Michael Wilson, Morgan Stanley's chief U.S. equity strategist ( Michael Wilson ), stated on October 26 that as uncertainties such as the U.S. mid-term elections, AI infrastructure financing risks, and the tightening financial environment gradually become clearer, the current adjustment in U.S. stocks is expected to come to an end. The firm predicts that the S&P 500 index may fall to between 7,100 and 7,200 points during this adjustment period, briefly breaking below the 200-day moving average, but still maintains its baseline target of 8,000 points for the end of the year.
Wilson believes that mid-term elections usually put pressure on the stock market in the initial phase, but in the 6 to 12 months following the elections, U.S. stocks tend to experience strong returns. However, he warns that market adjustments may continue for several days or even weeks after the elections, and tightening liquidity is the biggest risk factor determining when the market will bottom out.
I. The S&P 500 may fall to 7,100 points, but the year-end target remains at 8,000 points.
Wilson pointed out that U.S. stocks have been adapting to the mid-cycle shift in the economic cycle since June of this year. The slowdown in the growth of the Federal Reserve's balance sheet, the tightening of capital supply, and the policy uncertainties brought about by the mid-term elections have exacerbated market adjustments. During this process, stocks with sound financial conditions and higher quality earnings have continued to outperform the broader market, and their relative advantage has further expanded recently.
Morgan Stanley believes that the current adjustment has not yet fully concluded, and the S&P 500 index may further decline to between 7,100 and 7,200 points, briefly falling below the 200-day moving average. However, the firm still maintains its baseline target of 8,000 points for the end of the year.
Calculated based on the closing price of 7,623.68 points for the S&P 500 index on October 23, a downward target range of 7,100 to 7,200 points implies a potential decline of about 5.6% to 6.9% for the index, while an end-of-year target of 8,000 points corresponds to a potential increase of about 4.9%.
This judgment means that Morgan Stanley is still optimistic about the medium-term prospects of the U.S. stock market, but believes that the market may need to go through one last round of adjustment before it can enter a new upward phase again.
II. Three major uncertainties are expected to be gradually eliminated, and the mid-term elections may become a turning point
Morgan Stanley believes that there are three key events in the coming weeks that could push the market to end its current adjustment.
Firstly, there is the financing pressure faced by AI infrastructure investments. Recently, investors have been continuously concerned about whether the substantial funds required for the construction of AI data centers can be secured, while also remaining vigilant regarding capital costs, AI security issues, and opposition from local communities to data center construction. Wilson expects that these concerns will become more apparent over the next three to four weeks and will gradually be assessed more clearly.
Next is the U.S. mid-term elections held on November 3rd. Wilson pointed out that, based on historical experience, mid-term elections usually pose resistance to the stock market in the initial phase, but within 6 to 12 months after the elections, the market tends to perform strongly.
However, he emphasized that the election does not necessarily mean that the market will immediately rebound the next day. Since investors still need to digest the election results and subsequent policy changes, the trend of the U.S. stock market may continue to fluctuate in the days or weeks following the election.
The third factor is the continuous tightening of the financial environment. The Federal Reserve's interest rate hikes, the slowdown in the pace of balance sheet expansion, and rising energy prices are collectively increasing the pressures faced by the economy and financial system. Morgan Stanley believes that these factors may further affect market performance in the coming weeks.
III. Liquidity is the biggest risk; a shift in Fed policy could become a catalyst for a rebound
Among the above three factors, Wilson is most concerned about liquidity risk. He believes that a tightening of liquidity could either trigger the last round of decline in U.S. stocks or act as a catalyst for a policy shift and a market rebound from bottom.
Wilson pointed out that when Federal Reserve Chairman Kevin Warsh ( Kevin Warsh ) took office, he clearly promised to push inflation back down to the 2% target, but since then, the Fed has only raised interest rates once. Meanwhile, since February of this year, long-term interest rates in the United States have risen by more than 100 basis points, and the actual tightening of the financial environment has significantly deepened.
Higher long-term interest rates may gradually curb economic growth and inflation, but they could also increase the financing pressures on businesses and financial markets. If a tightening of the financial environment leads to more pronounced market turmoil, the Federal Reserve may be forced to adjust its existing policy stance.
Wilson believes that if financial market pressures prompt the Federal Reserve to adopt a relatively loose policy, even if it means it will take longer for inflation to return to the 2% target, this could still be beneficial for asset prices in the short term.
Therefore, Morgan Stanley expects that the current adjustment in U.S. stocks is likely to end in the coming weeks. However, whether the market can truly bottom out still depends on whether liquidity pressures will further intensify and whether the Federal Reserve will send signals of policy adjustments. The bank maintains its target of 8,000 points for the S&P 500 index by the end of the year, while reminding investors that the market may still experience significant volatility before it resumes its upward trend.
