Morgan Stanley Sees End to Equity Correction After Midterm Elections

The ongoing equity market correction may be nearing its end, with several upcoming "clearing events," including the U.S. midterm elections, poised to bring relief, according to a Morgan Stanley client note released Monday. Strategist Michael Wilson wrote that markets have been navigating a mid-cycle transition since June, a process exacerbated by slowing growth in the Federal Reserve's balance sheet and capital scarcity.

Key Catalysts on the Horizon

Morgan Stanley identified three primary clearing events that could mark a bottom for the market. Wilson noted that while the path could be "messy and may linger for days or weeks after election day," these developments are expected to resolve key uncertainties.

• AI-Related Concerns: Issues surrounding the supply and cost of capital, safety, and local opposition to development (NIMBYism) are expected to come to a head in the next three to four weeks.
• Midterm Elections: Historically, midterms act as an initial headwind for markets but are "usually then lead to very strong 6-12 month returns post the event," according to the note.
• Tightening Financial Conditions: Driven by Fed rate hikes, slower balance sheet growth, and higher energy prices, this factor represents a major risk. Wilson stated, "Of all the concerns, we think liquidity presents the biggest risk and catalyst for a final low."

Ad

Market Outlook and Fed Policy

The bank has a tactical downside target for the S&P 500 of 7,100 to 7,200, which would represent a slight break below the 200-day moving average. However, Morgan Stanley's base case for the index at year-end remains 8,000.

Wilson observed that while the Federal Reserve has a strong commitment to returning inflation to 2%, back-end rates have already risen by more than 100 basis points since February. He argued that this tightening could slow growth and inflation, but it also carries the risk of causing market stress that could force the Fed to pivot its policy. Such a pivot "would be asset price bullish in the short term," even if it delays the achievement of the Fed's inflation goals, the note concluded.