Morgan Stanley chief investment officer Mike Wilson believes the equity market is close to carving a durable bottom.
In a new episode of the Thoughts on the Market podcast, Mike Wilson says the current correction has already taken a significant toll beneath headline index levels, even as the S&P 500 hovers close to its highs.
According to Wilson, most stocks are in bear territory, indicating that the correction is nearly over.
“Beneath the surface, the damage has been even more significant, with over half of the stocks down at least 20% from their highs, and many down 30-40%. Resets of this scale usually occur near the end of corrections, not the beginning.”
The Morgan Stanley executive says a capitulation event in two tech subsectors would convince him that the market has bottomed out.
“If anything, what’s still missing and what I’d actually like to see is a bit more de-risking and crowded trade, like semiconductors and memory stocks in particular. That kind of repositioning reset is often required to seal a durable bottom.”
Wilson says he’s taking a barbell approach in cyclicals and quality growth names to prepare for a market reversal.
“On the cyclical side, I like financials, consumer discretionary, and industrials. These are the areas where earnings momentum remains strong and valuations have come down meaningfully. It’s also what was leading prior to the start of the Iran conflict and reflects our core view that we are still in the early stages of a recovery from the rolling recession. Last week’s jobs report supports that view, with private payrolls increasing by 186,000, one of the largest rises in three years.”
As for the growth side, Wilson says his top picks are hyperscalers, considering that mega-cap tech names have been beaten down despite strong earnings growth.
“I’m focused on the hyperscalers as a very good risk-reward at this point. These companies are trading at roughly the same multiple as defensive sectors like staples, but with more than three times the earnings growth. Meanwhile, the sentiment positioning is as bad as it’s been since 2022’s bear market, when these companies were showing negative earnings growth.”
As of Monday’s close, the S&P 500 is trading at 6,611.
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