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Why Stocks May Be Heading for a 10% Correction
They say what goes up must come down, but if you’re the current stock market, the decline has taken a wild turn that may be about to straighten out.
“We believe this is the time for consolidation of gains,” said Morgan Stanley’s closely watched chief investment officer. Mike Wilson told Yahoo Finance’s executive editor Brian Sozzi in your Initial bid podcast (watch the video above or listen to here).
Wilson believes stocks are headed for a 10% correction in the third quarter, due to low summer trading volume and growing concerns about the presidential election in November.
The market generally ignored Wall Street’s correction predictions for much of the year.
The S&P 500 is up 14% year to date amid strong corporate earnings and interest rate advances rate cuts this fall. The Nasdaq Composite is up 13% this year, fueled by AI optimism. And the Dow Jones Industrial Average posted a respectable 6% gain.
But cracks are appearing in the “bull” thesis.
The Nasdaq has been hit nearly 3% in the past five trading sessions on valuation concerns, mixed results of the alphabet (GOOG, GOOGL), It is frankly poor earnings figures from Tesla (TSLA).
The darling of the market Nvidia (NVDA) he has has fallen more than 5% in the last five dayswhile rival AMD (OMG) fell by about 10%.
In the last 10 daysthe S&P 500 fell about 3%, while the Nasdaq fell more than 6%.
Wilson believes these cracks could spread and weigh further on stocks in the near term.
He points to the ISM Manufacturing Index remaining “in contraction territory.” Manufacturing’s woes are easing, but services, which still account for 70% of the economy, are now weakening “substantially.”
“Where we are it is late [economic] cycle yet,” adds Wilson.
With economic growth deteriorating, Wilson notes, stock multiples are rising “because of the hope that the Fed will ease policy.” That’s an undesirable scenario for investors to get into stocks, Wilson says.
And so does the fact that the government is spending “lots of money on fiscal policy to keep things going.”
The AI sell-off could also continue, further damaging market sentiment.
“We believe AI will lead to productivity gains over time, but expectations were ahead of the timing of this development,” Wilson said.
Wilson isn’t the only short-term pessimist.
Veteran strategist Keith Lerner Truist’s CEO says the “corrective period” in tech still has further to go. He downgraded his views on tech stocks in June.
Lerner added: “This choppy market action of late is consistent with our expectations and should continue. Our base case is that the long-term bull market remains intact, but it is usually two steps forward and one step back.”
The story continues
Three times a week, executive editor of Yahoo Finance Brian Sozzi Insightful, market-focused conversations and chats with the biggest names in business Initial bid. Find more episodes on our video center. Watch on your preferred streaming service. Or listen and subscribe at Apple Podcasts, Spotifyor wherever you find your favorite podcasts.
Below Initial bid episode, EMJ Capital founder Eric Jackson makes the case for doubling Nvidia’s stock price despite valuation concerns.
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