AI Summary
5 min readThe equity market correction that began last fall is well advanced, but the S&P 500 could still fall another 5 to 7 percent before a final low appears next month. That is the central argument from Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist, who sees the current selloff as a continuation of a process that started long before the Iran conflict grabbed headlines.
Wilson dates the correction to last September, when he first warned that the Federal Reserve was not doing enough with its balance sheet. Financial conditions tightened, and by October the most speculative parts of the market were already under stress. The Fed eventually responded by ending balance sheet reduction and restarting asset purchases, which produced a strong January rally. But the underlying fragility never fully resolved. Now, with the S&P 500 having its worst week since October, Wilson argues the correction is "very well advanced in both time and price," with many stocks already down 30 percent or more. Dispersion between winners and losers is the highest in over twenty years.
The framework: year-over-year comparisons and the need for a final shock
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What you'll learn
- 1 (00:00) **Introduction & Thesis** - Mike Wilson introduces the topic: the Iran conflict and its implications for equities, arguing the current correction began last fall due to liquidity tightening.
- 2 (01:15) **Key Question for Investors** - Wilson frames the central question: what will the world look like in six months, and are prices cheap enough to assume a better future?
- 3 (01:28) **Parallel to Last Year's Correction** - Wilson draws a comparison to the 2025 correction, noting both started with non-tariff concerns before a major shock hit.
- 4 (02:00) **The Mechanism for a Market Bottom** - Wilson explains that corrections don't end until the highest quality indices get hit, which requires a bigger shock like "Liberation Day or War."
- 5 (02:16) **Year-over-Year Support Levels** - Wilson highlights that market levels are tied to where they were a year ago, suggesting another month of struggle.
- 6 (02:46) **The Iran Conflict and Oil** - Wilson declines to predict the conflict's outcome, instead assuming it will settle down in six months, similar to the Russia-Ukraine invasion.
- 7 (03:26) **Reasons for Optimism Six Months Out** - Wilson outlines three positive factors: broadening earnings growth, US energy independence attracting flows, and fiscal stimulus from the "Big Beautiful Bill."
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Guests on this episode
Show Notes
Our CIO and Chief U.S. Equity Strategist Mike Wilson explains why history, technicals and fundamentals suggest a clearer runway for U.S. stocks six months out, despite geopolitical concerns.
Read more insights from Morgan Stanley.
----- Transcript -----
Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist.
Today on the podcast, I’ll be discussing the conflict in Iran and what it means for equities.
It's Monday, March 9th at 11:30 am in New York.
So, let’s get after it.
While most believe the current equity market correction began in February, it's clear to me that it actually began last fall when liquidity began to tighten. In fact, back in September I warned that the Fed was not doing enough with the balance sheet – and financial conditions were likely to tighten and cause some stress in equities. Starting in October, that stress manifested as a sharp correction in the most speculative parts of the equity market and crypto currencies. The Fed responded by ending its balance sheet reduction earlier than expected and restarting asset purchases which led to strong equity performance in January.
At this point, the correction is very well advanced in both time and price, with many stocks down 30 percent, or more. Meanwhile, dispersion has rarely been higher with the spread between winners and losers the highest we have seen in 20+ years. As usual, the markets got it right by anticipating many of the concerns that are now obvious to all. The questions for equity investors now are what will the world look like in six months and are prices cheap enough to start assuming a better future?
The short answer is not yet, but get your shopping lists ready. In many ways, we find ourselves in a very similar position to last year. Recall that the major indices started to accelerate lower in Late February and early March. The concern at the time was centered around tariffs, but like today, equity markets had already been trading poorly for months on concerns that had nothing to do with tariffs. This time around, markets have been worried about AI labor disruption, private credit defaults and liquidity shortages long before the Iran conflict escalated.
Corrections typically don’t end until the best stocks and highest quality indices get hit and that usually takes a bigger shock, like Liberation Day or war. That process has begun with the S&P 500 having its worst week since October. The other thing to consider is that market levels tend to be tied to where they were a year ago. This year-over-year comparison is very important when thinking about support.
Given the sharp decline last year, it tells me we have another month during which the equity markets are likely to struggle. Based on this
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