Morgan Stanley: US Stocks May Drop Another 8%, Expected to Rebound After Three Major Risks Are Cleared

On October 28, citing jin10 data, Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, stated in a new client report that AI funding pressures, the Nov. 3 U.S. midterm elections, and tightening financial conditions could push the S&P 500 index down to around 7,100 over the coming weeks, representing a decline of approximately 8% from recent levels. This would mark the largest correction since market turbulence was triggered by the Iran war earlier this year.

Morgan Stanley's data shows that since early June, approximately 60% of Russell 3000 constituents have fallen more than 20% from their peaks, and nearly 96% of semiconductor stocks have declined over 20%. The bank forecasts the semiconductor sector could drop another 10% to 15% by mid-November. Credit spreads on data center-related bonds are widening, and CoreWeave's debt has entered distressed territory this month. After the Fed hiked rates to a 3.75%-4.00% range in September, bond yields rose accordingly, contributing to tighter financial conditions.

Despite a cautious near-term outlook, Morgan Stanley maintains its year-end target for the S&P 500 at 8,000 and sets its base case target for the next 12 months at 8,300. The firm notes that markets typically perform better following midterm elections. Data from 1950 to 2022 indicates that the S&P 500 has historically risen by an average of roughly 8% in the three months after elections.