Morgan Stanley says the recent decline in global equities appears to be moving toward its latter stages, but the firm cautioned that the outlook hinges heavily on monetary policy. In a note published Monday, analyst Michael Wilson argued the pullback remains a correction inside a bull market that began last April, and that the adjustment is advanced both in time and in price.
Wilson highlighted a pronounced valuation reset: the S&P 500's forward price-to-earnings ratio has fallen 15% since October. He characterized this decline as comparable in magnitude to the valuation compressions seen during the 2015 manufacturing downturn/global recession and the 2023 recession scare, underscoring the scale of the market rerating.
What sets the current episode apart, Wilson wrote, is that forward earnings projections have continued to pick up pace, "closing in on 20%," which, in his view, reduces the likelihood that the present oil shock will terminate the business cycle. That mix - falling multiples alongside rising forward earnings - is an unusual backdrop for a market correction.
Under the surface, the analyst pointed to positive developments, notably a sharp move in the S&P/Gold ratio. He described that shift as one of the more constructive recent market developments, and noted the gauge has historically bottomed when the United States "commits more forcefully to a major military conflict."
Despite those encouraging signs, Wilson insisted a persistent source of downside risk remains: central-bank policy. He said a hawkish pivot by central banks needs to fade before the correction can end in nominal terms. Wilson observed that Federal Reserve Chair Jerome Powell was perceived as more focused on inflation risks, and that the renewed negative correlation between bond yields and equities indicates that dynamic is back in play.
According to the note, monitoring bond volatility and funding stress will be important to detect a shift in policymaker stance back toward greater support. Those signals, Wilson argued, will help determine when the market can move past the correction phase in nominal terms.
Summary
Morgan Stanley views the market decline as a correction within a bull market but warns that continued central-bank hawkishness - reflected in bond-equity dynamics, bond volatility and funding stress - is the main impediment to a nominal market recovery. At the same time, rising forward earnings and a stronger S&P/Gold ratio are constructive undercurrents.