Morgan Stanley signaled that the adjustment in US stocks is nearing its end, but the final hurdle may still be challenging.
On Sunday, April 12, Morgan Stanley's Chief Equity Strategist Mike Wilson stated in his latest weekly report that the current market's adjustment process is deeper than most investors realize, and the S&amp;P 500 is bottoming out. However, until issues with interest rates and bond volatility are fully resolved, the market still faces the risk of retesting its lows.
Wilson believes that current market sentiment remains fragile. He clearly stated, &#34;This adjustment began last October, with the S&amp;P 500's forward P/E ratio falling 18% from its peak—a decline that historically only occurs during economic recessions or active Fed tightening cycles. &#34;But neither of these scenarios exists in our base forecast.&#34;
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<h2>Bull Market Correction, Not a Bear Market</h2>
Wilson maintains that this is a &#34;normal adjustment within the new bull market that began last April, following the rolling recession bottom from 2022 to 2025,&#34; rather than a trend reversal.
The key evidence lies in earnings. The S&amp;P 500's price decline is less than 10%, while more than half of Russell 3000 stocks have fallen over 20%. Wilson's interpretation is that this is not market complacency but rather that the market has reasonably priced in the risks.
The core data supporting this view is: The current median company EPS growth rate is in the double digits, the fastest since 2021.
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&#34;A decline in valuation multiples coupled with improving earnings growth—these are typical characteristics of a bull market correction, not a bear market.&#34; Wilson wrote.
He also compared it to historical oil shock cycles: back then, earnings were already deteriorating, whereas current earnings are still accelerating from high levels, and this round's oil price increase is relatively moderate in real terms.
<h2>Other Risks: Private Credit and AI Disturbances</h2>
Wilson also directly addressed two other market concerns.
Regarding private credit, he quoted his colleague Vishy Tirupattur: &#34;The risks in private credit are substantial, but not systemic.&#34; Private credit is tightening, but most banks have limited direct exposure, which may instead drive business back to traditional lenders.
Regarding AI disturbances, Wilson believes the narrative has run ahead of reality. &#34;Enterprise application layers are still in the early stages; in the short term, AI is more likely to support profit margins than compress them.&#34; He added that AI also gives companies a reason to suppress hiring, leading to upside surprises in operating leverage—one of the reasons for the current acceleration in EPS growth.
<h2>The Final Hurdle: Interest Rates and the Fed</h2>
Wilson clearly pointed out that the biggest source of uncertainty in the current market is interest rates and policy, not geopolitical or credit risks.
The stock-bond correlation has once again turned significantly negative, meaning rising interest rates are becoming a drag on valuations again. He characterized the central bank's hawkish pivot—driven primarily by commodity inflation expectations—as &#34;the final hurdle the stock market needs to clear.&#34;
Part of the market's rebound last week coincided with Fed Chair Powell signaling a more neutral stance and a decline in bond volatility.
&#34;The final phase of an adjustment is never easy,&#34; Wilson wrote. &#34;If rates or bond volatility rise again, the market may need to retest its lows.&#34;
However, he emphasized that such volatility is part of the bottoming process, not the start of a new bear market. &#34;The market usually doesn't give investors multiple chances, which is why we encourage early positioning.&#34;
<h2>Strategic Inclination: Dumbbell Allocation</h2>
In terms of specific strategy, Wilson maintains a &#34;dumbbell&#34; allocation framework:
On one end are cyclical stocks with solid earnings and compressed valuations, including financials, industrials, and consumer discretionary (durable goods); on the other end are high-quality growth stocks whose sentiment and valuations have been reset to healthy levels, namely mega-cap hyperscalers.
His final judgment is: &#34;Most of the pricing adjustments for geopolitical risks, private credit concerns, and AI disturbances have been completed. What remains are interest rate and policy issues, which will be resolved as the Fed leadership transition is completed.&#34;
&#34;The market always moves ahead of the news, and investors should too.&#34;

.SPX

Morgan Stanley Chief Equity Strategist Wilson stated that the current S&P 500 adjustment is nearing its end, but the final stage may still bring turbulence. He characterized this as a normal adjustment within a bull market: the S&P 500's forward P/E ratio has fallen 18% from its peak, yet the median company's EPS growth rate has reached a new high since 2021. The biggest variables now are interest rates and Fed policy. "If rates or bond volatility rise again, the market could retest its lows."

- Morgan Stanley's chief equity strategist, Mike Wilson, indicates that the current adjustment in the U.S. market is deeper than most investors realize, primarily due to unresolved issues with interest rates and bond volatility.  
- He argues that this adjustment is a normal phase within a bull market that began in April 2022, supported by strong earnings growth, even as many stocks have seen significant declines.  
- Wilson highlights that the main uncertainty now lies with interest rates and Federal Reserve policy, suggesting that any further increases could necessitate another market retest, emphasizing the need for investors to prepare accordingly.

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Morgan Stanley's Wilson: Market Correction Nearing End, But Final Stage Still Has Pain