Morgan Stanley says the market correction is entering its final phase

The market correction that began in June is entering its final stage and is likely setting up for a year-end rally, according to Morgan Stanley, the New York investment bank. Strategists led by Mike Wilson say the last phase of the drop involves the S&P 500's breadth narrowing as the index approaches the bank's 7,100 to 7,300 downside target.

Futures linked to the S&P 500 point toward a rise of 0.2%, to open at 7,417.50. Two main factors pushed the benchmark index here: the Federal Reserve's increasingly hawkish stance and the peak rate of change in earnings per share and revenue growth outlooks.

Wilson and his team believe the S&P 500 could fall to the low end of that target range in the coming weeks before moving upward again. Rather than waiting for a perfect low, the team recommends adding exposure over the next few weeks to quality cyclicals that have de-rated materially and show strong earnings per share revisions, according to MarketWatch.

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In 2028, they expect this figure to rise into the middle-single-digit range. Even in a possible bear market where data center capacity gets moved beyond that timeline, the strategists anticipate only a marginal impact on index earnings and revenues. Check your index fund holdings and retirement accounts as the market works through its final correction phase.