Morgan Stanley warns US stocks may fall by 10% in the short term!
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Morgan Stanley
Let's look at Morgan Stanley's weekly preview report. According to Morgan Stanley strategist Wilson, although the S&P is close to its all-time high, it's easy to underestimate the market correction in recent months if you only look at the index itself. The current US stock market is more like a typical mid-cycle pattern.
Wilson believes the correction in US stocks mainly took place at the individual stock and valuation levels. Since June, more than 40% of stocks in the Russell 3000 Index have fallen more than 20%, and on the valuation side, the S&P's projected P/E ratio has compressed to 19x, returning to the lows seen during the peak of the US-Iran conflict in March this year.
So why has the index itself declined so little? Clearly, it's due to corporate profits. While rising interest rates and sell-offs in the semiconductor sector have depressed valuations in recent months, at the same time, more and more companies' earnings forecasts have been raised, which has just offset the negative impact. As a result, the S&P hasn't seen a major pullback. Wilson notes that the combination of a declining valuation multiple plus improved earnings is a classic bull market correction scenario.
Last week's FOMC meeting did not change Morgan Stanley's outlook on this market cycle, either.
Wilson believes that this rate hike shows Walsh's willingness to deliver on his previous stance of controlling inflation. The market believes the Federal Reserve's proactive move is to avoid inflation spiraling further out of control, thus reducing market concerns about future inflation. Even if short-term rates rise, long-term US Treasury yields and corporate financing costs may not increase sharply.
Compared to what happened in 2024, back then the Fed cut rates, but that didn’t translate into much lower long-term funding costs. Conversely, this rate hike also may not lead to significantly higher long-term funding costs, especially if the hike dampens uncertainty about long-term inflation.
Therefore, Wilson believes that even if there are more rate hikes in the next year, this bull market may not end. By contrast, if the Fed further tightens its balance sheet and credit environment, that would have a greater impact on the market.
This week, he also continues to maintain his previous preference for large, high-quality companies. Over the past month, quality factors such as cash flow and operating efficiency have continued to outperform, indicating that market capital continues to favor companies with stable earnings and better financial quality.
Assuming this is a bull market correction in progress, will earnings continue to cover the expense of high interest rates and allow the rally to continue?
Our US investment team believes that corporate earnings remain strong at present, but overall profit expectations have already been revised quite high, especially in semiconductors. While profits can still support the market, further upward revisions are starting to slow. Of course, earnings take time to verify and are therefore a medium-term factor, while oil prices remain a key leading indicator in the short term.
If oil prices continue to rise, the first effect will be to reignite market expectations for inflation and further rate hikes, with long-end yields rising and valuations compressed further. If high oil prices persist for too long, they could impact corporate costs and consumption, and this may also weigh on earnings.
Morgan Stanley's S&P target remains at 8000 by year end, but they also note that if financial conditions tighten again or energy prices surge sharply in the next three to five weeks, the index could fall to 7000-7100, about 5-6% downside from current levels. According to Morgan Stanley's statistics, around US mid-term elections, the S&P usually experiences a 5-10% correction, while so far the index has only fallen about 2% from its peak.
Our US investment team's view on year end has not changed either. Overall, market risk remains manageable, and the upcoming earnings season is worth looking forward to. More importantly, there are two additional minor catalysts: easing geopolitical tensions and the "AI C-end." The "AI C-end" refers to the recent development with Meta, and on the geopolitical front, today the US and Iran continue to keep in touch, while oil prices have also pulled back somewhat. Compared to previous weeks, the market now sees a chance for geopolitical and oil supply risks to ease, indicating that the largest short-term pressure is no longer worsening.
Therefore, we remain confident in the performance of the US stock market from year-end to early next year, and we believe the opportunities outweigh the risks. At the start of this year, we set an S&P year-end target of 8200, and at this moment, it still looks achievable.
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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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