Morgan Stanley's chief US equity strategist Mike Wilson stated that the US stock market correction since June has entered its "final phase," and once tomorrow's midterm elections conclude, market uncertainty will significantly dissipate, potentially presenting buying opportunities in high-quality cyclical stocks.
Wilson noted in a client report released on Monday that regardless of the election outcome, the midterm elections themselves constitute a classic "clearing event." He cited historical data showing that since 1982, large-cap stocks have gained an average of approximately 15% (market-cap weighted) to 16% (equal-weighted) in the six months following midterm elections, with gains expanding further to about 22% over the subsequent year.
Regarding the election outcome, Wilson believes that a Democratic sweep of both chambers has already been fully priced in by the market and would not constitute a major surprise. At the same time, he warned that post-election risks should not be overlooked, with renewed military conflict with Iran and a new round of tariff policies listed as the primary potential threats.
Correction Approaching Final Stage, Market Showing Bottoming Signals
Wilson and his team judge that the current correction has entered its late stage, based on the convergence of multiple market internal indicators.
Among Russell 3000 constituents, 60% have already declined more than 20% from their June highs, while the S&P 500 followed suit amid narrowing market breadth. Wilson pointed out that the pattern of individual stocks declining ahead of the index, followed by the index catching down, is a typical characteristic of the market approaching a bottom historically.
Looking at recent market dynamics, since late September, the 10-year US Treasury yield has fallen nearly 40 basis points, and the proportion of S&P 500 constituents trading above their 200-day moving average has recovered from about 42% to 62%, a gain of approximately 20 percentage points. The equal-weighted S&P 500 rose nearly 5% during this period, outperforming the market-cap weighted index by about 6 percentage points. Wilson stated that this confirms his earlier judgment that long-end rates have neared their peak, and the equal-weighted S&P 500 is a more attractive expression of the "broad market trade."
The Nasdaq 100 index shed trillions of dollars in market value last month, at one point approaching technical correction territory. Wilson attributed the primary trigger of this correction to the market's cautious attitude toward the earnings outlook of AI-related companies, and emphasized that the investor evaluation framework has shifted—free cash flow (FCF) gaps are no longer tolerated, and earnings sustainability and cash generation capacity are being given higher weight, consistent with the typical environment of the mid-to-late economic cycle.
Election Outcome Has Limited Impact, Policy Variables Remain Key
On prediction markets Kalshi and Polymarket, the probability of a Democratic sweep of both chambers stands at 71% and 73%, respectively. Wilson believes this scenario has already been digested by the market and is therefore unlikely to trigger a major shock.
Even if Democrats achieve full control with a Senate majority, Wilson argues that the direct impact may not necessarily be bearish: delaying or reversing Medicaid and food stamp cuts could support consumer demand; companies rushing to finalize investments before a policy shift in 2028 could also accelerate short-term investment and M&A activity.
However, Wilson emphasized that tariffs, foreign policy, and institutional-level deregulation measures—the policy variables that have had the most profound market impact over the past two years—remain largely under the direct purview of the executive branch and will not change with shifts in congressional seats. "The stock market typically does not, and will not, price two years ahead over an extended period," he wrote.
In a scenario where Republicans maintain Senate control—which Kalshi shows at approximately 24% probability—Wilson believes the market may be forced to extend its gaze prematurely toward 2028, assessing the risk of deregulation policies encountering resistance.
Liquidity Replenishment May Provide Additional Support
On the monetary policy front, Wilson explicitly stated that his framework does not presuppose a Fed pivot to rate cuts or additional easing measures.
Instead, he views the decline in the US Treasury General Account (TGA) balance as another liquidity replenishment channel. The Treasury's cash balance is expected to drop from the current approximately $1.05 trillion to about $850 billion by year-end, and as government spending is executed, these funds will flow back into the market, forming a certain liquidity buffer.
Regarding Russell 2000 small-cap stocks, Wilson maintains a relatively cautious stance, believing that for the index to achieve a meaningful recovery, the required decline in interest rates remains greater than what has already occurred. This means that at the current stage, he prefers allocating capital to large-cap high-quality cyclical stocks whose valuations have already been sufficiently corrected, rather than small-cap growth-oriented names.
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