A Stock Market Bottom in Sight

Mike Wilson · Morgan Stanley

The equity correction is nearing its end; use coming weakness to add risk, with possibly one more retest.

Wilson argues the correction is much closer to its end than its beginning. The S&P 500 has moved toward his 7,100-7,300 support range set in August, and semiconductors are down roughly 40% from June highs and nearing downside targets from his silver-stock analog. He expects possibly one more test of last week's lows, perhaps a break on lower momentum, but says investors should not wait for a perfect low. His preference is to use weakness over the next few weeks to add risk, particularly in quality cyclicals that have de-rated substantially while still showing strong earnings revisions. He says the market has already done most of the work, having sold the midterms, AI capex funding and a tightening Fed ahead of time. He also cautions that the bottoming process could stretch into December.

“The good news is that this correction looks much closer to the end than the beginning.”at 1:02

Mike Wilson · Morgan Stanley

S&P 500 at 18x forward earnings already reflects much of the risk, so valuation is not stretched.

Wilson argues that much of the risk from the AI capex build-out is already reflected in valuations. He points to the S&P 500 trading at just 18 times forward earnings. Combined with an adoption story that keeps improving, this supports his constructive view that the correction is nearing its end.

“and much of the risk has already been reflected in valuations, with the S and P five hundred trading at just 18 times forward earnings.”at 3:04

Mike Wilson · Morgan Stanley

Industrials stand out as a quality cyclical: earnings revisions durable, ISM backlogs broadening, freight turning positive.

Wilson sees industrials as a standout among quality cyclicals, which have de-rated more than their fundamentals warrant. Relative earnings revisions for industrials have remained durable. ISM backlog data are broadening, and freight volumes have turned positive for the first time in nearly four years. He argues these are not signals of a cycle rolling over and that they show parts of the economy still moving forward even as the market discounts something worse.

“[Industrials] stand out in this regard. Relative earnings revisions have remained durable.”at 2:08

Mike Wilson · Morgan Stanley

Economy is not rolling over; investors may be pricing a slowdown the data does not show.

Wilson argues that investors may be preparing for an economic slowdown just as the market is finishing its own recession beneath the surface. His evidence is that industrial relative earnings revisions are durable, ISM backlog data are broadening, and freight volumes have turned positive for the first time in nearly four years. He reads these as signs that parts of the economy are still moving forward, not a cycle rolling over.

“Those are not signals of a cycle rolling over. They suggest parts of the economy that are still moving forward,”at 2:20

Mike Wilson · Morgan Stanley

Data center spend is only about 5% of S&P 500 revenue in 2027, so earnings impact stays manageable.

Morgan Stanley's CapEx mapping suggests data center spending in 2027 will be about 5% of consensus S&P 500 revenue, with a slightly higher but still mid-single-digit contribution in 2028. The election removed one layer of uncertainty around the AI build-out. Even if some capacity is delayed, Wilson says the impact on aggregate earnings should be manageable, and much of the risk is already reflected in valuations.

“[Data center spending in 2027] represents about 5% of consensus S and P five hundred revenue,”at 2:47

Mike Wilson · Morgan Stanley

AI adoption is his highest-conviction theme into 2027 as firms quantify real cost and revenue gains.

Wilson says the adoption story keeps improving. More companies are quantifying real benefits from AI, and the discussion is moving beyond productivity toward measurable cost savings and revenue generation. That is why he says AI adoption remains one of his highest-conviction themes into 2027, even as he stays selective on capital-spending beneficiaries such as semiconductors.

“That is why AI adoption remains one of my highest conviction themes into 2027,”at 3:25

Mike Wilson · Morgan Stanley

Stay selective on semiconductor capex beneficiaries after their roughly 40% drop from June highs.

Semiconductors, along with data-center beneficiaries and other early-cycle winners, were hit hard before election day. Semiconductors are down roughly 40% from their June highs and are approaching the downside targets from Wilson's silver-stock analog. Despite the sell-off, he stays selective on capital-spending beneficiaries in semiconductors, in contrast with his more constructive view on AI adoption.

“even as I stay selective around capital spending beneficiaries in areas like semiconductors.”at 3:30

Mike Wilson · Morgan Stanley

Markets tend to trade poorly into midterms and much better afterward; the midterm risk is largely sold.

Wilson says the midterms were the rumor and the market spent several months selling it, so most of the damage is already done. He notes that markets tend to trade poorly into midterms and much better afterward. He uses this seasonal pattern to argue that the midterm-driven weakness should be ending, while the next few weeks may still be choppy.

“Remember, markets tend to trade poorly into midterms and much better afterward.”at 3:56

Mike Wilson · Morgan Stanley

Positioning and sentiment are near capitulation levels, but not quite there yet.

Wilson says positioning and sentiment are closer to capitulation levels, which supports the view that the correction is near its end. He qualifies this by saying they are not quite there yet, so the bottoming process may take more time. He also notes that equity volatility finally caught up with bond volatility last week, which he sees as a constructive sign that the correction is ending.

“Positioning and sentiment are closer to capitulation levels, but not quite there,”at 4:04

Mike Wilson · Morgan Stanley

A hawkish, tightening Fed could stretch the market's bottoming process into December.

Wilson argues the Fed became less accommodative just as investors were most crowded into early-cycle momentum, which helped trigger the correction. He describes a Fed that is tightening. He warns that a more hawkish Fed could stretch the bottoming process into December, even though he thinks the correction is nearing its end.

“a more hawkish Fed could stretch the bottoming process into December.”at 4:08