Stocks could get rocked in second half, until the Fed stops raising interest rates, says Morgan Stanley

• Morgan Stanley said trade tensions could create market volatility and corrections in the second half as investors worry about the impact on the economy and earnings.
• The firm expects the Fed will then have to pause in its rate-hiking cycle, probably in September.
• The stock market will then rebound and finish higher on the year, as it typically does in midterm election years.

Traders work in the S&P 500 options pit at Cboe Global Markets Inc. in Chicago, Illinois.

Daniel Acker | Bloomberg | Getty Images

Trade tensions are expected to weigh on stocks, creating volatility and corrections, until the Fed pauses its rate hikes, Morgan Stanley chief equity strategist Michael Wilson said in a note.

Wilson said he expects to see more "volatility with several 10 percent corrections in global equity markets at different points."

Trade issues will be the catalyst in the near term and will be a negative influence because of concerns about their effect on earnings and the economy, he noted in his second-half outlook.

Wilson said credit markets will respond to the Federal Reserve's June rate hike and investors should be more defensive in stock selection. For that reason, he recently upgraded utilities.

"We think this defensive posturing will continue to pay off until the Fed eventually decides to pause its rate hikes, which we expect it will do in September," he wrote.

That should then drive the market to a strong finish to the year, which is typical in midterm election years.