S&P 500 Index: Bull market is intact but the correction has further to go – Morgan Stanley

Equity markets are struggling in the past few weeks. The current correction may be driven in part by the rise in US Treasuries yields, but Mike Wilson, Chief Investment Officer at Morgan Stanley, still sees a bull market.

Key quotes

“The non-linear move in 10-yr yields has awoken investors to the risk they thought was unlikely, if not impossible. As a result, equity valuations may move lower still in anticipation of the next 50bps jump in rates. In other words, the equity market now knows the 10-yr yield is a manipulated rate that either can't or won't be defended. Keep in mind that markets lead the Fed, not the other way around, and we are now at that moment of recognition.”

“Based on the tactical damage to date, the NASDAQ 100 appears to have further downside toward its 200-day moving average, which currently lies about 8% lower.”

“Everything that's going on now should be expected at this stage of a recovery from recession. After the big initial surge, the stock market tends to consolidate, as interest rates rise and valuations compress. This is why our year-end target of 3900 for the S&P 500 is toward the lower end of most sell side strategists. 

“The real bull market continues to be under the hood – with value, cyclicals and small caps leading the way. Growth stocks can rejoin the party once the valuation correction and repositioning is complete.”