Stock market ‘reset’ to help spur bullish rally to year-end: Morgan Stanley

The S&P 500 recorded its largest drop of 2026 on Friday, while the Nasdaq capped off its worst week since the Liberation Day tariff rout. It was a bruising moment for investors, but a top strategist says the pull back actually supports a continued bull run.

Morgan Stanley CIO Michael Wilson said the sell-off represents a “healthy reset,” maintaining his 8,000 year-end target for the S&P 500, implying 7.5% upside from Monday’s open.

“While Friday’s positioning-driven sell-off was notable, earnings and macro data remain strong and supportive of broader participation over the coming months,” Wilson wrote.

The S&P 500 recorded its largest single-day decline of the year on Friday after a stronger-than-expected jobs report nixed any hopes of the Federal Reserve cutting interest rates in 2026.

The chip-led decline

Friday’s sell-off marked an end of the stock market’s nine week winning streak.

The declines were led by chip stocks, with the iShares Semiconductor ETF seeing its largest daily losses since March 2020. The ETF is up over 80% year-to-date.

“Friday’s move lower was led by Semiconductors and Memory stocks, where sharp year-to-date gains met crowded positioning across hedge funds and levered ETFs,” the Morgan Stanley strategist said, noting that the firm’s research found that semis represent around 25% of the global hedge fund book. Wilson explained that this positioning likely amplified the sell-off.

“From here, the path for markets will likely depend on how quickly positioning normalizes, as well as how rates, rate volatility, oil, and the US dollar trade,” the strategist outlined.

The chip ETF opened Monday’s trading session higher, taking back some of losses from Friday, alongside the tech-heavy Nasdaq which led major indexes higher.

Bullish ‘glass half full’ outlook

Morgan Stanley’s CIO isn’t the only investing pro on Wall Street saying Friday’s sell-off isn’t cause for concern.

“In spite of Friday’s sharp weakness across traditionally riskier asset classes, we continue to forecast glass-half-full outcomes for diversified portfolio,” Northern Trust Wealth Management CIO Eric Freedman said.

“Friday’s volatility has been admittedly uncharacteristic, yet likely overdue. Before Friday’s sell-off, the S&P 500 had risen 20% since March 30, increasing in a near straight-line fashion,” he explained.

Both Wilson and Freedman point to earnings fueling fundamental strength that will support the bull run continuing through year end. The stronger-than-expected first quarter earnings season has raised some worries on Wall Street with some exports saying the AI bubble is an earnings bubble.

Nancy Tengler, CEO and CIO at Laffer Tengler Investments pushed back on AI bubble fears, saying, “If we’re in a bubble, then it’ll pop, but I’m not convinced we’re there yet.”

“There’s still a tremendous amount of skepticism, which is a good thing for investors because markets tend to climb a wall of worry. I think what we’re seeing in the short term is a flight toward what’s next,” she said.

Risks remain

Morgan Stanley’s base case signals the S&P 500 is set for further gains, but the firm’s CIO says risks to the bull market remain.

“Rates and rate volatility remain a near-term risk, contingent on inflation data as well as Fed and Treasury liquidity provisioning.”

The 10-year bond yield sits at 4.51%, above the level Wilson has flagged as a bearish indicator for equities.

The Fed will announce its latest interest rate decision on June 17 at its first FOMC meeting since Kevin Warsh succeeded Jerome Powell.

The market sees a rate hike before year-end as the most likely outcome, according to CME’s FedWatch tool, a stark contrast from the two to three rate cuts investors expected at the beginning of the year.

Investors will get fresh inflation data this week with a CPI release on Wednesday and PPI reports on Thursday.