Morgan Stanley's top US equity strategist, Michael Wilson, told clients in a Monday note that the stock market selloff that started in June is likely in its "final innings." The bank sees the November 3 midterm elections and a US Treasury cash drawdown as potential catalysts that could mark the end of the current downturn.
Wilson, who leads the bank's US equity strategy team, said the S&P 500 is "catching down" to weakening market breadth. In plain terms, that means the broad index is finally reflecting what many individual stocks have already been doing for weeks: falling. When only a handful of large companies are propping up the index while most stocks decline, that's a sign of narrow, fragile gains—and it's often a hallmark of the later stages of a slump.
What's behind the selloff?
The June correction has been driven by a mix of concerns: persistent inflation, aggressive interest rate hikes by the Federal Reserve, and worries about slowing economic growth. Investors have been reeling from a series of earnings disappointments, particularly in the tech sector, where giants like Intel have triggered sharp selloffs. The tech-led selloff has been a major drag on the broader market, with the Nasdaq dropping sharply on several occasions.
Morgan Stanley's note highlights how widespread the damage already is: about 60% of stocks in the Russell 3000 index—a broad measure of the US stock market—are down from their highs. That's a stark reminder that this isn't just a tech problem; it's a market-wide phenomenon.
Why the midterms and Treasury drawdown matter
The bank points to two specific events that could serve as "clearing events"—moments that help the market find a bottom and move on. The first is the November 3 midterm elections. Historically, markets often experience a relief rally after elections, as uncertainty about the political landscape fades. Investors may be holding back until they know which party will control Congress, and once that's resolved, they might feel more comfortable putting money to work.
The second is a US Treasury cash drawdown. The Treasury is expected to rebuild its cash balance, which could drain liquidity from the financial system. While that might sound negative, Morgan Stanley suggests that once this drawdown is complete, the market could see a more stable footing. It's a technical factor, but one that can influence short-term market movements.
These events are not guaranteed to end the selloff, but they represent potential turning points that investors are watching closely.
What it means for investors
For everyday investors, the key takeaway is that the pain may be nearing an end, but it's not over yet. "Final innings" doesn't mean the game is won—it means the game is in its late stages, and the outcome is still uncertain. The market could still swing lower before it stabilizes.
Wilson's comments echo a broader debate on Wall Street about whether the AI-driven tech rally is sustainable. Some banks, like Deutsche Bank, have recently turned bullish on US tech, arguing that the AI selloff is overdone. Others, however, warn that the rotation away from tech could continue, especially given tech's heavy weight in the S&P 500.
For those with a long-term horizon, this period of volatility is a reminder of the importance of diversification. A portfolio that leans too heavily on a single sector—like tech—can be hit hard when that sector stumbles. On the other hand, having a mix of assets can help cushion the blow.
It's also worth noting that market corrections are a normal part of investing. Since 1950, the S&P 500 has experienced a pullback of 10% or more roughly every two years on average. While that doesn't make the current downturn any less uncomfortable, it does put it in perspective.
As always, no one can predict exactly when the market will bottom. But Morgan Stanley's view suggests that the worst may be behind us, and that the coming weeks could bring more clarity. For now, investors should focus on their own financial goals and risk tolerance, rather than trying to time the market.
