As of October 16, the S&P 500 Index closed at 7,659.44 points, a drop of 1.09% for the day and a total decline of 1.95% for the week, significantly influenced by a sell-off in technology stocks related to AI and rising borrowing costs. On October 19, pre-market trading showed a slight rebound, with S&P 500 futures rising approximately 0.5% as the index aimed to recover towards 7,600 points. Morgan Stanley has indicated that the current correction in the U.S. stock market may be nearing its end.
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According to Mike Wilson, Morgan Stanley's chief U.S. equity strategist, stocks have experienced a "rolling correction" over recent months. He cautioned that if volatility in the bond market continues, the S&P 500 could see a further pullback of 5% to 10%. However, Wilson suggested that such a drop might signify the conclusion of this protracted correction. He posits that the current environment reflects a mid-cycle correction within a bull market rather than a reversal of the overall trend.
Despite the S&P 500's year-to-date increase of approximately 11.9%, underlying market conditions appear weaker. Data shows that around 62% of S&P 500 constituents have recently fallen below their 50-day moving average, with the index's performance largely buoyed by a select few large tech companies. Earnings projections for the third quarter of 2023 indicate an expected year-over-year growth of about 30.6% for S&P 500 companies; however, excluding major tech firms, overall earnings growth is markedly slower.
The market's ability to finalize its correction hinges on two critical factors: the demonstrable translation of AI capital expenditures into revenue and cash flow through upcoming earnings results from significant firms like Meta and Tesla, and the continued decline of U.S. Treasury yields, especially as the 10-year yield recently surpassed 5%, putting pressure on stock valuations. Morgan Stanley continues to target a year-end S&P 500 index level of 8,000, favoring large companies with stable earnings and high free cash flow.
From a technical perspective, the S&P 500 has broken below its 10-day, 20-day, and 60-day moving averages, suggesting a bearish short-term outlook. Current technical indicators, such as the Relative Strength Index (RSI), resting around 44, indicate the index is in a neutral-to-weak position, with potential for further decline.
Key support levels include 7,610. Should this level fail, the index may revisit its September 16 low near 7,500. Conversely, if the index can recover above 7,600 and reach 7,700, attention will shift to overcoming resistance at the 20-day moving average around 7,740, with further targets in the 7,800–7,845 range.
This article is for informational purposes and does not constitute investment advice. Readers should consult an independent financial advisor before making any investment decisions.