Morgan Stanley issues strong opinion on S&P 500

Morgan Stanley's Mike Wilson said on Monday that the stock market's four-month correction was nearing its end, telling CNBC that last week's sharp selloff marked the start of its final phase and created an opportunity to buy semiconductor stocks. "This is the final innings," Wilson said. "We don't know exactly when it's going to end, but we're into the zone." He put the likely bottom for the S&P 500 at 7,100 to 7,300.

Wilson said most stocks had already been in a deep slump before last week, and that the S&P 500 had held up only because a small group of large companies kept rising. "What was missing in this correction that began four months ago was that the S&P 500 was just really holding up in a way that typically is unusual, that has to get hit again," he said. "Thursday to me was the beginning of that process where the S&P catches down to what has really been a pretty devastating correction under the surface."

He expects the S&P 500 to rally toward 8,000 by year-end once the correction ends. He also pointed to historical outperformance of stocks following U.S. midterm elections, saying, "Don't second guess it," and that "every midterm election, the six to 12 month period post the midterms is really, really good."

Wilson said investors should now be looking for opportunities in semiconductor stocks rather than avoiding the sector. He noted that chip stocks have fallen about 40% from their highs, while some individual names have dropped 70% to 80%. "The time to be negative on semis was back in June and July, and we've had a severe correction in that sector," Wilson stated.

The iShares Semiconductor ETF (SOXX) lost more than 12% on Thursday, its steepest one-day decline since March 2020. SOXX shares gained 4.5% in Monday morning's recovery. U.S. equities rocketed in morning trade on Monday, recovering from last week's massive sell-off. The SPDR S&P 500 ETF (SPY) was up 1.69%, the SPDR Dow Jones Industrial Average ETF (DIA) gained 1.38%, and the Nasdaq-100 tracking Invesco QQQ Trust (QQQ) moved more than 2.5% higher.

Wilson forecast that companies would continue investing in artificial intelligence infrastructure despite concerns about the scale of spending. "This capex is going to happen. The capital's been raised," Wilson said. "The market now is priced for a slower trajectory. To me, that's an interesting entry point, not a sell point, but it could take another week or two." He favored higher-quality semiconductor companies with stronger balance sheets and cash flow over lower-quality stocks that led the rally earlier this year, a view he said holds "notwithstanding the news over the weekend," referring to the investigation involving Nvidia CEO Jensen Huang.