The market's correction is entering its final phase - but wait before buying the dip, says Morgan Stanley chief strategist

By Nora Redmond

The S&P 500 could decline to the lower end of Morgan Stanley's downside target of between 7,100 and 7,300 in the coming weeks, the bank said.

The market correction is entering its final stage and is now likely setting up for a year-end rally, according to Morgan Stanley.

The investment bank's view was that the last phase of the correction that started in June would be the S&P 500's breadth narrowing. And for strategists led by Mike Wilson, this is currently playing out as the index gets closer to reaching Morgan Stanley's 7,100 to 7,300 downside target and breadth is considerably off the lows.

Futures linked to the S&P 500 (ES00) SPX are currently pointing toward a rise of 0.2%, to open at 7,417.50.

The two main factors that have led the benchmark index to this point are the Federal Reserve's increasingly hawkish stance and the peak rate of change in earnings per share and revenue growth outlooks, the strategists said.

Wilson and his team believe the S&P 500 could fall to the low-end of the bank's target range in the coming weeks - which would provide a good opportunity to add risk - before its price moves upward again at the end of the year.

"Rather than waiting for a perfect low, we recommend adding exposure over the next few weeks to quality cyclicals that have de-rated materially and are exhibiting strong EPS revisions," they wrote.

Following the Democrats gaining control of the Senate and the House of Representatives in the midterm elections last week, the strategists see data-center capital expenditure for 2027 representing 5% of consensus revenue for the S&P 500. In 2028, they expect this figure to rise into the middle-single-digit range.

Even in a possible bear market, where data center capacity gets moved beyond that timeline, the strategists only anticipate a marginal impact on the index's earnings and revenues.

"Once again, the markets traded poorly into the midterms, as they typically do," they said. "This is one reason why they generally trade well in the 6-12 months after the midterms-buy the rumor, sell the news."

-Nora Redmond

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11-09-26 0526ET