Quick overview

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Strategists at Morgan Stanley are urging investors to lean into risk assets, even as the war in the Middle East continues to weigh on global markets.

While the conflict has shaken investor sentiment, the bank says a rebound in corporate earnings is helping shield the S&P 500 from deeper declines and masking a broader pullback across U.S. equities.

The team led by Michael Wilson points to resilient earnings and the ongoing economic recovery as key reasons why the benchmark index has fallen less than 10% from its January record high. In their view, equities may now be entering the “final phase” of a correction.

Valuation multiples for the S&P 500 have dropped 18% from the peak reached in October, while more than half of the stocks in the Russell 3000 have declined at least 20%. For the strategists, these metrics provide a clearer picture of the broader retreat in U.S. equities.

“For us, this does not reflect complacency but rather a market that has priced risks adequately and selectively, both at the index level and across individual stocks,” Wilson said. He added that risks stemming from private credit and artificial intelligence disruption have also been incorporated into valuations.

How to invest during the war, according to Morgan Stanley

Morgan Stanley strategists continue to favor cyclical sectors—including financials, industrials, and consumer discretionary—citing strong earnings and compressed valuations.

They also see opportunities in high-quality growth stocks, such as cloud service providers linked to AI, where sentiment and valuations have adjusted to more attractive levels.

The strategists advised investors to be prepared to increase risk exposure, even if the conflict in the Middle East continues to fuel uncertainty over energy supply and the path of monetary policy.

The S&P 500 was heading for further losses on Monday after talks between the United States and Iran failed to produce a diplomatic breakthrough over the weekend and President Donald Trump ordered a blockade of the Strait of Hormuz.

Despite these risks, analysts on Wall Street remain optimistic and expect S&P 500 companies to post earnings growth of around 12% for the first quarter. The reporting season begins this week, with Goldman Sachs scheduled to release its results before the market opens on Monday.

“The final phase of a correction is rarely straightforward and may require another test for markets, particularly if interest rates or bond-market volatility rise again,” the team wrote.