Morgan Stanley strategist Michael Wilson and his team said U.S. equities are vulnerable in the near term if energy prices keep rising and bond-market volatility intensifies. In that scenario, the S&P 500 could fall as much as 7%, according to the note cited by Odaily. The team said strong corporate earnings have so far helped stocks absorb pressure from higher bond yields, but valuations for the benchmark index have already slipped over the past four months to their lowest level since March. Wilson wrote that if tighter financial conditions and/or a sharp rise in energy prices lead to a deeper valuation correction in the short run, the S&P 500 could drop to 7,100 before the bull market resumes by year-end. He added that market volatility is likely to increase ahead of the November midterm elections. Even so, Wilson still expects solid earnings prospects to support a rebound into year-end, with the index moving toward his 8,000 target, implying nearly 5% upside from current levels.
Odaily said Morgan Stanley strategist Michael Wilson and his team think U.S. stocks are still vulnerable if energy prices keep climbing and the bond market gets even choppier. In that case, the S&P 500 could drop as much as 7%.
The strategists said solid corporate earnings have, up to now, helped equities hold up against the pressure from higher bond yields. But the S&P 500's valuation has still slid over the past four months, hitting its lowest point since March.
Morgan Stanley's downside scenario
In a report, Wilson wrote: "If valuations worsen further in the near term because of tighter financial conditions and/or a sharp increase in energy prices, we think the S&P 500 could fall to 7,100 before the bull market resumes by year-end."
Wilson said that level would mean a 7% drop from last Friday's close.
Year-end rebound still in view
Wilson also said he expects market volatility to pick up before the November midterm elections. Even so, he argued that strong corporate earnings prospects should help fuel a rebound by year-end, pushing the index toward his 8,000 target. That would mean nearly 5% upside from current levels.
The piece cited Jin10 as its source.
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