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- The S&P 500 will likely fall 10% in the near term before the bull market resumes, said Morgan Stanley's Mike Wilson on Monday.
- The investment chief said the benchmark's failed attempt to break through 3,550 last week signals that its correction that began in September is not over yet.
- Wilson added that the lack of fiscal stimulus, uncertainty around the election, and a second wave of coronavirus are headwinds to near-term stock gains.
- Investors should reallocate their portfolios with stocks that hinge on the economic reopening, he said.
The S&P 500 will likely see a 10% correction in the near term before the bull market continues, according to Morgan Stanley's chief investment officer.
"With so many uncertainties over the next month, we think another 10% correction from Monday's highs is the most likely outcome in the near term before this bull market can resume," Mike Wilson wrote in a Monday note.
The benchmark index saw its first 10% correction in the new bull market in September. After breaking 3,500, it quickly retreated 10%, explained Wilson. Last week, the S&P 500 attempted to break through 3,550 again, but failed, a sign that Wilson said demonstrates that the correction that began in September is not over.
Wilson added that the S&P 500's attempted breakthrough last week "occured on less momentum" than in September, which suggests that there is more downside to come before the bull market can resume.
"Last week's failure to break through technical resistance for the second time suggests the correction isn't over," said Wilson. "We expect softness into and past the election before the next leg of the bull market."
Wilson, who is also Morgan Stanley's chief US equity strategist, added that the lack of a fiscal stimulus deal, uncertainty surrounding the outcome and timing of the election, and a second wave of the coronavirus are headwinds to higher stock prices in the near term.
Going into any pullbacks, investors should look to reallocate their portfolios toward stocks that will benefit from the reopening of the economy, the investment chief said.
He added: "The best opportunities lie in stocks where earnings are growing with the cyclical rebound, and importantly, growing by enough to offset any headwinds from multiple contraction as rates move higher with the recovery."
These earnings-driven stocks have been outperforming, and Wilson said that this implies further upside ahead.
The S&P 500 fell as much as 0.8% on Monday and is trading at around 3,457.44 as of Monday afternoon.
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