Stocks likely to see 10% correction on earnings decline and mounting election uncertainty, Morgan Stanley CIO says

• Morgan Stanley predicts stock prices will likely fall about 10% between now and the November election.

• The bank’s Mike Wilson said this was because corporate earnings appeared weak and several factors were needed to improve them.

• Other forecasters are sounding the alarm, predicting an imminent correction as stocks appear overvalued.

Mike Wilson of Morgan Stanley predicts that stock prices will fall by several percent.

The bank’s CIO and chief U.S. equities strategist warned of an impending stock market correction, which he said would be driven largely by weak outlooks for corporate earnings and the economy in the run-up to the presidential election.

“If you have bad earnings reports, you get punished. That’s been consistent all year, which is why the average stock market is down this year,” Wilson told Bloomberg in an interview on Monday.

While the S&P 500 has hit several record highs this year, the benchmark index relies heavily on a handful of growth stocks that have posted outsized gains amid investor frenzy over all things artificial intelligence.

The weak earnings outlook is further compounded by the fact that inflation is falling, which is denting corporate profits as their ability to set prices weakens, Wilson said.

“The average company does not achieve good financial results,” he added.

According to Wilson, it will take a number of factors for the stock market to turn around and sustain itself for the rally to continue, pointing to various headwinds such as high interest rates and a tough job market.

Those headwinds tend to disappear as the economy enters a new business cycle, Wilson added, noting that the Russell 2000 index of small-cap stocks typically posts above-average gains when the economy is in recession. Until then, investors are exposing themselves to the risk of stocks falling precipitously, he suggested.

“What worries me is that this momentum is so strong … and if something unforeseen happens, you could have a real 10% to 15% valuation reset,” Wilson said of stocks. “I think the chance of a 10% correction is very likely between now and the election.”

Other forecasters have signaled the risk of a near-term stock correction given the high valuations. Prominent bears like John Hussman and fund manager Mark Spitznagel have sounded the alarm about a double-digit stock crash, pointing to similarities between today’s market and previous bubbles.

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