• Morgan Stanley analysts predict that stocks are set for a 10% correction in the coming months after the huge gains seen since the early days of the coronavirus pandemic.
  • Morgan Stanley analysts led by Michael Wilson wrote Monday: “We think the most likely outcome remains a 10% correction in the broader index led by the beneficiaries before the recovery and bull market continues.”
  • They are expecting the economy to have a “surprising recovery” later in the year and through 2021, which will see markets bounce back.
  • In the same note, Wilson and his team suggested a way for investors to capitalize on the coming slide in stocks, and warned of the threat of rising inflation in the US.
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Stocks will fall 10% before a “surprise” economic recovery takes place later in the year and into 2021, pushing markets back up, analysts from Morgan Stanley said this week.

A Morgan Stanley team, led by Michael Wilson, said in a research note Monday that a resurgence in coronavirus cases, and uncertainty stemming from the upcoming US presidential election, are factors that will likely push stocks lower in the coming months.

Wilson, along with colleagues Adam Virgadamo, Andrew Pauker and Michelle Weaver, said: “We think the most likely outcome remains a 10% correction in the broader index led by the beneficiaries before the recovery and bull market continues.”

Morgan Stanley’s warning comes as stocks continue to add to their gains this yea r.Tech stocks in particular have soared during the pandemic. For example, the Nasdaq is up 27% since the start of the year, while Apple’s stock is up almost 50%, and Amazon has risen 70%.

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The US bank thinks that tech stocks will fail to escape the wrath of uncertainty and a correction, but will ultimately bounce back.

"Once the correction is complete we expect the bull market to continue to broaden out and based on what we think will continue to be a surprising recovery in the economy and earnings later this year and into 2021," the analysts wrote.

Morgan Stanley's call is likely to reassure some investors, as many in markets fear that the seemingly weak recovery of the US economy - GDP contracted 33% in the second quarter - could push stocks lower in the longer term. Morgan Stanley is one of the few banks still expecting a V-shaped recovery in the economy.

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The US banking giant also said that stock markets are being overly bearish in their expectations of Q2 earnings.

Morgan Stanley said markets are currently pricing in sales and earnings to be down 10% to 36%.

"However, upside surprise in S&P 500 earnings this quarter is one for the record books at 22%, vs a normal range of 4-6%, driven by a mix of better than expected sales and aggressive cost cutting to protect margins," the bank said.

Morgan Stanley said: "This is very much in line with our V-shaped recovery for the economy and earnings. It's also supportive for our call for a rotation to the biggest laggards of the pandemic because those revisions have the most potential upside over the next 6-12 months."

In the same note, Wilson and his team suggested a way for investors to capitalize on the coming slide in stocks, and warned of the threat of rising inflation in the US.