Why the Stock Market’s Weakness Is a Buying Opportunity

Mike Wilson, chief U.S. equity strategist at Morgan Stanley. (Photograph by Christopher Goodney/Bloomberg)

Key Points

• The S&P 500 is down less than 5% from its recent high. Two-thirds of the top 1,000 U.S. stocks have lost more than 10% of their value.
• Morgan Stanley analysts view current market weakness as a buying opportunity, expecting a bullish 12-month outlook.
• Morgan Stanley projects 2026 EPS growth of 17%, exceeding the consensus estimate of 14%.

Despite a rebound in stocks on Monday, the market is weaker than it looks—and that is a good thing, analysts at Morgan Stanley say. Use the recent drawdown to buy, they advise.

Debate over the path ahead for the Federal Reserve’s interest rates and associated liquidity tightening has been one key factor weighing on markets. Investors took to heart comments from New York Fed President John Williams on Friday, who suggested that the central bank could still lower borrowing costs at its December meeting. Traders subsequently raised their bets for a rate cut, which in turn sent stocks higher on Friday.

But the market reaction isn’t an indication that the anxiety over the Fed has abated. In fact, the pressure is worse than a first glance may suggest, the team at Morgan Stanley led by equity strategist Michael J. Wilson wrote on Monday. While the S&P 500 is down less than 5% from its recent high, two-thirds of the top 1,000 U.S. stocks have lost more than 10% of their value. Ouch.

That is an opportunity, according to Wilson’s team. “Near-term weakness is medium-term bullish,” the team wrote. “The weakness under the hood is a sign that we’re closer to the end of this correction, than the beginning.”

Risks remain. The Fed might cut rates or wind down its balance sheet as soon as the market expects—both of which would impact market liquidity. Those factors may be what ultimately drag the largest names down—think Nvidia , Microsoft , Apple , Tesla —Wilson’s team said. A sharper drawdown in those names could encourage the Fed to cut, they said, but pain for the broader market would come first.

“We’re staying vigilant around this dynamic related to monetary policy and can’t rule out more index-level downside/choppiness in the short-term,” Wilson said. “While these risks could persist in the short-term, we maintain conviction in our bullish 12-month view.”

The Morgan Stanley team also named some sectors they like more than others going into the new year: discretionary goods, healthcare, financials, industrials, and small-caps.

The team at Morgan Stanley acknowledges that some of their views are aren’t the consensus, including another big reason for bullishness: the earnings outlook. Wilson’s team sees earnings-per-share growth for S&P 500 companies of 17% in 2026. The consensus estimate is closer to 14% growth.

“For the major indices, another encouraging sign that this sell-off is more of an unwind tied to monetary policy and liquidity is that earnings revisions breadth remains resilient,” Wilson added. “View any further weakness in the short-term as an opportunity to add long exposure into next year.”

Write to Jack Denton at jack.denton@barrons.com