Morgan Stanley's Wilson: The S&P 500 correction is nearing its end, and the market has fully priced in the risk of a US economic recession.

Michael Wilson, Chief U.S. Equity Strategist at Morgan Stanley, stated that the current adjustment in the S&P 500 Index is gradually entering its final stages, and the market has fully priced in the risks of a U.S. economic recession.

Wilson and his team of strategists noted in a research report released Monday that increasing evidence suggests the current decline in U.S. stocks "is approaching the end stage," and likened it to historical cases of "growth scares" that were not accompanied by recessions or interest rate hikes. The S&P 500 Index has fallen 8.4% since January 27th, pressured by concerns over artificial intelligence and the impact of the Middle East war, the latter actually having blocked the Strait of Hormuz, cutting off a key channel for global energy supply.

Wilson believes that the market has sufficiently priced in growth risks, and the current degree of valuation compression is broadly in line with correction scenarios in history that were not accompanied by recessions or interest rate hike cycles. However, he also warns that interest rate sensitivity is at its highest level in recent years, with the 10-year U.S. Treasury yield approaching the critical threshold of 4.5%. Rising rates remain a core risk variable facing the stock market.

Valuation Compression Nears Historical Adjustment Range

Wilson pointed out in his weekly research report that since the 2025 peak, the forward P/E ratio of the S&P 500 Index has compressed by 17%, which is comparable in scale to corrections not tied to recessions or Fed rate hike cycles. Meanwhile, over half of the Russell 3000 Index constituents have fallen more than 20% from their 52-week highs.

These data suggest that the market has priced in a significant portion of the risks brought by the Middle East war. "We believe the market’s pricing of growth risk is not as careless as the general consensus," Wilson’s team wrote in the report.

Oil Price Impact Less Severe than Historical Cases

Wilson made important distinctions between the current oil price shock and historical examples. Brent crude touched $116.89 per barrel on Monday as the U.S. increased troops in the Middle East and Yemeni Houthi forces intervened in the conflict, further boosting oil prices. However, Morgan Stanley’s commodity strategists forecast that crude will fall back to $80 per barrel after hitting $110 in the second quarter.

Wilson noted that compared to previous oil price shocks that ended economic cycles, the year-on-year increase in oil prices this time is about half of those earlier levels. More importantly, current market earnings growth is accelerating, rather than slowing or turning negative, which is a stark contrast to the backdrop of previous oil shocks. Positive earnings growth will provide a buffer against recession.

"Market pricing suggests the cumulative probability of restoring tanker passage through the Strait of Hormuz is much higher than the probability of recession, and we agree," Wilson’s team wrote. He also acknowledged that international markets, due to heavy reliance on imported energy, face greater downside risks.

Interest Rate Risk Remains The Biggest Near-Term Hidden Danger

Despite an optimistic judgment that the correction is nearing an end, Wilson clearly ranks monetary policy tightening as a major near-term risk for U.S. stocks. His research shows the current negative correlation coefficient between rates and stocks has reached -0.5, and sensitivity to interest rates is at its highest level in recent years.

The 10-year U.S. Treasury yield is now nearing 4.5%; it was this level of yield last year that led the White House to shift its tariff policy. Wilson pointed out the U.S. Treasury market has partly priced in the possibility of rate hikes in 2026, though Morgan Stanley economists’ baseline model still anticipates several rate cuts.

"Whether today’s rise in yields is driven by inflation factors, Fed hawkishness, deficit pressures prompted by war, or a combination thereof, we believe this is a risk variable worthy of close attention," Wilson’s team said.

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