Stocks now in 'the painful stage' before a more balanced bull market emerges, Morgan Stanley chief US equity strategist says

• The S&P 500 is in its final stage of correction before balancing out and ushering in a healthier bull market, Mike Wilson, chief US equity strategist at Morgan Stanley, said Monday.
• Tech stocks' recent dips mark "the painful stage" where market leaders enter the correction seen across other industries, he said.
• The decline is ultimately "a healthy development for the bull market," as it will broaden out the S&P 500's weighting and encourage a rotation from tech-crowding to non-tech cyclical stocks.
• Wilson expects the equal-weighted S&P 500 to outperform the market-cap-weighted index for the next few years as economic recovery pulls non-tech sectors from their bottoms.
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The stock market is in for some growing pains, Morgan Stanley said Monday.

The S&P 500 closed last week with a slight loss, failing to break out of a trading range to new highs. The dip was primarily driven by tech giants' declines as investors' lofty second-half hopes grappled with rising case counts and new economic threats.

Stocks now sit in "the final stage of the correction" before a healthier bull market emerges, Mike Wilson, chief US equity strategist at Morgan Stanley, said in a note.

"Despite new index recovery highs in the past few weeks, the average stock remains in a 'correction.' Now, we appear to have entered the painful stage as leaders take their turn," he wrote. "Ultimately, this is a healthy development for the bull market."

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Wilson's comments arrive as several strategists warn of concentration in tech stocks reaching dot-com-bubble levels of concentration. The bank's chief US stock chief didn't address such concerns, but noted that the upcoming recovery should counteract such crowding and make for a healthier investing environment. A more equally weighted market would be more insulated from a tech slump and jump higher when other sectors rebound, Wilson said.

Though the slide in tech stocks began last week, the broader market fell into a correction in early June. The equal-weighted S&P 500 has yet to retake its June 8 high since, as rising COVID-19 infection rates, election uncertainties, and stimulus expirations drag on most sectors. Market corrections typically don't end until they reach the leading names, Wilson said, and tech's latest dip marks a turning point for neglected equities.

"We think this relative outperformance can begin as market leaders rollover in the final leg of this ongoing correction," the strategist said.

Wilson expects the equal-weighted S&P 500 to outperform the market-cap-weighted index for the next few years as economic recovery pulls non-tech sectors from their bottoms and ends the broader stock correction.

"In short, it's not different this time," he added.

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