Waiting for the Final Dip? Morgan Stanley's Wilson: Regardless of Midterm Election Outcomes, It Could Be a Prime Opportunity to Buy U.S. Stocks
Written by: Zhang Yangqi, Wall Street CN
Morgan Stanley Chief U.S. Equity Strategist Mike Wilson stated that the U.S. equity market correction since June has entered its "final stage." Once the midterm election held tomorrow concludes, market uncertainty will dissipate significantly, creating potential buying opportunities for high-quality cyclical stocks.
In a client report released on Monday, Wilson pointed out that regardless of the election outcome, the midterm election itself constitutes a classic "clearing event." Citing historical data, he noted that since 1982, large-cap stocks have risen by an average of approximately 15% (market-cap weighted) to 16% (equal-weighted) within six months following midterm elections, with gains expanding further to around 22% over the subsequent year.
Regarding election outcomes, Wilson believes the scenario of Democrats sweeping both chambers has been fully priced in by the market and does not constitute a major surprise. Meanwhile, he warned that post-election risks should not be overlooked—resumption of military conflict with Iran and a new round of tariff policies are listed as the primary potential threats.
Correction Nears End, Market Shows Bottom Signals
Wilson and his team judge that the current correction is entering its final stage, based on a convergence of multiple internal market indicators.
Among Russell 3000 Index constituents, 60% have already fallen cumulatively by more than 20% from their June highs, while the S&P 500 Index followed suit amid narrowing market breadth. Wilson pointed out that the pattern of individual stocks falling ahead of the index, followed by catch-up declines in the index, is a typical characteristic of markets nearing their bottom historically.
Looking at recent market dynamics, since the end of September, the yield on the 10-year U.S. Treasury bond has declined by nearly 40 basis points, and the proportion of S&P 500 constituents trading above their 200-day moving average has rebounded from approximately 42% to 62%, a rise of about 20 percentage points. The equal-weighted S&P 500 rose by nearly 5% during this period, outperforming the market-cap weighted index by about 6 percentage points. Wilson stated that this confirms their prior assessment—that long-end rates have neared their peak, making the equal-weighted S&P 500 a more attractive vehicle for broad-market trading.
The Nasdaq 100 Index wiped out tens of trillions of dollars in market capitalization last month, briefly approaching the threshold for a technical pullback. Wilson attributed the main catalyst for this round of correction to the market's cautious stance on the earnings prospects of AI-related companies, emphasizing that investor evaluation frameworks have shifted—free cash flow (FCF) shortfalls are no longer tolerated, and earnings sustainability and cash generation capacity carry higher weight, which aligns with typical conditions in the middle-to-late stages of the economic cycle.
Election Outcome Impact Limited, Policy Variables Remain Key
Prediction markets Kalshi and Polymarket price in the probability of Democrats sweeping both chambers at 71% and 73%, respectively. Wilson believes this scenario has been absorbed by the market and is therefore unlikely to trigger a significant shock.
Even if Democrats achieve unified control through a Senate majority, Wilson argues the direct impact may not necessarily be bearish: delaying or reversing cuts to Medicaid and food stamp programs could support consumer demand, and corporate investment and M&A activity might accelerate in the short term as firms rush to execute before potential policy shifts in 2028.
However, Wilson emphasized that tariffs, foreign policy, and de-regulation initiatives at the agency level—the policy variables that have had the deepest impact on the market over the past two years—are mostly still directly controlled by the executive branch and do not change with shifts in congressional seats. "Stock markets typically would not, nor could they long-term, price in events two years in advance," he wrote.
In the scenario where Republicans maintain control of the Senate—Kalshi shows a probability of approximately 24%—Wilson suggests the market might be forced to look ahead to 2028 to assess the risk of resistance to deregulation policies.
Liquidity Infusion May Provide Additional Support
On the monetary policy front, Wilson made it clear that his analytical framework does not presuppose a Federal Reserve shift toward rate cuts or additional easing measures.
Instead, he views the decline in the U.S. Treasury General Account (TGA) balance as another path for liquidity replenishment. The Treasury's cash balance is expected to fall from approximately $1.05 trillion currently to around $850 billion by year-end, and as government spending executes, these funds will flow back into the market, providing a degree of liquidity buffer.
Regarding Russell 2000 small-cap stocks, Wilson maintains a relatively cautious stance, believing that the required decline in interest rates for the index to achieve a meaningful recovery still exceeds the reductions that have already occurred. This means that at this current stage, he prefers allocating capital to large-cap high-quality cyclical stocks whose valuations have fully corrected, rather than leaning toward small-cap growth.