Morgan Stanley’s strategist Mike Wilson believes the current S&P 500 correction is much closer to its end than its beginning.
His argument centers on the idea of a “stealth correction.” While the main S&P 500 index has fallen less than 10% from its peak, the damage beneath the surface is widespread. More than half of the stocks in the broader Russell 3000 index have already experienced drawdowns of 20% or more. This indicates that much of the pain has already been felt by individual companies, even if the headline index number doesn't fully reflect it.
So, what caused this? The correction has been driven by a clear sequence of events. First, valuation has done most of the heavy lifting. The S&P 500’s forward P/E ratio, a key measure of how expensive stocks are, has compressed significantly from its peak of 23.1 in late 2025 to around 21.2 now. This means stocks have already gotten cheaper relative to their expected earnings.
Second, the market has been digesting a geopolitical shock from the war in Iran. This conflict pushed Brent crude oil prices near $120 per barrel, stoking fears of inflation and slower economic growth. However, after the initial spike, markets have started to price in this risk, showing more stability on days when oil prices rise again. This suggests the worst of the oil shock may be accounted for.
Finally, the last piece of the puzzle is interest rates. The Federal Reserve held interest rates steady in March and signaled only one rate cut for 2026. This pushed the 10-year Treasury yield, a benchmark for borrowing costs across the economy, up toward 4.5%. Wilson sees this level as a critical threshold. As yields rise, bonds become more attractive compared to stocks, putting downward pressure on stock valuations. The thin equity risk premium (ERP)—the extra return investors expect for holding stocks over risk-free bonds—is now just 0.36%, making the market highly sensitive to any further increases in yields.
In essence, Wilson’s view is that the correction has matured through valuation resets and the pricing-in of war risks. The final variable is the 10-year yield. If it stays below the 4.5% danger zone, the market may have found its footing. But a sustained move above it could trigger the next leg down.
- Glossary -
- P/E Ratio (Price-to-Earnings Ratio): A valuation metric that measures a company's current share price relative to its per-share earnings. A higher P/E suggests investors expect higher earnings growth in the future.
- 10-year Treasury Yield: The interest rate the U.S. government pays to borrow money for 10 years. It serves as a benchmark for many other interest rates, including mortgages and corporate bonds.
- Equity Risk Premium (ERP): The excess return that investing in the stock market provides over a risk-free rate, such as the return from Treasury bonds. It is the compensation for taking on the higher risk of equity investing.