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

Morgan Stanley’s chief U.S. equity strategist Michael Wilson said that this round of S&P 500 corrections is gradually moving toward its end, and the market has already priced in the risk of a U.S. economic downturn.

In a research report published on Monday, the strategy team led by Wilson said that mounting evidence suggests this bout of U.S. stock selloff is “approaching the end of its phase,” drawing a comparison to historical “growth panic” cases that were not accompanied by recessions or rate-hike cycles. Since January 27, the S&P 500 has fallen a cumulative 8.4%, pressured by a double hit from worries about artificial intelligence and the Middle East war—an event that has effectively sealed the Strait of Hormuz, cutting off a key channel for global energy supplies.

Wilson believes the market has already priced in growth risks fairly well, and the extent of valuation compression roughly matches historical correction patterns that occurred without recessions and without a Fed rate-hike cycle. However, he also cautioned that interest-rate sensitivity has risen to the highest level in recent years, with the yield on the 10-year U.S. Treasury note hovering near the key threshold of 4.5%; further rate hikes remain the core risk variable facing the stock market.

The extent of valuation compression is near historical correction ranges

In his weekly research report, Wilson said that since the 2025 highs, the forward price-to-earnings ratio of the S&P 500 has contracted by 17%, which is comparable to correction magnitudes in history that were not accompanied by recessions or Fed rate-hike cycles. At the same time, in the Russell 3000 index, more than half of its constituent stocks have fallen by over 20% from their 52-week highs.

The above data indicate that the market has priced in a considerable degree of risk stemming from the Middle East war. “We believe the stock market’s pricing of growth risk is not as indifferent as the market consensus suggests,” Wilson’s team wrote in the report.

Oil-price shock intensity is lower than historical precedents

Wilson made an important distinction between the current oil-price shock and historical cases. Brent crude touched $116.89 per barrel on Monday, and the U.S. troop buildup in the Middle East and the involvement of Yemen’s Houthi armed group further pushed up oil prices. However, Morgan Stanley’s commodity strategists forecast that oil will drop back to $80 per barrel after reaching $110 in the second quarter.

Wilson said that compared with past oil-price shocks that brought economic cycles to an end, the year-over-year increase in oil prices in the current episode is about half of the earlier figure. More importantly, current market earnings growth is in an accelerating phase rather than slowing or turning negative, which is starkly different from the backdrop during multiple historical oil-price shocks. Positive earnings growth will provide a buffer for the economy to withstand a downturn.

“The market’s pricing indicates that the cumulative probability of the Strait of Hormuz reopening oil tankers is far higher than the probability of a recession, and we agree with that,” Wilson’s team wrote. They also acknowledged that international markets face greater downside risk because they are highly dependent on imported energy.

Interest-rate risk remains the biggest hidden hazard in the near term

Although Wilson’s outlook for the correction being near its end is optimistic, he clearly lists monetary policy tightening as the main risk for U.S. equities in the near term. His research shows that the current negative correlation coefficient between rates and stocks is -0.5, and the market’s sensitivity to interest rates is at its highest level in recent years.

The yield on the 10-year U.S. Treasury note is currently nearing 4.5%, and it was at this level last year that the White House shifted its tariff policy. Wilson said that the U.S. Treasury market has already partially priced in the likelihood of rate hikes in 2026, even though Morgan Stanley economists’ baseline model still assumes several rate cuts.

“Regardless of whether today’s rise in yields is driven by inflation factors, the Fed’s hawkish stance, or deficit pressures triggered by the war, or by multiple factors combined, we believe this is a risk variable that needs to be given close attention,” Wilson’s team said.

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