Morgan Stanley’s Wilson Says Get Ready to Buy as Stock Drop Ends

(Bloomberg) — Investors should prepare to add risk to their portfolios as a months-long pullback in parts of the equity market nears an end, according to Morgan Stanley’s Michael Wilson.

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While the S&P 500 Index is only 2% shy of its all-time high, valuations have retreated over the past months accompanied by a deterioration of breadth within the benchmark.

That pattern, characterized by an outperformance of the so-called quality factor and a decline in the equal-weighted version of the index, is set to come to an end, providing an opportune window to snap up stocks, the strategist said.

“We advise investors to be ready for either a very rapid reconciliation or a slower bleed into November because in our view, that will be the time to add risk rather than shun it,” Wilson said in a client note.

The strategist stuck with his preference for quality stocks, highlighting that it’s been economically sensitive sectors, such as financials, industrials and consumer discretionary stocks that have born the brunt of the valuation adjustment. De-rating in parts of the market has created entry opportunities in pockets with improving earnings-per-share momentum, such as capital goods, he said.

Wilson’s view may reassure some investors anxious that the recent surge in bond yields threatens to derail the artificial intelligence investment boom, which is increasingly reliant on fresh debt. Given the importance of AI in driving the four-year bull market, some market participants have said they see signs of bubble conditions forming.

At Goldman Sachs Group Inc., strategists noted on Monday that investor positioning is turning increasingly defensive, while peers at JPMorgan Chase & Co. said stabilizing bond yields could “go a long way” in supporting stocks.

Broader confidence in the outlook for equities is largely down to the robust prospects for earnings. S&P 500 companies are expected to report year-on-year profit growth of 24.6% in the third quarter, according to a Bloomberg Intelligence-compiled estimate.