Morgan Stanley strategist Michael Wilson on Monday said he does not expect the S&P 500 to make a meaningful new low in the near term, arguing that recent market action points to a nascent bottom and that investors should begin selectively adding risk.
Wilson emphasized the rebound off support that Morgan Stanley has been monitoring for several weeks, writing that: "We saw a strong bounce from support levels we have been flagging for weeks (6300-6500)." He acknowledged the possibility of a re-test but said the firm does not foresee "a meaningful break of last week’s lows for the S&P 500 ahead," unless the Iran conflict escalates further or pressure from higher bond yields or bond volatility intensifies.
Framing his view in macro and valuation terms, Wilson described the U.S. as remaining in a bull market that began last April after what he refers to as the trough of the 2022-2025 rolling recession. He pointed to the forward price-to-earnings multiple on the S&P 500, which has dropped 18% from its peak about six months ago, as evidence that a substantial portion of market risk has already been priced in.
Wilson noted that the extent of multiple compression seen recently is historically observed primarily during recessions or Federal Reserve tightening cycles. He said Morgan Stanley does not treat either a full-blown recession or a prolonged Fed tightening cycle as its base case.
On portfolio positioning, Wilson advocates a barbell approach. He recommended increasing allocations to cyclicals - citing Financials, Consumer Discretionary Goods and short-cycle Industrials - while also maintaining exposure to quality growth franchises, especially the large cloud and internet platforms often referred to as the hyperscalers. He observed that the so-called Magnificent 7 trades at roughly 24x forward earnings, close to Staples at 22x, yet the group is expected to deliver more than three times the earnings growth. At the 2nd percentile of its valuation range since 2023, he said the group "looks quite attractive here."
Wilson identified central bank policy and interest rates as the chief remaining risks to the market outlook. He highlighted 4.50% on the 10-year Treasury yield as a critical level, noting that moves above that threshold have historically weighed on equity multiples. Bond market volatility is another key variable for his team. He cited the MOVE Index, saying readings in the 130-140 range have historically been the point at which tightening financial conditions push central banks to pivot back toward easing.
Despite yields sitting near recent highs and a payroll report that surprised to the upside, Wilson noted that bond volatility fell sharply last week, an observation he flagged as relevant to the stability of financial conditions.
Turning to the economic picture, Wilson said hard data is starting to align with Morgan Stanley's rolling recovery thesis. He pointed to the March ISM Manufacturing PMI, which came in above consensus at 52.7, and to an 8% increase in U.S. hotel revenue per available room over the past six months. He summarized the data sequence, writing: "Soft data leads hard data, which ultimately feeds through to the most lagged data - labor market data."
In sum, Wilson's note urges investors to consider adding exposure to both cyclically sensitive sectors and durable growth names, while remaining mindful of the potential for renewed stress from central bank policy, higher interest rates or a spike in bond volatility.