Waiting for the Last Dip? Morgan Stanley's Wilson: Regardless of Election Results, It May Be a Good Opportunity to Buy U.S. Stocks

Author: Zhang Yaqi, Wall Street Watch

Mike Wilson, Chief U.S. Equity Strategist at Morgan Stanley, stated that the adjustment in U.S. stocks since June has entered the "final phase." Once the midterm elections take place tomorrow, market uncertainty will significantly dissipate, and high-quality cyclical stocks may present buying opportunities.

In a client report released on Monday, Wilson pointed out that regardless of the election results, the midterm elections themselves constitute a classic "clearing event." He cited historical data indicating that since 1982, large-cap stocks have averaged an increase of about 15% (market-cap weighted) to 16% (equal-weighted) within six months after midterm elections, with the gains further expanding to about 22% over the following year.

Regarding the election results, Wilson believes that the scenario of the Democratic Party sweeping both houses has been fully priced in by the market and does not constitute a significant surprise. At the same time, he also warned that post-election risks should not be overlooked—renewed military conflict with Iran and a new round of tariff policies are listed as the main potential threats.

Adjustment Nearing Its End, Market Showing Bottom Signals

Wilson and his team judge that the current adjustment is nearing its end, based on the resonance from multiple internal market indicators.

Among the constituents of the Russell 3000 index, 60% have cumulatively fallen more than 20% from the June peak, while the S&P 500 index has followed suit amid narrowing market breadth. Wilson pointed out that the pattern of individual stocks declining ahead of the index, followed by the index catching up in decline, is a typical characteristic when the market is nearing a bottom.

From recent market dynamics, since the end of September, the yield on 10-year U.S. Treasury bonds has fallen by nearly 40 basis points, and the proportion of S&P 500 constituents above the 200-day moving average has rebounded from about 42% to 62%, an increase of about 20 percentage points. The equal-weighted S&P 500 has risen nearly 5% during this period, outperforming the market-cap weighted index by about 6 percentage points. Wilson stated that this confirms the previous judgment—long-term interest rates are nearing their peak, and the equal-weighted S&P 500 is a more attractive expression of "broad-based trading."

The Nasdaq 100 index lost trillions of dollars in market value last month, nearing a technical correction zone. Wilson attributed the main trigger for this round of adjustment to the market's cautious attitude towards the earnings prospects of AI-related companies, emphasizing that the investor assessment framework has shifted—free cash flow (FCF) gaps are no longer tolerated, and profitability sustainability and cash generation capabilities are weighted more heavily, which aligns with the typical environment in the later stages of the economic cycle.

Limited Impact of Election Results, Policy Variables Remain Key

On prediction markets Kalshi and Polymarket, the probability of the Democratic Party sweeping both houses is 71% and 73%, respectively. Wilson believes this scenario has been digested by the market and is unlikely to trigger significant shocks.

Even if the Democratic Party achieves full control with a majority in the Senate, Wilson believes the direct impact may not be negative: delaying or reversing cuts to Medicaid and food stamps is expected to support consumer demand; companies may accelerate investment and merger activities in the short term to land before policy shifts in 2028.

However, Wilson emphasized that tariffs, foreign policy, and deregulation measures at the institutional level—policy variables that have had the most profound impact on the market over the past two years—are mostly still directly dominated by the executive branch and will not change due to congressional seat changes. "The stock market typically does not, and will not, price in two years in advance," he wrote.

In the scenario where the Republican Party maintains control of the Senate—Kalshi shows a probability of about 24%—Wilson believes the market may be forced to extend its focus to 2028, assessing the risks of deregulation policies facing resistance.

Liquidity Supplement May Provide Additional Support

On the monetary policy front, Wilson clearly stated that his judgment framework does not rely on the Federal Reserve shifting to rate cuts or introducing additional easing measures.

On the contrary, he views the decline in the U.S. Treasury General Account (TGA) balance as another path for liquidity supplementation. The Treasury's cash balance is expected to decrease from the current approximately $1.05 trillion to about $850 billion by the end of the year. As government spending is executed, this portion of funds will flow back into the market, forming a certain liquidity buffer.

Regarding the Russell 2000 small-cap index, Wilson's attitude is relatively cautious, believing that the required decline in interest rates for effective recovery of this index is still greater than the decline that has already occurred. This means that at this stage, he prefers to allocate funds to high-quality cyclical stocks with fully adjusted valuations rather than small-cap growth directions.

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