Morgan Stanley: S&P 500 Index Could Fall by Up to 7%

Morgan Stanley strategist Michael Wilson’s team stated that the U.S. stock market is vulnerable to further increases in energy prices and heightened bond market volatility. In such a scenario, the S&P 500 Index could drop by as much as 7%. The strategists noted that although robust corporate earnings have so far helped stock prices withstand the pressure from rising bond yields, the S&P 500’s valuation has already declined over the past four months to its lowest level since March. Wilson wrote in a report: “If due to a further tightening of financial conditions and/or a sharp rise in energy prices, the valuation correction worsens further in the short term, we believe the S&P 500 Index could drop to 7,100 points before a bull market recovery resumes before year-end.” This level would represent a 7% decline from last Friday’s closing price. Wilson also expects market volatility to increase ahead of the midterm elections in November, but ultimately believes that strong corporate earnings prospects will drive a year-end rebound, bringing the index closer to his 8,000-point target. This implies a rise of nearly 5% from current levels.