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Expect a ‘10% correction in the next three months’, warns Morgan Stanley’s chief investment officer

Too darned hot?

As much of the U.S. gets ready to face a heatwave, the appetite is just as sizzling for stocks after Fed Vice Chairman Richard Clarida and New York Fed President John Williams revved up market expectations about rate cuts. Despite some backpedaling on those comments, there’s still plenty of enthusiasm out there for equities.

Hold your horses, says our call of the day, from Mike Wilson, chief investment officer of Morgan Stanley, who tells MarketWatch in an interview that investors should wait for better times to jump into this stock market. And they are coming.

“We’re not looking for the bottom to fallout like last year, but I do expect a 10% correction in the next three months,” said Wilson, whose end-year S&P target is 2,750.

One reason is that earnings estimates are still 5% to 10% too high, a factor which will weigh on stocks in the next 6 months, he says. Once those estimates come down, stocks will look a lot more attractive.

There are other obstacles for equities, such as tough technical resistance at 3,000 for the S&P 500 and the hype surrounding an expected Fed cut that may turn it into a “sell the news” type of event.

“We think there’s still some unfinished business and it’s not going to be scary, but it will be a better opportunity to buy stocks over the next three to six months, and maybe 18 months. We tell people don’t chase break outs when everyone is getting excited,” said Wilson.

As for what they will buy when that moment comes, he’s looking around.

“There are a lot of stock markets out there that have not done that well in the last 18 months. We’re looking to buy some of those markets that have really underperformed, small-caps or the cyclicals, banks or energy or value, even Europe and Japan. That’s what we will be looking to buy more aggressively than the S&P 500,” he says.


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