According to Morgan Stanley's chief strategist, if U.S. stocks experience a deep correction, it would represent the "ultimate starting gun" for a complete shakeout and a charge toward a major year-end rally.

Amid persistently rising U.S. Treasury yields and elevated market volatility, Morgan Stanley Chief U.S. Equity Strategist and Chief Investment Officer Mike Wilson believes that a moderate correction in the S&P 500 Index could actually create conditions for a stronger year-end rally. Wilson stated that if pressure in the bond market cannot be alleviated, U.S. equities could face greater volatility, with the S&P 500 potentially experiencing a 5% to 10% pullback. However, he believes such a correction would not necessarily signal a reversal of the long-term trend, but rather a restart after the market completes its internal adjustments. "Frankly, I would welcome such a correction," Wilson said on Morgan Stanley's podcast "Thoughts on the Market," noting that a final index-level correction is often one of the ways a months-long internal market adjustment process comes to an end.

U.S. Treasury Selloff Becomes the Biggest Variable for Stocks

The U.S. Treasury market has recently undergone dramatic adjustments. Since early September, U.S. Treasury yields have continued to climb, with the 30-year Treasury yield rising to a 22-year high and the 10-year yield reaching its highest level since 2007. High yields are becoming an important factor affecting stock valuations. Since long-term U.S. Treasury yields serve as a critical global asset pricing benchmark, their rise increases the discount rate applied to companies' future cash flows and adds pressure to stock market valuations. Wilson pointed out that the current 2-year Treasury yield is already significantly higher than the path forecast by Federal Reserve officials. On Tuesday, the 2-year yield briefly rose to 4.941%, above the Fed's latest median projections of 4.1% for 2026 and 2027, and 3.9% for 2028. He believes this indicates that the bond market may have recently priced in an overly hawkish rate path in the short term. However, Wilson did not argue that rising yields alone would necessarily derail the stock market rally. His concern is whether bond market volatility will further spread to the stock market, and whether financing pressures are beginning to affect corporate and investor behavior.

Improving Market Breadth Could Drive the Next Phase of Gains

Wilson believes that clear divergence has already emerged within the market. Some sectors that previously led the market higher have recently shown weakness, including autos, semiconductors, and industrial stocks. He stated that such conditions typically appear when the economic cycle enters its later stage and the Federal Reserve begins tightening policy. In this environment, market preferences may shift from chasing high-growth themes toward focusing on earnings quality, cash flow, and operational efficiency. Wilson said that if bond market pressures ease, the scope of the market rally could broaden, giving more stocks an opportunity to participate in the advance. "If these pressures ease, market breadth can catch up and drive the market higher; if they don't ease, the index may need further adjustment," he said. This echoes views from some Wall Street institutions recently. Previously, JPMorgan's trading desk argued that with yields gradually stabilizing and economic data remaining resilient, the short-term environment for U.S. stocks is improving, and it has turned bullish again.

Preference for Large-Cap Quality Companies and Cash Flow Assets

Facing a high interest rate environment, Wilson said he still favors large-cap, high-quality companies, especially those with stable business models, strong service attributes, and fee-based revenue models. He believes that during periods when rates remain elevated, the market typically reduces its reliance on pure growth stories and places greater emphasis on companies' actual profitability and cash flow generation capabilities. U.S. stocks are still in a high-valuation environment, with the artificial intelligence investment boom continuing to support the technology sector's performance, but rising bond yields are raising the market's requirements for earnings delivery. Wilson's judgment is that if bond market pressures decline in the future, U.S. stocks could see a broader rally; but if yields continue to climb rapidly, the S&P 500 may still need a correction to rebalance valuations and risks.