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The underwater correction in US stocks may be approaching a turning point. Morgan Stanley's well-known strategist Wilson pointed out that the resilience of the index has masked deep de-valuation in certain sectors. Regardless of whether the correction is fast or slow, November will become a strategic strike zone for re-adding equity risk exposure. The correction that has persisted for several months in some US stock sectors may be nearing its end. Morgan Stanley strategist Michael Wilson recommends that investors begin preparing to re-increase their equity risk exposure and shift their focus toward areas of the market where valuations have already pulled back and earnings momentum is improving.
Wilson believes the market is approaching a window period worth reassessing equity allocation. His core judgment is that the recent correction does not necessarily mean the bull market is over; instead, it may provide investors with an opportunity to reposition. This view is not built on the premise that US stocks have already fallen significantly. As of the time of the report, the S&P 500 Index was only about 2% away from its all-time high. However, over the past few months, valuations of certain stocks have declined, and market breadth within the index has also deteriorated, indicating a divergence between overall index performance and individual stock movements.
Market breadth has weakened, and the correction brings structural opportunities. Wilson pointed out that the recent US stock market has exhibited two characteristics: first, the so-called "quality factor" has performed relatively prominently, with capital favoring companies of higher operational quality; second, the S&P 500 equal-weight index has weakened, reflecting a narrowing range of participation in market gains. He expects this market pattern to change, but does not limit his judgment to a specific rebound date. In a note to clients, Wilson stated that investors should prepare for two scenarios: the market completes its adjustment quickly and rebalances, or the decline continues at a slower pace into November. According to his judgment, regardless of how the correction ends, November may become the point at which investors consider increasing risk exposure rather than simply avoiding risk.
In terms of specific allocation, Wilson still prefers higher-quality stocks. However, he also noted that this round of valuation adjustment has dealt a relatively heavy blow to economically sensitive sectors such as financials, industrials, and consumer discretionary. The downward revision of valuations for certain individual stocks is also beginning to present more concrete screening opportunities. For example, in Wilson's view, some capital goods-related companies are seeing improving earnings-per-share growth momentum, and their adjusted valuations may offer investors more suitable entry opportunities. This means his view is not about indiscriminately buying all fallen stocks, but rather about focusing on whether a more favorable combination emerges between valuation adjustments and earnings trends. A stock price decline alone is not sufficient reason to buy; whether earnings momentum can improve remains an important consideration.
Bond yields and AI investment risks remain market focal points. Wilson's judgment also offers another perspective for investors who have recently felt uneasy about the US stock market outlook. Over the past period, rising bond yields have triggered market concerns: if corporate financing costs continue to rise, whether the artificial intelligence investment boom can be sustained will face a greater test. AI investment has become an important force driving this US stock bull market that has lasted about four years, and related investments increasingly require new debt financing. Some market participants have therefore begun to worry that the AI trade may show signs of a bubble. If interest rate pressure intensifies further, high-valuation stocks may face more pronounced valuation compression. Other Wall Street institutions have shown different areas of emphasis in their market assessments. Goldman Sachs strategists pointed out on Monday that investor positioning is becoming more defensive; JPMorgan strategists believe that stabilizing bond yields will help support the stock market. The bond market trend has thus become an important variable for judging whether the US stock correction is nearing its end. If yields stabilize, the pressure on market valuations may ease; if yields continue to climb, sectors that rely on high growth expectations and substantial capital investment may still come under pressure.
Earnings growth expectations provide support for US stocks. Despite internal divergence in the market, the corporate earnings outlook remains an important basis for the stock market's resilience. According to market estimates compiled by Bloomberg Intelligence, third-quarter profits for S&P 500 constituent companies are expected to grow 24.6% year over year. This expectation provides fundamental support for current stock prices and also explains why some strategists are still looking for opportunities to position after the correction. However, earnings growth expectations do not mean market risks have disappeared. Investors currently still need to weigh whether corporate profits can meet expectations, how bond yields will change, and whether market gains can expand from a handful of stocks to more industries. Wilson's latest view focuses on adjusting how investors respond to corrections: when the market experiences valuation downgrades while some companies' earnings momentum is still improving, investors do not need to keep reducing risk exposure solely because of short-term declines. For the market, the key going forward is not only when the index will rebound, but also which industries and companies can regain capital favor after the correction by virtue of better earnings performance.
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