in the Russell 3000 have dropped by more than 20%. Wilson's interpretation is that this is not complacency in the market, but rather that the market has already priced in the risks reasonably.
The core data supporting this judgment is that the current median company EPS growth rate has reached double digits, the fastest since 2021.
"Declining valuation multiples combined with improved earnings growth - this is a typical feature of a bull market correction, not a bear market," Wilson wrote.
He also compared the historical oil shock cycles: at that time, profits were already deteriorating, while currently profits are still growing rapidly from a high base, and the increase in oil prices in this round is relatively moderate when measured in real terms.
Other risks: Private credit and AI disruptions
Wilson also directly addressed the other two major concerns of the market.
In terms of private credit, he cited the view of his colleague Vishy Tirupattur: "The risks in private credit are substantial but not systemic." Private credit has been tightening, but most banks' direct exposure is limited, which may instead drive business back to traditional lenders.
In terms of AI disruption, Wilson believes that the narrative has outpaced reality. "The enterprise application layer is still in its early stages, and in the short term, AI is more likely to support profit margins rather than compress them," he added. AI also provides companies with a reason to hold back on hiring, which in turn brings an upside surprise in operating leverage - one of the reasons for the current acceleration in EPS growth.
The Final Challenge: Interest Rates and the Federal Reserve
Wilson made it clear that the biggest source of uncertainty in the current market is interest rates and policies, rather than geopolitical or credit risks.
The correlation between stocks and bonds has once again turned significantly negative, meaning that rising interest rates have become a drag on valuations. He characterized the hawkish shift by central banks - mainly driven by expectations of commodity inflation - as "the last hurdle for the stock market to overcome".
Last week's partial rebound in the market coincided with the release of a more neutral stance by Federal Reserve Chair Powell and the decline in bond volatility.
"The final stage of adjustment is never easy," Wilson wrote. "If interest rates or bond volatility rise again, the market may need to retest."
But he also emphasized that such fluctuations are part of the bottoming process rather than the start of a new bear market. "Markets usually don't give investors multiple chances, which is why we encourage early positioning."
Strategy inclination: Dumbbell configuration
In terms of specific strategies, Wilson maintains a "dumbbell" configuration framework:
On one end are cyclical stocks with stable profits and compressed valuations, including those in finance, industry and consumer goods (durable goods); on the other end are high-quality growth stocks with reset sentiment and valuations to healthy levels, namely hyperscalers in cloud computing.
His final judgment is: "Most of the pricing adjustments for geopolitical risks, private credit concerns and AI disruptions have been completed. What remains are mainly interest rate and policy issues, and these will be resolved as the leadership transition at the Federal Reserve is completed."
The market is always ahead of the news, and so should investors.
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