Morgan Stanley: U.S. stocks face a short-term 7% downside risk

TechFlow reports on September 21, the team of Morgan Stanley strategist Michael Wilson stated that U.S. equities are vulnerable to further increases in energy prices and heightened bond market volatility, in which scenario the S&P 500 index could fall by as much as 7%. The strategists noted that while strong corporate earnings have so far helped stocks withstand upward pressure from rising bond yields, the valuation of the S&P 500 has declined over the past four months to its lowest level since March.

Wilson wrote in a report, “Should valuations deteriorate further in the near term due to a tightening financial environment and/or sharply higher energy prices, we see the S&P 500 potentially falling to 7,100 before the bull market recovers by year-end.” This would mark a 7% decline from Friday’s closing price.

Wilson also expects market volatility to rise ahead of the midterm elections in November, but he ultimately believes strong corporate earnings prospects will drive a year-end rebound, bringing the index closer to its 8,000-point target. This implies an upside of nearly 5% from current levels.