Morgan Stanley Warns a 2nd Market Correction Is Coming

Weakness in once market-leading tech threatens to reprise the winter 10% slide, the firm says.

To the growing chorus of bearish views, add that of Morgan Stanley. The mammoth investment firm believes that a stock selloff is coming that will be at least as deep as last winter’s.

In late January through early February, the market fell more than 10%, which means it went through a correction. Since then, stocks have fitfully nudged up to match the January 26 record high. The S&P 500 closed slightly up on Tuesday, and needs to rise 2% more to reach the peak.

The villain of the winter slump was a reaction to a higher-than-expected employment report and wage growth, which spooked investors into thinking that the Federal Reserve would overreact by jacking interest rates up quickly. Since then, the Fed under new Chairman Jerome Powell has made clear that it intends to proceed on a gradual regimen of rate hikes.

This time, Morgan Stanley wrote in a research note, the problem is the weaker-than-usual showing of some signal tech stocks that have led the rally. 

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Chief US equity strategist Michael Wilson conveyed his unease in the note this way: “The weaker earnings beat from several tech leaders and outright misses from Netflix and Facebook were simply additional support for our call.” In other words, failing to beat analysts’ expectations by the usual wide margin is cause for concern.

A new market dip would rope in consumer discretionary and small-cap stocks, as well as tech, Wilson contended.

To be sure, earnings results, aside from some once-high-flying tech companies like Netflix and Facebook, are healthy so far this season. But the question has long remained: Will they ebb in the year’s second half? And the stock market is always more concerned about the future.

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