Our Insights

Welcome to Thoughts on the Market. I'm Mike Wilson, Morgan Stanley’s CIO and Chief U.S. Equity Strategist. 

Today on the podcast I’ll be discussing where we are in the bottoming process for this equity market correction.

It's Monday, November 9th at 11:30am in New York.  

So, let’s get after it.

There are times when the market spends months worrying about an event, only to discover that by the time it arrives, most of the damage has already been done. I think that is where we are at now. The midterms were the rumor, and the market spent several months selling it.

Semiconductors, data-center beneficiaries, and many early-cycle winners were hit hard before election day, while the S&P 500 finally began catching down to the weak breadth underneath.

That was the missing piece of the correction we identified way back in June: the transition from early to mid-cycle, the peak in the rate of change of earnings revisions, and a Fed that became less accommodative just as investors were most crowded into the momentum of early cycle beneficiaries.

The good news is that this correction looks much closer to the end than the beginning. The S&P 500 has moved toward our 7100-to-7300 support range we identified back in August; while Semiconductors are down roughly 40 percent from their June highs and are approaching the downside targets suggested by our silver-stock analog.

I would not be surprised to see one more test of last week’s lows. Perhaps even a break on lower momentum. That would be the cleanest technical outcome. However, I would not wait for a perfect low since markets rarely send engraved invitations. My preference is to use weakness over the next few weeks to begin adding risk, particularly in quality cyclicals that have de-rated substantially but continue to show strong earnings revisions.

That is an important evolution in the quality call we made back in June. Quality has worked, and I still want to own it. But the rotation is now well understood. The better opportunity may be in quality cyclicals which are less defensive and where expectations have fallen faster than the fundamentals. Industrials stand out in this regard.

Relative earnings revisions have remained durable, ISM backlog data are broadening, and freight volumes have turned positive for the first time in nearly four years. Those are not the signals of a cycle rolling over. They suggest parts of the economy are still moving forward even as the market discounts something worse.

The provocative point is that investors may be preparing for an economic slowdown just as the market is finishing its own recession beneath the surface.

The election also removed one layer of uncertainty around the AI buildout. Our capex mapping suggests data-center spending in 2027 represents about 5 percent of consensus S&P 500 revenue, with a slightly higher but still mid-single-digit contribution in 2028.

Even if some capacity is delayed, the impact on aggregate earnings should be manageable. And much of the risk has already been reflected in valuations, with the S&P 500 trading at just 18x forward earnings.

At the same time, 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 AI adoption remains one of my highest-conviction themes into 2027, even as I stay selective around capital spending beneficiaries in areas like semiconductors.

There are other potential positives coming out of the election. Oil has fallen sharply on hopes for progress with Iran, or at least not a re-escalation. Some SNAP and Medicaid cuts could also be reversed, helping the consumer, while businesses may pull forward investment and M&A ahead of the 2028 presidential election.

Remember, markets tend to trade poorly into midterms and much better afterward. That does not mean the next few weeks will be smooth. Positioning and sentiment are closer to capitulation levels, but not quite there, and a more hawkish Fed could stretch the bottoming process into December. Equity volatility finally caught up with bond volatility last week, a constructive sign that the correction is ending. This is not the moment to get bearish.

Bottom line: buy the rumor, and sell the news – but in reverse. The market sold the fear ahead of the events that are now happening. Mid terms, AI capex funding supply and a Fed that is tightening. The headlines are the clearing mechanism. We may still need one final retest, but the market has already done most of the work. I want to use that weakness to add quality cyclicals and AI adopters rather than waiting for certainty. By the time the headlines feel safe, the best part of the opportunity will probably be gone.

Thanks for tuning in; I hope you found it informative and useful. Let us know what you think by leaving us a review. And if you find Thoughts on the Market worthwhile, tell a friend or colleague to try it out!

Andrew Sheets: Welcome to Thoughts on the Market. I'm Andrew Sheets, Global Head of Fixed Income Research at Morgan Stanley.

Today, what a blue wave means for fixed income.

It's Friday, November 6th at 2pm in London.

If the last decade has taught us anything, it's that financial professionals should approach political predictions and their market impact with a great deal of caution.

With that caveat in mind, let's talk about Tuesday's U.S. midterms and what they might mean for fixed income.

The word surprise has lost some meaning in investing over the years, but the U.S. election results qualify. Democrats won far more seats in both the House and the Senate than almost anyone expected. Key statewide races, such as Texas governor, also flipped unexpectedly. Democrats enjoyed the largest vote share of any party in almost 50 years.

Speaking to investors over the last month, this so-called blue wave, I think, was generally seen as the more market negative outcome. And indeed, in the first hours after U.S. polls closed, that was the market reaction.

But with the results behind us and in the cold light of day, I think there are a number of reasons why fixed income markets over time have grown more comfortable with the result.

First, markets hate uncertainty, and a variety of measures suggest that investors had reduced exposure into Tuesday, whether as a direct function of the vote or due to broader volatility from everything from technology to Brazil. Uncertainty is now lower. After all, we know the result, and investors should have some room to add if they want to.

Second, one factor that has been weighing on fixed income markets this year has been inflation. It's been too high, with both tariffs and energy prices contributing to upward pressure. To the extent that the market sees these results reflecting the unpopularity of tariffs or certain foreign policy, investors could assume that these policies are more likely to change down the road. And that could help to push down long-term bond yields. And much more immediately, unrelated to the election, I note that our economists expect that the next U.S. inflation number this month is going to show a notable step down.

Another factor that's weighed on fixed income this year has been AI spending, which has generated record amounts of bond issuance, pushing up both spreads and yields. Our analysts don't think that the midterms change the big picture on AI. But to the extent that some changes in statewide power result in more regulation and a more elongated build-out – well, that could help ease some of the concerns around supply pressure and potential mismatches between supply and demand.

But maybe the reason not to fret too much about the midterms is even more simple. Following the last 11 midterm elections from 1982 to 2022, the S&P 500 was higher one year later after all of them, regardless of the party that won.

Now, it's possible that going 11 for 11 is just a coincidence, and this is hardly a sophisticated analysis. But I think it speaks to the fact that while elections matter a great deal to the country in question, they don't always mean as much to markets.

Thank you, as always, for your time. If you find Thoughts on the Market useful, let us know by leaving a review wherever you listen. And also tell a friend or colleague about us today