Morgan Stanley Declares U.S. Stock Market Correction Nears End! Maintains Year-End S&P 8000 Target, Identifies Three Major Rebound Catalysts

According to Smart Finance APP, Michael Wilson, Chief U.S. Equity Strategist at Morgan Stanley, emphasized in his latest research report that the firm's latest judgment is—the internal correction of the U.S. stock market that began in June is now in its final tail phase, although indices may still experience one last downward movement. After the heavy pressure from AI financing costs, the clarity brought by the midterm elections, and the Federal Reserve’s liquidity outlook, the market is expected to usher in a strong year-end rebound.

From the perspective of top strategists at Wall Street financial giants like Morgan Stanley, the logic of aggressively increasing positions and buying the dip in global AI computing power themes and broadly technology stocks—both of which have recently faced sell-off shocks—is forming. However, whether tech stocks can bottom out and realize a sustained upward trend will now enter a dual verification period until year-end earnings releases and AI financing conditions become clear.

As Morgan Stanley remains bullish on the stock market, the recent market performance has precisely demonstrated this semiconductor-led tech stock rebound momentum, as well as the split and divergence in capital flows highlighted by the corporate credit bond market.

The Philadelphia Semiconductor Index rose 0.44% on October 23 and climbed a further 2.82% on the 26th, but its closing price of 11,083.5 points is still down about 24.27% from the June 22 closing high. The Nasdaq 100 Index, known as the “tech stock wind vane,” and the broader Nasdaq Composite, which features more tech stocks, both rose on October 26 by 1.09% and about 0.83%, respectively. However, they remain approximately 6.25% and 5.18% below their October 6 closing highs. While a strong short-term rebound in U.S. tech stocks has occurred, the deep correction previously accumulated in the heavyweight semiconductor sector is far from repaired.

The credit market reveals another side of the negative constraints facing the AI computing power trade theme. CoreWeave’s bonds maturing in 2031 had a secondary market yield of 15.76% as of October 22, indicating that investors demand a higher risk premium and compensation for the company’s financing dependence and repayment risks tied to AI infrastructure projects.

Intraday on October 26, the core stock of the “AI computing power sell-off storm” and the “AI bubble burst narrative”—CoreWeave (CRWV.US)—had a five-year Credit Default Swap (CDS) spread of about 1,148 basis points. Under a 40% recovery rate assumption, the model estimates a roughly 62% cumulative implied default probability over five years. Note: this indicator also incorporates credit risk premiums and is not equivalent to a direct prediction of actual default rates over the next five years. At the same time, the five-year CDS for Meta, Alphabet, and Microsoft were approximately 121, 83, and 55 basis points, up from 98, 73, and 52 basis points on September 25—highlighting the general rise in risk premiums demanded in the corporate credit market, though the pressure borne by companies varies significantly.

Japanese investment giant SoftBank, which has almost fully bet on AI in recent years, saw its five-year CDS rise to 432 basis points on October 20, the highest in nearly four years. Its three tranches of USD bonds issued in September yield 8.625%, 9.25%, and 9.75%, respectively. Collectively, these data indicate that the explosive expansion demand for AI computing power resources can only translate into industry chain income if clients can continue to secure funding, and if project cash returns can cover financing costs. High-rated tech giants mainly endure costlier new financing and downward valuation pressure, while new cloud providers that rely on external capital also face direct constraints as financing channels narrow.

Wilson Outlines Three Core Catalysts for the Year-End Equity Market Rally

Michael Wilson of Morgan Stanley states that the bearish sentiment and adjustment in the U.S. stock market since June is now in its final closing stage. The digestion of three key uncertainties—AI-related capital issues (AIQ, AIEQ), midterm election uncertainties, and changes in Federal Reserve liquidity—are expected to drive the market to form a bottom, laying the groundwork for the S&P 500 to rebound by year-end toward a record 8,000 points.

This transition to the mid-cycle phase of the economic cycle is occurring concurrently with peak breadth changes in earnings forecasts. Previously, various industries experienced “rolling recessions,” which bottomed out around “Liberation Day” last year. This cycle transition has had a considerable impact on stocks beneath the index’s surface. As investors shift toward higher-quality large-cap stocks, new cloud players, financials, cyclical consumption themes, and autos—early cycle sectors—have clearly underperformed.

In a Monday report, Wilson wrote that since this rotation began, about 60% of the Russell 3000 Index’s (IWV.US) components have fallen more than 20%. Semiconductors have been hit the hardest—96% of that sector’s stocks have seen declines of over 20%.

The quality factor (QUAL) has continued to lead throughout this period, now breaking out. Wilson notes that while the S&P 500 remains resilient, market breadth is beginning to improve, showing that as the mid-cycle transition is digested, index performance and internal market conditions are “moving closer together.”

Wilson maintains a tactical downside target of 7,100–7,200 points, meaning the index could slightly break below its 200-day moving average. As of writing, the S&P 500 is around 7,688 points, less than 2% below its early October record high.

This strategist outlined three potential catalysts that could signal the end of the correction. First, concerns and panic investing around AI capital return, funding costs and availability, safety issues, and “Not-in-my-backyard” sentiment—local opposition to new data centers—are expected to peak over the next three to four weeks.

Second, midterm elections usually create headwinds for the market in the early stages, but returns six to twelve months after voting are often strong. Historically, the S&P 500 has averaged a 17% rise in the twelve months following midterm elections.

Third, and most crucially, Wilson sees liquidity as the biggest risk and catalyst for the market’s true bottom. Fed Chair Powell has slowed the balance sheet expansion by about half, but with inflation still above target, rate policy remains behind the curve. Financial conditions have tightened significantly, matching 2018 levels and approaching the degree of tightening seen during the policy action phase in 2022.

Morgan Stanley’s composite sentiment indicator is currently at neutral, with third-quarter earnings expected to rise by 27% year-on-year. Based on this, Wilson maintains: as these key uncertainties are clarified in the coming weeks, attractive buying opportunities should emerge in the market.

Three Hurdles Before the S&P 500 Breaks 8,000: Can Funding Be Sustained, Will the Election Bring Clarity, and Will Liquidity Reverse?

With the S&P 500 closing at 7,676.77 points on October 26, the 7,100–7,200 range implies a potential downside of about 6.2%–7.5%, while 8,000 represents about a 4.2% upside. If the index first retreats to this support zone and then rebounds to 8,000, the increase would reach about 11.1%–12.7%. This variance means that the investment opportunity Wilson describes depends heavily on entry point and whether the earnings base remains stable after risk is released.

The first hurdle is whether AI financing supply can be smoothly absorbed by the market. Wilson’s team at Morgan Stanley has long focused on capital return, funding cost and accessibility, as well as security disputes and community opposition to data center construction. On an October 26 podcast, he further noted that new funding needs will still need to be digested by the market in the coming weeks, while weaker-qualified enterprises may continue to face widening spreads and falling stock prices. He predicted that the semiconductor index may fall another 10%–15% by mid-November. This indicates that, while remaining bullish for the end of the year, a difficult risk digestion process lies ahead.

From the industrial chain perspective, successful financing increases the odds of actually procuring GPU/TPU/ASIC, storage, network infrastructure, data center optical interconnects, high-performance CPUs, and power-chain facilities. However, new stock and debt issuance also requires market absorption. Expansion of financing supports construction, but the financing price and future cash flows determine how long this expansion can last. Thus, for global stock markets, the continuous rally of the AI computing power theme and the semiconductor sector will depend on whether customer budgets secure funding, and if orders, deliveries, and payments can be realized consistently.

The second hurdle is digestion of election uncertainty. Wilson believes that strong returns typically arrive six to twelve months after midterm elections, but corrections can sometimes persist for days or even weeks after voting ends. The logic is that a settled election result helps investors re-evaluate the regulatory, fiscal, and project construction environments. What truly drives pricing is how policy risk changes, not the election date itself.

The third—and most important—hurdle is whether liquidity pressure prompts a policy response. Since February, long-term U.S. rates have risen more than 100 basis points. Since Powell’s appointment, the Fed has raised rates only once, but the market has already implemented considerable tightening via long-term rates and financing costs. If this tightening further impacts growth or the credit markets, a policy shift may support asset prices, even if it takes longer for inflation to return to 2%. The latest investment approach detailed by Wilson in his research advocates for investors to prioritize cash flow, balance sheets, and earnings quality at this stage, seeking windows to increase exposure after concentrated risk release. Wilson himself is particularly focused on high-quality capital goods companies that have undergone significant adjustment.