Morgan Stanley's Mike Wilson says a S&P 500 correction of 5% to 10% could actually help the market finish the year stronger, as a historic Treasury selloff pushes yields to multi-decade highs. He says the direction of yields from here will decide whether the rally broadens or the index keeps correcting.
Morgan Stanley's chief U.S. equity strategist and chief investment officer, Mike Wilson, said a pullback in the S&P 500 might be exactly what the market needs to close out the year stronger. Wilson pointed to a historic selloff in the bond market as the trigger that could still drag the index lower.
Treasury yields hit multi-decade highs
Since early this month, the U.S. bond market has experienced a historic selloff. The yield on the 30-year Treasury hit a 22-year high of 5.538%. The 10-year yield reached 5.213%, a level not seen since 2007.
If yields don't soon start to ease, the stock market could become more volatile, dragging the S&P 500's price down by between 5% and 10%, Wilson said. According to a recent episode of the Thoughts on the Market podcast, Wilson said: "Frankly, I would welcome it." He added that a final index-level correction is often how a multi-month correction beneath the surface ends.
The two-year Treasury yield reached 4.941% early Tuesday, already above the path projected by the Federal Open Market Committee. That level sits well above the Federal Reserve's median forecasts of 4.1% for 2026 and 2027 and 3.9% for 2028. To Wilson, this suggests the bond market has been leaning too hawkish in the near term.
Wilson favors large-cap quality over cyclicals
Investors should watch for bond volatility and funding stress, and whether either is accompanied by swings in the stock market, Wilson said. If those pressures ease, breadth can catch up and drive the market higher; if they do not, the index probably has more correcting to do.
Groups that led powerfully from the rolling recession trough, including automotives, semiconductors and industrials, have been among the weakest areas recently, Wilson said. He explained this normally happens when the cycle matures and the Federal Reserve starts raising interest rates. Instead, the market begins rewarding stable profit margins, free cash flow, operating efficiency and raised earnings forecasts, favoring large-cap, asset-like, services-oriented and fee-based businesses.
Source: MarketWatch
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