Morgan Stanley anticipates that several upcoming factors will help alleviate the recent decline in U.S. equities, yet the firm cautions that the S&P 500 may see additional declines before a durable rebound takes hold.
Strategist Michael Wilson noted that equities have been in a mid‑cycle adjustment since June, as diminished liquidity, tighter capital availability, and uncertainty ahead of the U.S. midterm elections have dampened investor sentiment.
Morgan Stanley’s tactical downside scenario projects the S&P 500 range of 7,100–7,200, which would sit just below its 200‑day moving average. The firm’s base‑case target for the end of 2026 stays at 8,000.
Political and AI Uncertainty May Subside in the Near Term
Wilson identified three key turning points that could influence the market, starting with concerns about artificial‑intelligence investment.
Debates over capital supply and costs, AI safety, and local opposition to data‑center construction are likely to intensify over the next three to four weeks.
The November 3 midterm elections constitute another pivotal development.
“Midterm elections typically act as a short‑term headwind for markets, but historically they have been followed by strong 6‑ to 12‑month gains,” Wilson wrote.
Historical data show that markets often rally after midterm elections, yet Wilson cautioned that the post‑election adjustment could remain volatile for days or weeks.
Tightening Financial Conditions May Mark the Market’s Final Bottom
Morgan Stanley views diminishing liquidity as the most immediate threat to equity performance.
Higher Federal Reserve rates, a slower expansion of the Fed’s balance sheet, and elevated energy costs have combined to tighten financial conditions.
“Among all the risks, we believe liquidity is the biggest threat and the most likely catalyst for a final market low,” Wilson said.
He observed that Fed Chair Kevin Warsh took office with a mandate to bring inflation back to 2%, yet the central bank has enacted only one rate hike during his term.
Longer‑term Treasury yields have climbed more than 100 basis points since February, adding further pressure on financing conditions.
Market Weakness May Prompt a Federal Reserve Policy Pivot
Wilson suggested that tighter monetary conditions could eventually restrain economic activity and aid inflation moderation.
Conversely, if financial markets encounter further stress, the Federal Reserve may feel compelled to shift its stance, which could offer near‑term support for asset prices.
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