The recent pullback in equities could be approaching its final phase, according to Morgan Stanley strategist Michael Wilson, who said the threshold “remains high for the oil spike to threaten the business/earnings cycle.”
In a note released Monday, Wilson said that while some additional short-term downside remains possible, “we maintain our view that this correction is closer to its ending stages in time and price.”
He pointed out that the decline is already relatively advanced, noting that “50% of stocks in the Russell 3000 [are] down at least 20% from 52-week highs.”
Wilson added that markets have once again moved “well in front of the risks that are now obvious,” suggesting the current market behavior resembles the early warning patterns seen last year.
However, he expects the present correction to be “notably more modest” than the previous year’s downturn, though volatility could persist due to ongoing geopolitical tensions.
Morgan Stanley expects equities to trade within a broad range in the near term, identifying potential support around the 6,400–6,500 level if the S&P 500 breaks below its 200-day moving average, with resistance near 6,850.
Wilson also said the bank is currently locking in gains in small-cap stocks and shifting its stance on the sector to neutral for the time being.
Despite the near-term uncertainty, Morgan Stanley reiterated that its outlook for the next six to twelve months remains positive.
The bank highlighted projected S&P 500 earnings growth of about 13%, noting that this differs from previous late-cycle periods when oil shocks derailed economic expansions. It also pointed to strong fiscal support and improving business cycle momentum as factors supporting the broader market outlook.