The S&P 500 has been struggling since summer, and last week’s tech-led 2.7% drawdown has left many investors wondering whether the index is a buy. In a research note shared with me, Morgan Stanley’s veteran analyst Mike Wilson thinks the answer is yes, but with an asterisk.
Since summer, Wilson’s outlook has been for the S&P 500 to test the 7,100 to 7,300 range, where considerable support exists. At last week’s low, the benchmark reached 7,350, close enough to prompt a relief rally, but not necessarily an “all clear” sell-off that would lead Wilson to model for a straight line higher.
Instead, Wilson believes that the S&P 500 could retest last week’s low, setting the stage for a more durable rally.
“Technically, we favor a retest in the coming week(s) that could reach the low end of our target range, after which we think price action resolves to the upside into year-end. Rather than waiting for a perfect low, we recommend adding exposure over the next few weeks to quality cyclicals that have de-rated materially and are exhibiting strong EPS revisions,” wrote Wilson.
The sell-off gets toward the final stage
Wilson warned during the summer that the S&P 500 could see a rotation that weighs down technology stocks. That was a correct call, given technology, led by semiconductors, has retreated, while other sectors, including financials, have rallied.
From June 30 through the sell-off low on Thursday, Nov. 5, the State Street Financial Select Sector SPDR ETF (XLF) gained 7.6% while the State Street Technology Select Sector SPDR ETF (XLK) lost 14.7%.
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“Back in June, we called for a period of material underperformance in Semis as EPS revisions breadth for the space was likely to peak,” said Wilson. “We now think we’re closer to the end of that correction given the price damage already sustained, with the Philadelphia Stock Exchange Semiconductor Index (SOX) down ~40% since June.”
The steep drop in the semiconductor industry includes high-profile companies that have been hit especially hard. Micron and SanDisk, for instance, fell 43% and 64.5% from June 30 to last week’s low. I
previously wrote about five tech stocks that had fallen more than 50%, including SanDisk (SNDK), and noted on Friday that I’d started buying again because of Thursday’s sell-off, picking up exchange traded funds and shares in SanDisk.
The potential for stocks to move meaningfully higher from here, however, may hinge on a successful test of the lows that shakes out the last sellers, providing a launch pad for a more sustainable run.
“Based on the extreme downside momentum observed last Thursday, we would expect the index to break to new lows versus last week and reach our range on lower momentum. This would serve as a classic “re-test” that marks the end of the correction and then resolves to the upside into year-end and 2027. This is the ideal technical pattern and provides a good strategy for adding risk over the next week(s),” wrote Wilson.
Stocks to buy if S&P 500 retests
Wilson has favored non-technology stocks since the summer. He thinks that one more move lower could create good opportunities.
“In our view, we are close enough to start adding individual names that have already de-rated severely,” said Wilson.
One area he likes is industrials, saying they offer attractive risk/reward on “broadening in the ISM backlog data,” and the Cass Freight Index data showing “improving shipping growth for the first time in nearly 4 years.”
Wilson also thinks that there could be opportunities in semiconductors, given how hard-hit they have been, but investors interested in that industry shouldn’t chase and should stay focused on high-quality players.
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“Semis have led on the downside in this final phase, and are close to the downside targets pointed to by our silver stock analog,” wrote Wilson. “Investors should also be more selective in this classic early cycle group and stay up the quality curve.”
Instead, Wilson suggests a better area to target is companies adopting AI, especially quality names that can leverage AI for productivity and cost savings.
“AI adoption fits well with this rotation and remains our highest-conviction theme into 2027,” wrote Wilson.
Among the companies on Morgan Stanley’s list that are adopting AI are financial services firms, which are already using AI to help with loans, customer service, and hedging. Morgan Stanley specifically highlighted Bank of America, Citigroup, and JPMorgan Chase as stocks within its AI adopter universe with at least 20% upside to its price target.
