Investing.com -- Morgan Stanley strategist Michael Wilson said in a note Monday that the broader U.S. equity correction may be nearing its end.

Wilson pointed to the breakout in the quality factor and widening earnings revision gaps as signs that the mid-cycle transition has further to run.

The strategist noted that the bank’s quality factor has hit a new 52-week high, gaining about 6% since mid-August, while over the same period, the equal-weight S&P 500 has fallen nearly 4%.

The spread in earnings revisions breadth between high- and low-quality stocks has reached nearly 10%, the second-widest reading since 2010, according to Morgan Stanley. Historically, quality has outperformed by an average of 7.5% over the following year at similar levels. Relative valuation for the factor remains near its historical median.

Wilson said financial conditions are effectively doing the Fed’s work. The bank’s composite of rates, the dollar and energy is at its tightest since 2022, and economically sensitive stocks are down nearly 10% since mid-August.

“We think some acknowledgment of this tightening by Warsh would be well received by rate-sensitive areas that have already de-rated notably,” he wrote.

“Equity and other risk markets have been correcting for more than three months,” Wilson added, describing this as a migration from early cycle to mid cycle, occurring as the AI trade shifts from enablers to adopters.

“The finality of such corrections typically end with the high quality index catching down even as the factor itself holds up,” Wilson said.

He added that this could happen quickly or slowly.

“Be ready either way as this will likely mark the end of the correction, rather than something more ominous about the end of the business or capex /credit cycle,” the strategist wrote.

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