U.S. equities may face more near-term pressure, but Morgan Stanley strategist Michael Wilson says investors should treat the pullback as a buying opportunity heading into 2026.
Wilson acknowledged that tensions around Federal Reserve policy and tightening liquidity have weighed on markets, but reiterated his “high conviction” in a bullish 12-month outlook. He said market behaviour has unfolded precisely as the bank warned in late September, when Morgan Stanley flagged the risk that less-dovish Fed guidance and tighter liquidity could create short-term headwinds.
That tactical scenario is now playing out, with high-momentum stocks proving most sensitive to liquidity constraints and the S&P 500 reacting to the incremental hawkishness delivered at the October 29 FOMC meeting. Wilson noted that while the index is down only 5%, the underlying weakness is far deeper: two-thirds of the largest 1,000 U.S. stocks have seen drawdowns of more than 10%. That deterioration in breadth suggests the correction is closer to the end than the beginning.
Morgan Stanley warns that if the Fed delays rate cuts or maintains balance-sheet tightness, the final stage of the correction could involve mega-cap leaders “catching down,” a common late-correction pattern. But Wilson views any further weakness as an opportunity to double down on the firm’s rolling-recovery thesis, pointing to soft alternative labour data as support for the Fed eventually getting “ahead of the curve on rate cuts.”
Looking toward 2026, Morgan Stanley remains out of consensus, arguing the U.S. is in an early-cycle environment and forecasting 17% EPS growth next year. The bank keeps overweight positions in Small Caps, Consumer Discretionary Goods, Healthcare, Industrials and Financials, saying the resilience in earnings-revision breadth shows the sell-off is driven by liquidity—not fundamentals.
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Since his note expectations for a FOMC cut in December have firmed, Daly the latest to join the cut chorus:
This article was written by Eamonn Sheridan at investinglive.com.