Episode summary
The Next Stage of the Market Correction
Thoughts on the Market (Morgan Stanley)
· · 5 min · Hosts: Mike Wilson
Summary
Mike Wilson argues the equity correction that started in June is still in its later stages, but not finished yet. He says the high-quality S&P 500 may need one more leg lower before the adjustment is complete, with 7100 to 7200 as the zone where it should find material support. In his view, the market’s internal damage is already substantial: about 60% of Russell 3000 stocks are down more than 20% since June, especially in semiconductors, autos, consumer cyclicals, and capital goods.
He says three clearing events could end the selloff. First is AI, where investors are questioning returns, funding, and the cost of capital, and he expects semiconductors could fall another 10 to 15% into mid November. Second is the midterm elections, which he says could create a sharp but potentially buyable downdraft given the strong historical post-midterm pattern. Third, and most important, is liquidity: financial conditions have tightened enough that the market may be doing the Fed’s work for it.
Wilson’s preferred stance is to stay with quality stocks that have already corrected, especially in capital goods, while being ready to buy weakness if a final washout appears. He thinks that final uncomfortable phase could set up the Fed’s pivot and the next leg higher for stocks.
Key takeaways
- Mike Wilson says the June correction is in its final stages, but he still expects one more uncomfortable leg lower before it ends.
- He sees 7100 to 7200 on the S&P 500 as the area where the correction should find material support.
- Wilson says roughly 60% of Russell 3000 stocks are down more than 20% since June, with semiconductors, autos, consumer cyclicals, and capital goods hit hardest.
- He expects semiconductors to fall another 10 to 15% into mid November as the AI spending debate clears.
- He thinks liquidity is the most important catalyst, and that tighter financial conditions may force the Fed and Treasury to respond if stress worsens.
Notable quotes
“The correction that began in June is now well advanced beneath the surface”
“If the index does move lower, I believe 7100 to 7200 on the S&P 500 is where the correction should find material support”
“Roughly 60% of the Russell 3000 stocks are down more than 20% since June”
“I see another 10 to 15% lower for the semiconductor index into mid November”
“The third and most important clearing event is liquidity”
How the episode opens
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley CIO and chief US equity strategist. Is the end of this equity market correction in sight?
Today on the podcast, I'll share what I think could turn the tide. It's Monday, October 26 at 11:30 a.m. in New York.
So, let's get after it. The correction that began in June is now well advanced beneath the surface. But I believe the highquality S&P 500 index may still have some unfinished business.
Until that plays out, I don't think we can say the adjustment is complete. The real question to ask, how bad does it have to get before it gets better? We've described this correction as a classic midcycle transition.
The peak rate of change and earnings revisions arrived right on schedule about a year after the recession trough. And the market responded the way that it usually does. Early cycle leaders with more operating and financial leverage started to underperform while higher quality asset light servicesoriented business moved to the front.
This quality rotation is now well understood though and positioning has followed it. Ironically the final step is usually a convergence between the resilient highquality S&P 500 index and the weaker breath beneath. We may already be seeing the beginning of that meeting in the middle.
If the index does move lower, I believe 7100 to 7200 on the S&P 500 is where the correction should find material support. The reason I believe it will ultimately have a positive resolution to this transition is that a lot of damage has already occurred. Roughly 60% of the Russell 3000 stocks are down more than 20% since June.
And the hit has been even more severe in early cycle areas like semiconductors, autos, consumer cyclicals, and capital goods. At the same time, hedge fund positioning has come down meaningfully, leaving us near the lows for the past 12 months.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- market correction
- sp-500 support
- russell 3000 drawdown
- earnings revisions
- sentiment/positioning
Companies and tickers mentioned
- MS
- Morgan Stanley
Watch the episode
Watch “The Next Stage of the Market Correction” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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