US market correction nearing end, Morgan Stanley strategists say

Nov 2 (Reuters) - The US market correction that began in June is in its "final innings", Morgan Stanley strategists said on Monday, adding that the November 3 midterm elections should help remove a major market overhang.

"We expect near-term clearing events to provide an attractive opportunity to add risk to quality cyclicals that have de-rated as we head into 2027," strategists led by Michael Wilson, Morgan Stanley's chief US equity strategist, said.

• The S&P 500 is catching down to weaker market breadth, which is typically the last stage of a slump, Wilson said, noting 60% of Russell 3000 stocks have already seen at least a 20% correction since June

• The risk of a correction led by AI company earnings has kept markets on the edge. Last month, the tech-heavy Nasdaq-100 .NDX shed trillions of dollars in market value and was on the brink of entering correction territory

• Large-cap stocks have typically gained 15% in the six months following election results, they said, adding that a Democratic sweep is already priced-in by investors

• The bigger risk would be what comes after the vote, with the potential of renewed military escalation with Iran or new tariffs, Morgan Stanley said

• Recent earnings reinforce signs that the market correction could be nearing its end

• "Investors are no longer overlooking FCF shortfalls as they often did earlier in the cycle, consistent with a more typical mid- to late cycle environment where earnings durability and cash conversion matter more," Wilson said

• He does not expect the Federal Reserve to rush toward interest rate cuts or add support, relief could come from the US Treasury spending down its cash pile, from about $1.05 trillion to about $850 billion by year-end