Buy selloff in U.S. stocks after Moody’s cut: Morgan Stanley’s Wilson

Investing.com -- Morgan Stanley’s Michael Wilson sees the recent selloff in U.S. equities following Moody’s downgrade of the U.S. credit rating as a potential buying opportunity, driven more by interest rate fears than fundamentals.

In a note this week, Wilson emphasized that Moody’s action, while impactful, should be viewed in context. 

“Moody’s is the last ratings agency to downgrade the U.S. credit rating, a process that began 14 years ago in the summer of 2011,” he wrote. 

The move, coupled with bond yields hovering near critical levels, has increased rate sensitivity for stocks. “A breakout of the 10-year yield above 4.50% would take this correlation negative, and drive more rate sensitivity for equities,” Wilson said.

Despite the credit-related jitters, Morgan Stanley (NYSE:MS) highlighted that volatility has subsided following a surprise trade deal with China. 

“We check off the first item on our list of catalysts for a more durable rally—a trade deal with China,” the analysts wrote, pointing to a sharp drop in the effective tariff rate from 145% to 30%.

However, the note cautioned that continued market gains depend on earnings momentum. “The burden is on rebounding EPS revisions to push the rally beyond 6100 short-term as rate relief appears less likely,” the strategists wrote, citing stable yields and limited prospects for Federal Reserve rate cuts.

Overall, the bank believes a break above 4.50% in the 10-year yield can lead to “modest valuation compression (5% compression is around what we’ve gotten in prior historical analogs),” and they “would be buyers of such a dip.”

Morgan Stanley sees cyclical sectors like Industrials leading in revisions breadth, while remaining cautious on Consumer Discretionary and Staples.