(Bloomberg) - Accelerating earnings are protecting the S&P 500 from deeper losses and masking a broader pullback in US equities, according to strategists at Morgan Stanley.
The team led by Michael Wilson points to resilient earnings and continued economic recovery as reasons the S&P 500 has fallen less than 10% since hitting a record high in January. Beneath the surface, they see evidence that stocks are in the “final phase” of a correction.
There are better gauges to assess the US stocks retreat, they argue: S&P 500 earnings multiples have dropped 18% from an October peak, and more than half of Russell 3000 stocks are down at least 20%.
“To us, that’s not complacency, but a market that has appropriately and surgically discounted the risks both at the index and stock level,” said Wilson. Risks from private credit and artificial intelligence disruption have also been accounted for, he added.
The S&P 500 was set for renewed losses on Monday after talks between the US and Iran failed to produce a diplomatic resolution over the weekend and US President Donald Trump ordered a blockade of the Strait of Hormuz.
Despite all the risks, Wall Street analysts remain optimistic — they see 12% growth in first-quarter earnings for companies in the S&P 500. The reporting season kicks off this week, with Goldman Sachs Group Inc. releasing earnings on Monday showing its equity traders posted a second consecutive quarterly record.
The Morgan Stanley strategists continue to favor cyclicals — including financials, industrials and consumer discretionary — citing strong earnings and compressed valuations. They also see opportunity in quality growth stocks such as AI cloud service providers, where sentiment and valuations have reset to more attractive levels. At Goldman Sachs, strategists led by Ben Snider have pointed to opportunities in secular growth stocks, though they urged investors to be selective.
Investors should be ready to add risk, the Morgan Stanley analysts said, even if the Middle East war continues to raise questions over energy supplies and the path for monetary policy.
“The final phase of a correction is rarely easy and could require another re-test for markets, particularly if rates or bond volatility push higher again,” the team wrote.
By Levin Stamm
With assistance from Michael Msika
April 13, 2026
