Morgan Stanley says another 10% correction is needed before bull market can resume

Published Mon, Oct 19 202010:03 AM EDTUpdated Mon, Oct 19 202010:40 AM EDT

(This story is for CNBC Pro subscribers only.) The market correction that began in September is not over, according to Morgan Stanley. The Wall Street firm believes equities' failure to break out last week is a sign that September's pullback could continue at least through the election in two weeks. "With so many uncertainties over the next month, we think another 10% correction from Monday's highs is the most likely outcome in the near term before this bull market can resume," Morgan Stanley chief U.S. equity strategist Mike Wilson told clients. The S & P 500 is down 1.86% from Monday's high of 3,549.85, which means stocks could fall more than 8% before the correction is over. Last week, the S & P 500 failed its second breakout attempt through long-term resistance level of 3,550. After breaking through this level in early September, the index quickly retreated for its first 10% correction in this new bull market. Morgan Stanley noted the second rally attempt also occurred on less momentum, "suggesting the correction that began in September is likely not complete," said Wilson. The firm said the stalemate in Washington over a new stimulus deal and election uncertainty are the main headwinds for higher equity prices in the near term. Plus, a second wave of virus cases remains an overhang. "Last week's failure to break through technical resistance for second time suggests the correction isn't over," said Wilson. "We expect softness into and past the election before next leg of bull market." Morgan Stanley told clients to buy on pullbacks in stocks that hinge on the reopening of the economy. "We think the best opportunities lie in stocks where earnings are growing with the cyclical rebound and growing by enough to offset any valuation headwinds," said Wilson. The firm said some consumer discretionary stocks like L Brands , Columbia Sportswear , Ralph Lauren , American Eagle Outfitters and Ross Stores have upside potential. Morgan Stanley also said if banks continue to post strong earnings beats throughout the quarter, the group's relative revisions and growth expectations will continue to rise. "This should be bullish for the relative performance of an industry group that is currently trading in just the 1st and 0 percentile of historical relative P/E and P/B levels, respectively (back 20 years)," Wilson added. Morgan Stanley likes Comerica , Huntington Bancshares and Regions Financial in the bank sector. — with reporting from CNBC's Michael Bloom.

The Charging Bull near Wall Street is pictured in New York.

Carlo Allegri | Reuters

(This story is for CNBC Pro subscribers only.)

The market correction that began in September is not over, according to Morgan Stanley.

The Wall Street firm believes equities' failure to break out last week is a sign that September's pullback could continue at least through the election in two weeks.