Morgan Stanley sees S&P 500 falling 9% to 7,100 before a rebound to 8,000
Morgan Stanley's chief US equity strategist expects the S&P 500 to fall about 9% from its last record to 7,100 points before the correction now running beneath the surface of the market plays out, and he wants investors to treat that drop as a buying opportunity.
Mike Wilson, who took the role in February 2017 after joining the bank as an investment banker in 1989, told Bloomberg that a cluster of "adjustment events" - the US midterm elections, concern over artificial intelligence spending and liquidity constraints - could pull the index down. He said the market has already priced in Democrats winning the House and probably the Senate by a narrow margin, with a 52-48 result assumed; a wider 55-45 outcome could be more disruptive, he said, if it feeds state and local resistance to data centre construction and brings more regulation.
Beyond the elections, Wilson argued that the historical record is strong for equities in the six to 12 months after a midterm vote, though he conceded the run-up is not always smooth - 2018 being one example. He said he is "pretty convinced" of a good stretch of at least six months, and possibly 12, once the adjustment is done, with the S&P 500 reaching 8,000.
On the wave of equity issuance from companies including Meta, SpaceX and Anthropic, Wilson said supply has not yet outrun demand. Capital is being absorbed by the wider economy, which he said is growing at 7.5% in nominal GDP terms, and he expects the current fundraising phase to pause within about 30 days. He also pointed to companies switching between debt and equity issuance as a healthy sign that they are watching their cost of capital, with strong demand from credit buyers at a total cost of 7% to 8%.
Wilson linked this year's rise in bond yields mainly to rapid economic growth rather than government borrowing alone, arguing that a 10-year yield of 5% looks reasonable against nominal GDP growth of 7% to 10%. That environment, he said, favours quality companies able to grow at higher borrowing costs and squeezes smaller, lower-quality firms facing 8% to 10% lending rates - a K-shaped split that applies to companies as well as consumers.
