Investors had been bracing for a deeper stock-market reset after the latest pullback exposed the cracks beneath the surface.
Morgan Stanley says that fears might be going too far.
According to a note shared with me, strategist Michael Wilson said the correction underscores a normal shift inside an earnings-driven bull market, not the end of the rally.
That comes as a surprise, as Wall Street is pricing in more turbulence and a potential Fed rate hike amid Middle East uncertainty.
The pullback being referred to is the early-June slide after a long winning streak.
Investopedia reports that the S&P 500 fell 2.6% in the week ended June 5, while the Nasdaq dropped 4.7%, led by weakness in semiconductor, memory, and AI-related stocks.
However, that move hasn’t exactly been one-way.
AP reported that the S&P 500 rebounded 1.7% Monday to 7,554.29 after hopes for a U.S.-Iran deal pushed Brent crude down 4.8%, easing inflation fears.
Morgan Stanley is pointing investors in the opposite direction, especially if geopolitical pressure eases and bond markets walk back that hike.
Investors were selling weakness, but Morgan Stanley still sees the bull market intact.
The question now is whether the choppiness becomes a buying window or the first sign of broader fatigue.
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What Morgan Stanley said about the stock market pullback
Morgan Stanley said the recent stock-market pullback does not look strong enough to break the bull market.
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Strategist Michael Wilson said the correction reflected a peak in the rate of change for earnings revisions, market breadth, and liquidity.
Simply put, the forces that pushed stocks higher have started to cool after moving sharply in the market’s favor.
However, Morgan Stanley feels that kind of transition is typical during an earnings-driven bull market. The firm said earnings-revision breadth will moderate, but next-12-month earnings-per-share estimates are likely to rise through year-end.
“While we might see some more choppiness in coming weeks, our conviction in the current bull market is intact,” Wilson wrote.
For perspective, investors are assessing whether the latest weakness marks the start of a deeper reset.
Morgan Stanley’s view, though, is much more measured: the correction could last into the end of the month and through the Q2 earnings season, but the broader earnings cycle remains supportive.
Wilson also said a stable resolution in the Middle East should help bond markets walk back the Fed rate hike currently being priced in, giving stocks another source of support.
Key data behind Morgan Stanley’s stock market call
- Morgan Stanley’s S&P 500 target: The firm is committed to its year-end target of 8,000, signaling it sees upside despite near-term choppiness.
- Fed risk in bond markets: Bonds are pricing in 1 Fed hike by next January, but Morgan Stanley says that could unwind if Middle East tensions ease.
- Semiconductor momentum: Earnings-revision breadth in chip stocks has exceeded 70%, suggesting the hottest trade may be due for a pause.
- Cyclical leadership: Consumer discretionary goods, transports, and regional banks rose 9%, 13%, and 8% over the past month, beating the S&P 500’s 1% decline.
- Transport earnings strength: Revisions’ breadth in transports has climbed to 40%, the strongest level in 4 years.
Why earnings revisions matter for stock market investors
Morgan Stanley’s stock market call rests on the core idea that earnings momentum is slowing, but it hasn’t cracked.
For context, earnings revisions breadth had surged sharply, especially in market leaders such as semiconductors, where revisions breadth moved above 70%.
Morgan Stanley said that kind of acceleration was unlikely to continue at the same pace.
But a slowdown in revisions is not the same as falling earnings.
Morgan Stanley said next-12-month earnings-per-share forecasts are still likely to rise into the year-end. That is why Michael Wilson said the bull market remains intact, even if stocks stay messy into the end of the month and the second-quarter earnings season.
Here are some statistics to back up the incredible earnings performance from the S&P 500 businesses:
- Q1 earnings were far stronger than expected: FactSet said the S&P 500’s blended Q1 earnings growth rate reached 27.7%, up from 13.1% expected at the end of March, marking the strongest growth since Q4 2021.
- Companies beat estimates at a rare pace:84% of S&P 500 companies that had reported Q1 results topped EPS estimates, above the 5-year average of 78% and 10-year average of 76%.
- The next quarter also improved: FactSet said Q2 earnings growth is now expected at 21.9%, up from 18.7% at the start of the quarter, marking the 7th straight quarter of double-digit earnings growth.
For investors, the bigger message is about leadership.
The bank’s arguments suggest the rally may broaden beyond momentum trades into cyclical groups where earnings revisions are improving.
That is why Morgan Stanley highlighted consumer discretionary goods, transports, and regional banks.
Those groups rose 9%, 13%, and 8% over the past month, while the S&P 500 fell 1%. Transport earnings-revision breadth has also climbed to 40%, the strongest level in 4 years.
A big risk is if liquidity tightens further or rate expectations keep pressuring valuations. But Morgan Stanley believes rising earnings forecasts could absorb near-term volatility.
The bigger question now is whether earnings strength keeps spreading or whether the pullback exposes a rally too dependent on a few crowded winners.
Related: Another veteran analyst doubles down on stock market message
