Investors had been bracing for a deeper stock-market reset after the latest pullback exposed the cracks beneath the surface.
Morgan Stanley says that fears might be going too far.
According to a note shared with me, strategist Michael Wilson said the correction underscores a normal shift inside an earnings-driven bull market, not the end of the rally.
That comes as a surprise, as Wall Street is pricing in more turbulence and a potential Fed rate hike amid Middle East uncertainty.
The pullback being referred to is the early-June slide after a long winning streak.
Investopedia reports that the S&P 500 fell 2.6% in the week ended June 5, while the Nasdaq dropped 4.7%, led by weakness in semiconductor, memory, and AI-related stocks.
However, that move hasn’t exactly been one-way.
AP reported that the S&P 500 rebounded 1.7% Monday to 7,554.29 after hopes for a U.S.-Iran deal pushed Brent crude down 4.8%, easing inflation fears.
Morgan Stanley is pointing investors in the opposite direction, especially if geopolitical pressure eases and bond markets walk back that hike.
Investors were selling weakness, but Morgan Stanley still sees the bull market intact.
The question now is whether the choppiness becomes a buying window or the first sign of broader fatigue.
What Morgan Stanley said about the stock market pullback
Morgan Stanley said the recent stock-market pullback does not look strong enough to break the bull market.
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Strategist Michael Wilson said the correction reflected a peak in the rate of change for earnings revisions, market breadth, and liquidity.
Simply put, the forces that pushed stocks higher have started to cool after moving sharply in the market’s favor.
However, Morgan Stanley feels that kind of transition is typical during an earnings-driven bull market. The firm said earnings-revision breadth will moderate, but next-12-month earnings-per-share estimates are likely to rise through year-end.
“While we might see some more choppiness in coming weeks, our conviction in the current bull market is intact,” Wilson wrote.
For perspective, investors are assessing whether the latest weakness marks the start of a deeper reset.
Morgan Stanley’s view, though, is much more measured: the correction could last into the end of the month and through the Q2 earnings season, but the broader earnings cycle remains supportive.
Wilson also said a stable resolution in the Middle East should help bond markets walk back the Fed rate hike currently being priced in, giving stocks another source of support.
