Morgan Stanley says US market correction in 'final innings' ahead of midterms
Morgan Stanley strategists said on Monday that the US market correction which began in June is in its "final innings", with the 3 November midterm elections expected to remove a major overhang. They noted 60 per cent of Russell 3000 stocks have seen at least a 20 per cent correction since June.
Morgan Stanley strategists said on Monday that the US market correction that began in June is in its "final innings", adding that the 3 November midterm elections should help remove a major market overhang.
"We expect near-term clearing events to provide an attractive opportunity to add risk to quality cyclicals that have de-rated as we head into 2027," strategists led by Michael Wilson, Morgan Stanley's chief US equity strategist, said.
The S&P 500 is catching down to weaker market breadth, which is typically the last stage of a slump, Wilson said, noting 60 per cent of Russell 3000 stocks have already seen at least a 20 per cent correction since June.
The risk of a correction led by AI company earnings has kept markets on the edge. Last month, the tech-heavy Nasdaq-100 shed trillions of dollars in market value and was on the brink of entering correction territory.
Large-cap stocks have typically gained 15 per cent in the six months following election results, they said, adding that a Democratic sweep is already priced-in by investors. The bigger risk would be what comes after the vote, with the potential of renewed military escalation with Iran or new tariffs, Morgan Stanley said.
Recent earnings reinforce signs that the market correction could be nearing its end. "Investors are no longer overlooking FCF shortfalls as they often did earlier in the cycle, consistent with a more typical mid- to late cycle environment where earnings durability and cash conversion matter more," Wilson said.
He does not expect the Federal Reserve to rush toward interest rate cuts or add support, but relief could come from the US Treasury spending down its cash pile, from about US$1.05 trillion to about US$850 billion by year-end.