MW Buy any Moody's downgrade dip in stocks, says Morgan Stanley's now-optimistic strategist

By Steve Goldstein

A stock-market dip does appear to be in the cards for Monday

A dip in the stock market caused by the Moody's downgrade of U.S. debt should be bought, according to a once-pessimistic and now seemingly bullish strategist.

Mike Wilson, Morgan Stanley's chief stock-market strategist, made reference to the Moody's credit downgrade in his weekly research note, which focused on the interim U.S. trade deal with China checking one more item off its list for a durable rally.

Wilson said the equity-return-to-bond-yield correlation right now is around 0, having declined from early highs of 0.6, on a scale of -1 to 1.

"In our view, a breakout of the 10-year yield above 4.50% would take this correlation negative, and drive more rate sensitivity for equities," he said.

"Moody's late-day downgrade of the U.S. credit rating last Friday is also worth considering in this conversation, though Moody's is the last ratings agency to downgrade the U.S. credit rating, a process that began 14 years ago in the summer of 2011. In short, a break above 4.50% in the 10-year yield can lead to modest valuation compression (5% compression is around what we've gotten in prior historical analogs) - we would be buyers of such a dip," he said.

S&P 500 futures (ES00) were indeed dipping on Monday, with the contract down more than 1%. The yield on the 10-year Treasury BX:TMUBMUSD10Y shot up 10 basis points to 4.55%. Yields move in the opposite direction to bond prices.

Wilson points out that Morgan Stanley's economics team expects core PCE inflation to start to turn higher in May, and then get hotter through the summer.

"In short, we're unlikely to see near-term progress on the last two items on our check list for a more sustained rally - a more dovish Fed and the 10-year yield below 4.0% without recessionary data. Thus, the burden is on rebounding EPS revisions to push the rally beyond 6100," he said.

He did say the 90-day pause of most of the U.S. and China tariffs was an unexpected positive. "The combination of upside momentum in [earnings] revisions breadth and last week's deal with China has placed the S&P 500 firmly back in our original pre-Liberation Day [first-half] 2025 range of 5500-6100," he said, referencing President Donald Trump's name for the early April date in which he unveiled his planned tariff rates on global trading partners.

-Steve Goldstein

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May 19, 2025 07:50 ET (11:50 GMT)

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