The S&P 500 will likely plunge 10% in the near term before the bull market resumes, Morgan Stanley’s investment chief says

• The S&P 500 is likely to fall 10% in the near term before the bull market resumes, Morgan Stanley’s Mike Wilson said on Monday.
• The investment chief said the benchmark’s failed attempt to break through 3,550 last week signaled that its correction that began in September is not over yet.
• Wilson added that the lack of fiscal stimulus, uncertainty about the election, and another wave of coronavirus infections were headwinds to near-term stock gains.
• Investors should reallocate their portfolios with stocks that hinge on the economic reopening, he said.
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The S&P 500 is likely to see a 10% correction in the near term before the bull market continues, according to Morgan Stanley’s chief investment officer.

“With so many uncertainties over the next month, we think another 10% correction from Monday’s highs is the most likely outcome in the near term before this bull market can resume,” Mike Wilson, also Morgan Stanley’s chief US equity strategist, wrote in a Monday note.

The benchmark index saw its first 10% correction in the new bull market in September — after breaking 3,500, it quickly retreated, Wilson said. Last week, the S&P 500 attempted to break through 3,550 but failed, a sign that the correction that began in September is not over, he said.

Wilson added that the S&P 500’s attempt last week “occurred on less momentum” than in September, suggesting that there is more downside to come.

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“Last week’s failure to break through technical resistance for the second time suggests the correction isn’t over,” Wilson said. “We expect softness into and past the election before the next leg of the bull market.”

Wilson added that the lack of a fiscal stimulus deal, uncertainty about the outcome and timing of the election, and another wave of coronavirus cases were headwinds to higher stock prices in the near term.

Going into any pullbacks, investors should look to reallocate their portfolios toward stocks that will benefit from the reopening of the economy, the investment chief said.

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“The best opportunities lie in stocks where earnings are growing with the cyclical rebound, and importantly, growing by enough to offset any headwinds from multiple contraction as rates move higher with the recovery,” he said.

These earnings-driven stocks have been outperforming, and Wilson said this implies further upside ahead.

Wilson said stocks like Ralph Lauren, Skechers, Planet Fitness, Xerox Holdings, and Advanced Micro Devices had upside potential.

The S&P 500 fell as much as 0.8% on Monday and traded at about 3,457.44 on Monday afternoon.

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