Morgan Stanley strategist Michael Wilson suggests that investors should capitalize on the recent dip in US stocks, citing a robust earnings outlook for the upcoming year. Wilson believes that while the S&P 500 faces headwinds from a weakening labor market and inflation linked to tariffs, which could delay Federal Reserve interest rate cuts, any market pullback should be seen as a chance to buy. He indicates that a "rolling recovery has begun.
This perspective from Morgan Stanley challenges the notion that the market correction is fundamentally driven, instead positing it as a technical adjustment. Hedge funds have significantly reduced their gross exposure at one of the fastest rates on record, suggesting a "momentum flush" rather than a collapse in underlying earnings. The firm emphasizes that corporate earnings remain resilient, and the selloff is more about market mechanics than a deterioration of fundamentals.
Indeed, Morgan Stanley's analysis highlights that despite a 15% drop in the S&P 500's forward price-to-earnings ratio since October, earnings growth is accelerating, nearing 20%. This disconnect between falling valuations and strong earnings growth implies that the market may be oversold. The key hurdle for a sustained rally, according to Wilson, is a shift away from hawkish central bank policies, which he refers to as the "hawkish pivot." If policy remains tight, the market might continue to undervalue future cash flows, delaying a full recovery. However, the firm maintains that the underlying earnings and AI infrastructure story will survive the current unwind.
In a related deep-dive report on July 27, Morgan Stanley addressed the AI sector's correction, concluding it's primarily due to technical factors like crowded positioning unwinding and momentum reversal, not fundamental issues. The report, "Playing the AI Infrastructure Dip," projects significant efficiency gains and profitability in AI infrastructure. For instance, hyperscalers could cut AI token pricing by approximately 75% while maintaining margins, and GPU advancements are expected to boost data center profit margins to 80-90%. Morgan Stanley also anticipates substantial demand for data center power, estimating a potential shortfall of up to 38 GW in the US between 2026 and 2028, with grid connection queues stretching 5-7 years in some regions.
