Morgan Stanley’s Wilson Says S&P 500 Correction Nears End Stage

Core Viewpoint - The S&P 500 correction is nearing its final stage despite ongoing geopolitical tensions, with Federal Reserve interest-rate hikes posing a near-term risk to stocks [1][7]. Market Conditions - Over half of Russell 3000 stocks have declined more than 20% from their 52-week highs, and the S&P 500 forward price to earnings ratio has dropped over 15%, indicating that market pricing is increasingly reflecting risks from the Middle East conflict [2]. - The S&P 500 has experienced an 8.4% drop since January 27, driven by concerns over artificial intelligence and the war affecting global energy supply routes, particularly the Strait of Hormuz [3]. Energy Market Impact - Markets have priced in higher energy costs, with the increase in oil prices being approximately half of previous oil shocks that ended business cycles. Positive earnings growth is expected to mitigate recession risks [4]. Interest Rate Sensitivity - The sensitivity of equities to interest rates is at one of the highest levels in recent years, with the 10-year Treasury yield approaching 4.5%, a level that historically pressures stock valuations [7][10]. - The current movements in yields are influenced by inflation, a more hawkish Federal Reserve, and potential deficits arising from the war, making it a significant risk variable [10].