Morgan Stanley's chief U.S. equity strategist, Michael Wilson, emphasized in his latest research note that the firm's newest view is that the internal correction in the U.S. stock market that began in June has entered its final tail phase, though the index may still experience one last leg lower. Once the heavy burden of AI financing costs, the midterm elections, and the outlook for the Federal Reserve's monetary liquidity policy gradually become clearer, the market is expected to stage a strong year-end rally.

In the view of top strategists at Wall Street giants such as Morgan Stanley, the logic for contrarian positioning and buying on dips in the global AI computing power theme and broadly in technology stocks, which have recently been hit hard by selling, is now taking shape. However, whether technology can bottom out and then sustain an upward trend will enter a dual verification period before year-end, through both the earnings disclosure season and AI financing conditions.

Just as Morgan Stanley continues to hold a bullish view on the stock market, recent market action has precisely shown this semiconductor-led rebound tension in tech stocks, as well as the fragmentation and divergence in funding conditions revealed by the corporate credit bond market. The Philadelphia Semiconductor Index rose 0.44% on October 23 and further gained 2.82% on October 26, but its close of 11,083.5 points was still about 24.27% below its June 22 closing high. The Nasdaq 100 Index, known as a bellwether for tech stocks, and the Nasdaq Composite Index, which includes a broader set of technology names, rose 1.09% and about 0.83%, respectively, on October 26, but remained about 6.25% and 5.18% below their October 6 closing highs. A strong short-term rebound in U.S. tech stocks has already appeared, but the deep correction previously accumulated in the semiconductor sector, which accounts for a major share of technology market capitalization, is far from repaired.

The credit market reveals another negative constraint facing the AI computing power trade theme. The secondary-market yield on CoreWeave's 2031-maturity bonds reached 15.76% on October 22, indicating that investors are demanding higher risk premiums and compensation for the company's financing dependence and debt repayment risks tied to AI computing infrastructure. During intraday trading on October 26, the five-year credit default swap spread for CoreWeave (CRWV.US), the stock at the very center of the "AI computing power selloff storm" and the "AI bubble burst narrative," was about 1,148 basis points. Under a 40% recovery rate assumption, the model estimates an implied five-year cumulative default probability of about 62%; this indicator also heavily includes a credit risk premium and cannot be directly equated with the company's actual probability of default over the next five years. In the same period, five-year CDS spreads for Meta, Alphabet, and Microsoft were about 121, 83, and 55 basis points, respectively, higher than the 98, 73, and 52 basis points on September 25, highlighting a broad rise in the risk compensation demanded by the credit market for corporate bonds, while the pressure borne by different companies varies significantly.

Japanese investment giant SoftBank, which has in recent years bet almost entirely on AI, saw its five-year CDS rise to 432 basis points on October 20, the highest in nearly four years; the coupons on its three tranches of dollar bonds issued in September reached 8.625%, 9.25%, and 9.75%, respectively. Taken together, these data show that whether the explosive expansion in demand for AI computing resources can be converted into revenue across the industrial chain increasingly depends on whether customers can continue to obtain funding and whether project cash returns can cover financing costs. High-rated technology giants are mainly bearing the pressure of more expensive new financing and valuation discounting, while new cloud providers that rely on external capital also face the direct constraint of narrowing financing channels.

Morgan Stanley's Wilson Outlines Three Core Catalysts for a Year-End Stock Market Rally

Morgan Stanley's Michael Wilson said the bearish and cautious sentiment correction in the U.S. stock market that began in June is entering its final phase. The digestion of three key uncertainties, including AI-related capital issues (AIQ, AIEQ), midterm election uncertainty, and changes in Federal Reserve liquidity, is expected to help the market form a bottom and lay a major foundation for the S&P 500 to rally to a record level near 8,000 by year-end.

This transition of the economic cycle toward its mid-phase coincides with the peak in the speed of change in the breadth of earnings forecast revisions. Earlier, the "rolling recession" experienced by various industries in turn bottomed around last year's "Liberation Day." The cycle transition has already dealt a significant blow to individual stocks beneath the surface of the index. As investors shifted toward large-cap quality stocks with stronger fundamentals, new cloud players, financials, cyclical consumer themes, and early-cycle sectors such as autos clearly underperformed. Wilson wrote in a Monday report that since the start of this transition, about 60% of the constituents of the Russell 3000 Index (IWV.US), which focuses on U.S. small- and mid-cap stocks, have fallen more than 20%. Semiconductors were hit hardest, with 96% of stocks in the sector experiencing drawdowns of more than 20%. The quality factor (QUAL) has continued to lead during this transition and is now breaking out. Wilson noted that although the S&P 500 has shown resilience, market breadth has begun to improve, indicating that as investors gradually digest the mid-cycle transition, index performance and internal market conditions are "moving toward the middle."

Wilson said the tactical downside target remains 7,100 to 7,200, which implies the index could briefly fall below its 200-day moving average. At the time the original article was written, the S&P 500 was around 7,688, less than 2% below its record high set in early October. The strategist proposed three catalysts that could mark the end of the correction.

First, investors' broadly active concerns and anxious investment calls around AI capital returns, funding costs and availability, safety issues, and NIMBY sentiment, where local communities oppose building data centers nearby, are expected to become concentrated over the next three to four weeks. Second, midterm elections typically create initial market headwinds, but the six to twelve months after the election often produce strong returns. Historically, the S&P 500 has averaged a gain of about 17% in the twelve months after a midterm election.

Third, and most critically, Wilson believes liquidity poses the greatest risk and catalyst for the market to form its final low. Federal Reserve Chair Warsh has already slowed the pace of balance sheet expansion by about half, but with inflation still above target, interest rate policy remains behind the curve. Financial conditions have tightened significantly, to a degree comparable to 2018 and close to the levels seen during the active tightening period in 2022. Morgan Stanley's composite sentiment indicator is currently at a neutral level, and third-quarter earnings are expected to grow 27% year over year. On this basis, Wilson maintains his judgment that attractive buying opportunities should emerge as these key uncertainties gradually become clearer in the coming weeks.

Before the S&P 500 Can Break Above 8,000, It Must Pass Three Tests: Can Funding Continue, Can the Election Become Clear, and Can Liquidity Turn

Based on the S&P 500's October 26 close of 7,676.77, 7,100 to 7,200 implies potential downside of about 6.2% to 7.5%, while 8,000 corresponds to upside of about 4.2%; if the index first falls to that support zone and then recovers to 8,000, the gain would be about 11.1% to 12.7%. This difference means the investment opportunity in Wilson's judgment is highly dependent on the entry point and on whether the earnings base can remain stable after risk is released.

The first test is whether the market can smoothly absorb the supply of AI financing. The Morgan Stanley analyst team led by Wilson has long focused on capital returns, funding costs and availability, as well as safety disputes and community opposition to data center construction. In an October 26 media podcast, he further pointed out that additional financing will still need to be absorbed by the market in the coming weeks, weaker-quality companies may continue to face widening spreads and falling share prices, and he expects the semiconductor index could fall another 10% to 15% by mid-November. This indicates that his year-end bullish view still includes a difficult period of risk digestion.

From the perspective of the industrial chain mechanism, the completion of financing can increase the probability that purchases of GPUs, TPUs, ASICs, memory, networking infrastructure, data center optical interconnect equipment, high-performance CPUs, and power chain facilities will be realized, but new equity and debt issuance also needs to absorb market funds. A larger scale of financing can support construction, while the price of financing and subsequent cash flows determine how long such expansion can last. Therefore, the key verification for a sustained rebound in the global stock market's AI computing power theme and the semiconductor sector is that after customer budgets receive funding support, orders, deliveries, and payments can be continuously fulfilled.

The second test is the digestion of election uncertainty. Wilson believes there are usually strong six- to twelve-month returns after midterm elections, but the correction may still continue for days or even weeks after voting ends. The logic is that once election results are settled, it helps investors reassess the regulatory, fiscal, and project construction environment; what truly affects pricing is how policy risk changes, not the election date itself.

The third test, and the most important one, is whether liquidity pressure prompts a policy response. Long-end U.S. rates have risen by more than 100 basis points since February. Since Warsh took office, the Federal Reserve has raised rates only once, yet the market has already completed a considerable degree of tightening through long-end rates and financing costs. If this tightening further hits growth or the credit market, policy adjustments could support asset prices, even if it takes longer for inflation to return to 2%.

In his latest research note, Wilson's corresponding strategy is that investors should currently prioritize cash flow, balance sheet strength, and earnings quality, and look for windows to increase exposure after risk is concentrated and released; Wilson himself is especially focused on high-quality capital goods companies that have already undergone significant corrections.