Most investors still feel like the market is fragile. Morgan Stanley thinks it is further along than they realize.
In his Sunday Start note dated April 12, Morgan Stanley equity strategist Michael Wilson argued that the S&P 500 was in the process of carving out a low after hitting the bottom of the firm’s targeted correction range of 6,300 to 6,500. The bank has consistently maintained that this is a correction within a new bull market, not the start of a bear market.
“As always, the market trades in advance of the headlines. Investors should do the same,” Wilson wrote.
The correction began last October, Wilson noted. Since then, the S&P 500’s forward price-to-earnings ratio has declined 18% from its peak.
That kind of P/E compression typically accompanies a recession or an actively tightening Federal Reserve. Morgan Stanley’s base case includes neither.
Beneath the surface, more than half of the stocks in the Russell 3000 have dropped 20% or more from their 52-week highs. Wilson does not see that as a sign of complacency. He sees it as a market that has appropriately discounted the risks.
The key supporting argument is earnings. Price damage for the S&P 500 has been contained to less than 10% because earnings growth is moving in the opposite direction from valuations. Falling multiples alongside improving earnings growth is, in Wilson’s framing, the signature of a bull market correction rather than a bear market.
Wilson addressed the comparisons being drawn to previous oil shocks directly. In those prior cycles, he noted, earnings were already deteriorating or falling sharply when energy prices spiked.
Today, earnings are accelerating from already high levels. The median company is growing earnings per share in the double digits, the fastest pace since 2021.
Tax refunds are running more than 10% higher this year, which Wilson cited as additional context for why the oil move feels more contained in practice than in headlines.
On other risks, Wilson argued that both private credit and AI disruption appear better understood by markets, with many affected stocks already down 40% or more.
On private credit specifically, he cited colleague Vishy Tirupattur’s view that risks are material but not systemic, and that tightening in private credit could ultimately drive business back toward traditional lenders.
With AI, Wilson said the disruption narrative has moved faster than actual implementation and that the enterprise application layer remains in early days. In the near term, he said AI looks more likely to support margins than compress them, particularly for early adopters.
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Wilson was clear about what stands between the market and its next leg higher. The equity-rates correlation has turned decisively negative again, meaning higher yields are once more a direct headwind for valuations.
The recent hawkish pivot from central banks, driven by commodity inflation concerns, is what Wilson identified as the primary source of current market anxiety and likely the final hurdle equities need to clear. He noted that part of last week’s brief rally coincided with falling bond volatility after Fed Chair Powell signaled a more neutral position.
Financial conditions are tightening, but Wilson observed that this dynamic could ironically create the conditions that allow the Fed to override its primary mandates. The key question, in his view, is whether conditions need to tighten further before they ease. He believes the issue will be resolved as the transition in Fed leadership is completed.
Morgan Stanley correction target range for S&P 500: 6,300 to 6,500
Russell 3000 stocks down 20% or more: more than half
Median S&P 500 company EPS growth: double digits, fastest since 2021
Tax refunds year-over-year increase: more than 10%
Bull market start: April 2025, following 2022-2025 rolling recession trough
Wilson continued to favor a barbell approach. On the cyclical side, he highlighted financials, industrials, and consumer discretionary goods, where earnings remain strong and valuations have compressed. On the growth side, he pointed to the hyperscalers, where sentiment and valuations have also reset to what he called healthy levels.
The final phase of a correction is rarely clean, Wilson cautioned. Another retest is possible, particularly if rates or bond volatility push higher again. But he framed that possibility as consistent with a market continuing to carve out a low, not one entering a new bear market.
His closing message was direct: markets are already discounting a future that investors have not yet fully recognized. “Markets aren’t typically so gracious as to offer multiple opportunities,” Wilson wrote, which is why the bank has encouraged investors to be early rather than wait for confirmation.
