Morgan Stanley’s Wilson said on Monday that the US stock market correction is largely done, with rates, not war, the final hurdle before equities resume higher.Summary:Wilson sees current weakness as a late-stage correction within an ongoing bull marketS&P 500 forward P/E down ~18%, a rare reset outside recession/tightening cyclesEarnings growth accelerating, not deteriorating, which is a key divergence vs past oil shocksBreadth damage severe, with >50% of stocks down 20%+, suggesting late-cycle correctionSupport at 6300–6500 held; downside risk seen as limited absent rate shockPrefers barbell: cyclicals (financials, industrials, discretionary) + hyperscaler growthMain risk is rates and policy, with 4.5% US 10Y a key valuation thresholdTighter conditions could trigger eventual dovish central bank pivotMorgan Stanley CIO and Chief U.S. Equity Strategist Mike Wilson argues that the recent equity drawdown should be viewed as a late-stage correction within an ongoing bull market, rather than the start of a broader downturn.Wilson maintains that the current bull cycle began in April last year, following what he describes as a “rolling recession” spanning 2022 to 2025. Despite multiple headwinds, including geopolitical tensions in the Middle East, persistent conflict in Ukraine, concerns around private credit, and disruption from artificial intelligence, the broader recovery trend in equities remains intact.He highlights that markets have already undergone a meaningful reset. The S&P 500 Index forward price-to-earnings multiple has declined by around 18%, a magnitude typically associated with recessions or aggressive central bank tightening cycles. Wilson notes that neither condition appears likely at present. At the same time, earnings growth is not deteriorating, in fact, it is accelerating to multi-year highs, marking a key divergence from prior oil-shock episodes that tipped economies into recession.Beneath the index level, the correction has been more severe. Over half of stocks have fallen at least 20% from their peaks, with many down 30–40%. Such broad-based drawdowns are historically more consistent with late-cycle corrections than early-stage declines, suggesting the market may be approaching a bottoming phase.Technically, Wilson points to the S&P 500 finding support in the 6300–6500 range, a zone that held during last week’s rebound. While a retest remains possible, particularly if bond yields rise further or geopolitical risks intensify, he does not expect a sustained breakdown. Instead, he sees scope for additional “clearing” in crowded areas of the market, particularly semiconductors and memory stocks, where positioning remains elevated. A further unwind in these trades could help solidify a durable low.From a positioning standpoint, Wilson advocates a barbell strategy. On one side, he favours cyclical sectors such as financials, industrials, and consumer discretionary, where earnings momentum remains robust and valuations have compressed. Recent labour market strength, highlighted by a sizeable gain in private payrolls, reinforces the view that the economic recovery remains intact.On the other side, he sees opportunity in large-cap growth, particularly hyperscale technology companies. These firms are now trading at valuation multiples comparable to defensive sectors like consumer staples, despite delivering significantly stronger earnings growth. Sentiment and positioning in these names have deteriorated to levels last seen during the 2022 bear market, creating what he views as an attractive risk-reward setup.Looking ahead, Wilson identifies interest rates and central bank policy, not geopolitics, as the primary risk to equities. He notes that markets have shifted back into a regime where stocks and bond yields are negatively correlated, meaning higher yields weigh on valuations. A 4.5% level on the U.S. 10-year Treasury is flagged as a key threshold beyond which equity valuations could face renewed pressure.However, tighter financial conditions, driven by rising yields and elevated bond volatility, may ultimately prompt a more dovish response from central banks. Wilson argues that policymakers retain flexibility and have demonstrated a willingness to ease conditions if tightening becomes excessive.In his view, markets have already priced in a wide range of risks, including geopolitical escalation, private credit concerns, and potential downsides from AI adoption. The remaining hurdle lies in navigating interest rate levels, policy expectations, and volatility. Once these factors stabilise, he expects a clearer path forward for equities. This article was written by Eamonn Sheridan at investinglive.com.