Morgan Stanley's Wilson: U.S. Stock Correction Nearing End, Advises Investors to Prepare to Add Positions
nashnova research
Morgan Stanley chief equity strategist Michael Wilson says the months-long US equity pullback is nearly over and investors should prepare to add exposure; the S&P 500 sits just ~2% below its all-time high, yet cyclical sectors have absorbed significant valuation compression beneath the surface.
The index is 2% from a record — so what's been "correcting"?
The S&P 500 is only about 2% below its all-time high, seemingly almost fully recovered.
But Wilson notes a sharp divergence underneath: the quality factor has kept outperforming, while the S&P 500 equal-weight version — which treats all 500 stocks the same instead of weighting by market cap — has lagged.
This means → a handful of mega-cap names have propped up the headline index. Most stocks are still down. Financials, industrials, and consumer discretionary — the cycle-sensitive sectors — have borne the brunt of valuation compression.
What is Wilson telling clients to do?
He believes this sector-level divergence is about to end and advises investors to prepare to add risk.
His words: "Whether the resolution is a quick snapback or a slow grind into November — in our view, that will be a time to add exposure, not hide from risk."
On positioning, he keeps his preference for quality stocks but flags capital-goods names — sectors such as equipment makers and infrastructure firms — where valuations have pulled back and EPS momentum is improving.
Could rising bond yields derail the AI spending boom?
Some market participants worry that AI capital expenditure relies increasingly on new debt, and rising bond yields could puncture the AI investment wave.
Wilson's call to add risk may ease that anxiety. Separately, JPMorgan strategists argue that if yields stabilize, that would provide "meaningful support" for equities.
Goldman Sachs strategists, meanwhile, note investor positioning is turning defensive. In plain terms = the three Wall Street houses don't fully agree, but all see yields as the single most critical variable right now.
What does this call ultimately depend on?
Bloomberg-compiled forecasts show S&P 500 constituents are expected to post Q3 EPS growth of 24.6% year-over-year — the key pillar underpinning broad market confidence.
Wilson's "add risk" window ultimately hinges on whether that earnings estimate holds up through reporting season.
This means → if Q3 results disappoint, the "correction is over" thesis weakens materially; if earnings deliver, they become the hardest support for adding exposure.
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