Strategists urge investors to embrace the recent market weakness
Wall Street strategists are bullish despite the S&P 500’s biggest fall since April, arguing that the recent correction creates attractive buying opportunities.
The recent market sell-off that spooked many investors could be exactly what was needed, according to Wall Street strategists who argue that the pullback is largely over.
Despite the S&P 500 tumbling as much as 5.8 per cent from its record high of 6920.34 in late October – its biggest fall since April – top strategists are maintaining bullish calls for 2026 and urging clients to use any further weakness to add to their positions.
Morgan Stanley chief investment officer Michael Wilson sums up the view: “Near-term weakness is medium-term bullish”.
He argues that two thirds of the largest 1000 stocks have already fallen more than 10 per cent from recent peaks, suggesting the damage is largely done.
“We think the weakness under the hood is a sign that we’re closer to the end of this correction than the beginning,” Wilson says. His team maintains “high conviction” in a bullish 12-month view and sees any further weakness as “an opportunity to add long exposure into next year”.
Back home, Australia’s ASX 200 has suffered even more, plunging as much as 8 per cent after hitting a record high of 9115.2 points last month. Interestingly, despite two of its biggest “up days” in months, the ASX is yet to string together two consecutively since peaking five weeks ago.
But the optimistic case rests on several powerful pillars. First, earnings expectations for 2026 are robust. Wilson’s team forecasts 17 per cent earnings growth next year, well above the 14 per cent Wall Street consensus.
For Australia’s ASX 200, UBS this week predicted a double-digits percentage rise in EPS next year.
Secondly, signs of labour market softening should eventually force the US Federal Reserve to cut interest rates more aggressively than markets expect.
That shift in Fed expectations is already under way. The market-implied likelihood of a 25 basis-point rate cut at next month’s meeting has surged from about 60 per cent to 87 per cent in the past week alone, driven mainly by dovish comments by Fed officials, including key allies of chair Jerome Powell – John Williams and Mary Daly.
Wall Street Journal Fed whisperer Nick Timiraos writes that they have “laid the groundwork for him to push a rate cut through a divided committee at next month’s meeting even though it could draw multiple dissents”.
Back home however, the Reserve Bank shows no such urgency; markets are pricing just a 7 per cent possibility of a December cut. But that won’t matter much if a US rate cut gives global stocks a tailwind.
Goldman Sachs head of asset allocation research Christian Mueller-Glissmann agrees the setup is “modestly pro-risk” despite increased near-term dangers. “US earnings should drive attractive returns, with earnings sentiment still positive, even outside tech,” he says.
Bell Potter’s Richard Coppleson believes the worst may already be over. “As we know the two big worries in the US have been the AI bubble and no cut by the Fed in December,” he says.
“Well the AI bubble fears were alienated after yet another big result for Nvidia, and the other massive worry – that no rate cut was coming in December – has done a U-turn and caught so many off guard.”
He says many investors thought these two catalysts would trigger a bigger correction.
“The 5 to 8 per cent correction that I’ve been waiting for looks to have come and the lows have probably been set in this sell-off,” he says.
In an encouraging sign, volatility in both stocks and bonds appears to have peaked in recent days, with the VIX index of S&P 500 volatility falling sharply after testing its October high.
Yet not everyone is convinced the turbulence is over.
Citi chief US equity strategist Scott Chronert describes investor sentiment as “exhausted” as the holiday season approaches.
“The strong equity move off the April lows, coupled with limited stock price gains despite good earnings, suggests investors may be inclined to secure profits into year end,” he says.
All three strategists point to lingering concerns about the massive spending spree on AI infrastructure and whether it will ever pay off.
Companies are increasingly using debt to fund AI spending, and cash balances are declining to levels more typical of ordinary industrial companies. Goldman Sachs says that credit spreads for big technology firms have widened relative to the broader market, hitting a 15-year high.
The so-called “Magnificent Seven” technology stocks – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla – are also fracturing. While Nvidia has surged 36 per cent this year and Alphabet 67 per cent, Meta, Tesla and Amazon have barely moved.
The Wall Street Journal writes that investors are “straining to absorb a flood of new bonds from tech companies funding their artificial intelligence investments, adding to the recent pressure in markets”.
The prices of these bonds have been sliding – a sign that investors were “caught off guard by the sheer quantity of bonds entering the market and of growing concern about the worsening credit metrics of the businesses”.
Oracle credit default swaps shot up to a three-year high recently.
“The days of the Magnificent Seven as a tradeable cohort are mostly behind us,” Chronert argues.
“Instead, the markets are weighing in that the individual components of the group are increasingly trading on their idiosyncratic fundamental setups.”
He says that at current levels, roughly 80 per cent of the S&P 500’s value is based on expectations of earnings far into the future, or what analysts call “terminal value”.
An index at 7000 would require investors to bet on a terminal price-to-earnings multiple above 21 times, which is near the top end of historical ranges.
“The market is weighing the productivity promise of AI against its implications for labour and business models,” Chronert says.
Perhaps the most telling sign of the shift in psychology is that US supermarket giant Walmart jumped after strong earnings last week even though it trades at a higher forward price-to-earnings ratio than Nvidia. Investors, it seems, have more confidence in the Walmart’s future than in the chip maker at the heart of the AI revolution.
It will be a holiday-shortened week in the US, with markets closed for Thanksgiving on Thursday and a half day on Friday.
For Australian investors watching from afar, the message from Wall Street’s bulls is clear: the sell-off has created attractive entry points for those with a 12-month horizon.
Whether they’re right will depend on earnings growth materialising and the Fed delivering the rate cuts markets now expect.
Originally published as Strategists urge investors to embrace the recent market weakness
John Ibrahim sues Adgemis backer over pub wreck
