Morgan Stanley Sees US Stock Market Correction Nearing Final Stages
Morgan Stanley analysts report that the US stock correction is nearing its end, driven by upcoming midterms, AI sector adjustments, and tightening liquidity conditions, maintaining an S&P 500 target of 8,000.
Analysts at Morgan Stanley believe that the current correction in the US stock market is nearing its final stages, and that upcoming midterm elections alongside other developments could pave the way for a market recovery, according to reports. Strategist Michael Wilson noted that since June, the stock market has been adjusting to a new phase of the economic cycle, driven by a slower pace of Federal Reserve balance sheet expansion, tighter capital availability, and political uncertainty. Consequently, the bank maintained its year-end forecast for the S&P 500 at 8,000 points, while warning of a potential near-term drop to 7,100-7,200 points, slightly below the 200-day moving average.
Morgan Stanley has identified three key catalysts that could bring an end to the market correction. The first involves artificial intelligence, a sector where concerns regarding capital availability, financing costs, technological safety, and local resistance to data center construction are expected to intensify in the coming weeks. The second factor is the midterm elections, which Wilson suggests will remove a significant source of market uncertainty. While midterms typically weigh on markets initially, they generally pave the way for strong returns over a 6 to 12-month horizon, though volatility may persist for days or weeks following the vote.
The third factor centers on tightening financial conditions, driven by Federal Reserve rate hikes, a slowing balance sheet expansion, and rising energy prices. Wilson emphasized that liquidity remains the primary risk and the most likely catalyst for a final market bottom. He pointed out that Federal Reserve Chair Kevin Warsh assumed office committed to returning inflation to the 2% target, yet policymakers have raised rates only once since his appointment. Meanwhile, yields on long-term US government bonds have climbed by over 100 basis points since February, tightening credit conditions and weighing on financial markets.
Wilson projects that tighter financial conditions will eventually slow economic growth and alleviate inflationary pressures. However, a sharper market downturn could prompt the Fed to reconsider its monetary policy stance, offering support to asset prices. Such a shift would prove positive for asset valuations in the short term, even if it extends the timeline for achieving the central bank's inflation objectives.
