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Investing.com -- U.S. equities may be facing near-term pressure, but investors should use the weakness as a buying opportunity heading into 2026, according to Morgan Stanley’s Michael Wilson.
In a note, Wilson said that “tensions around the Fed & liquidity have weighed on stocks,” but reaffirmed his “high conviction in our bullish 12-month stance.”
Morgan Stanley stated that recent market dynamics are unfolding exactly as the firm warned in late September.
At that time, Wilson highlighted the risk that “less dovish than expected Fed guidance and tighter liquidity” could act as short-term headwinds.
The bank now says this “tactical scenario is playing out,” with high-momentum stocks proving most sensitive to liquidity constraints, while the S&P 500 reacted to “incremental hawkishness” delivered at the October 29 Federal Open Market Committee meeting.
Despite the modest 5 percent pullback in the S&P 500, Wilson stressed that “the damage under the surface has been significant,” noting that two-thirds of the largest 1,000 stocks have seen drawdowns exceeding 10 percent.
This breadth deterioration, Morgan Stanley argues, suggests markets are “closer to the end of this correction, than the beginning.”
The firm added that if the Fed delays rate cuts or maintains a tighter balance sheet, the final leg of the correction could see “mega cap leaders catching down,” a typical late-correction pattern.
But Wilson views any additional weakness as a chance to “double down on our rolling recovery thesis,” noting that alternative labor data is “broadly soft” and ultimately supports the Fed getting “ahead of the curve on rate cuts.”
Morgan Stanley noted that its 2026 outlook remains “out of consensus,” including its view that the U.S. is in an early-cycle environment and its forecast for 17 percent EPS growth next year.
The bank reiterated overweights in Small Caps, Consumer Discretionary Goods, Healthcare, Industrials and Financials, and said the resilience in earnings revisions breadth reinforces that the sell-off is tied to “monetary policy and liquidity,” not fundamentals.