Morgan Stanley: Market Correction Nearing End, But Fed Policy a Key Risk
Morgan Stanley believes the recent stock market pullback may be approaching its final phase. However, the bank warns that a shift toward tighter monetary policy by central banks is now the main barrier to a sustained recovery.
A Correction Within a Bull Market
According to analyst Michael Wilson, the current downturn should be viewed as a correction within a broader bull market that began last April.
He noted that the adjustment is already well advanced, both in terms of time and price action, suggesting that much of the downside may have already been priced in.
Valuations Reset Sharply Since October
Wilson highlighted that the S&P 500’s forward price-to-earnings ratio has declined by roughly 15% since October. This represents a significant valuation reset, comparable to previous downturns such as the 2015 global manufacturing slowdown and the 2023 recession scare.
Strong Earnings Growth Supports Market Outlook
Despite the correction, forward earnings growth remains strong, approaching 20%. This continued momentum reduces the likelihood that the current oil shock will trigger a broader economic downturn or end the business cycle.
Positive Signals Beneath the Surface
Morgan Stanley also pointed to improving underlying market indicators. One notable signal is the recent movement in the S&P/Gold ratio, which Wilson described as a constructive development for equities.
Historically, this ratio has bottomed during periods when the United States becomes more actively involved in major geopolitical conflicts.
Hawkish Central Banks Remain the Main Obstacle
Even with these positive signals, Wilson cautioned that a shift toward more hawkish monetary policy remains the biggest challenge for equities.
Jerome Powell has recently emphasized inflation risks, reinforcing expectations that interest rates could stay higher for longer.
Additionally, the return of a negative correlation between bond yields and stock prices suggests that rising yields are once again pressuring equities.
What Investors Should Watch Next
Wilson stressed that investors should closely monitor bond market volatility and signs of funding stress. These factors will be key indicators of when central banks may pivot back toward a more supportive policy stance.
Until then, the path to a full market recovery may remain uncertain.
