Morgan Stanley warns: US stocks could fall another 8%, and are poised to rebound after three major risks are cleared.

Morgan Stanley’s Chief US Equity Strategist Mike Wilson said in a recent client report that AI financing pressures, the November 3 US midterm elections, and tightening financial conditions could push the S&P 500 index to around 7,100 points in the coming weeks, a roughly 8% drop from current levels. This would mark the largest correction since market volatility sparked by the Iran war earlier this year. Morgan Stanley’s data shows that since early June, around 60% of Russell 3000 constituents have fallen more than 20% from their peaks, and roughly 96% of semiconductor stocks have dropped over 20%. The bank forecasts the semiconductor sector could fall another 10% to 15% before mid-November. Credit spreads on data center-related bonds have widened, and CoreWeave’s debt has entered distressed territory this month. The Federal Reserve raised its policy rate to 3.75% to 4.00% in September, driving bond yields higher and tightening financial conditions. Despite its cautious near-term outlook, Morgan Stanley maintains its year-end S&P 500 target of 8,000 points, with a base 12-month target of 8,300 points. The bank notes that markets typically perform better after midterm elections; data from 1950 to 2022 shows the S&P 500 rises an average of around 8% in the three months following an election.