Morgan Stanley’s Wilson says stocks are in a ‘rolling-type correction.’ Here’s what he would own

Published Mon, May 17 20214:55 PM EDT

Morgan Stanley 's Mike Wilson expects the S & P 500 to finish the year lower than where it's currently sitting, but he stressed Monday on CNBC that there are still opportunities for investors to find upside. "It's a bull market. There's always something to buy and own," the firm's chief U.S. equity strategist said in an interview on "Closing Bell." Wilson described the market as being in a "rolling-type correction" that has so far hit high-multiple growth stocks , as well as small caps . "My guess is it's going to rotate now into some of the reopening stocks that have really run up," he said, suggesting that includes retail, consumer discretionary and, possibly, homebuilders. Instead, Wilson said he would be concentrated right now in sectors that benefit from the post-pandemic economic expansion such as banks and materials. "Those are our two favorite reflation areas," he said. "Then also what I call high-quality, reasonably priced stocks, and that would be more health care than tech and some of the [communication] services area," Wilson explained. "Then you also you can kind of pick and choose individual names where you think the market is not appreciating the earnings growth that is still there." But on the whole, Wilson said he expects choppy trading at the broad index level to persist for a handful of reasons, including valuation concerns and the prospect of a change in Federal Reserve monetary policy. Wilson's year-end price target for the S & P 500 is 3,900, which represents more than 6% downside from Monday's close of 4,163. In a new note to clients Monday morning, Wilson and his team said their target through June 2022 is 4,225. "We're in a bull market. ... The earnings picture has been spectacular, but the one thing we're struggling with is valuation," Wilson told CNBC. "We just don't think the multiple of 21.5, 22 times is right given that we now know that rates are going to move higher, probably, over time. That seems to be consensus." Additionally, while Fed officials have maintained they intend to keep policy highly accommodative to aid the economic recovery, Wilson said the central bank's "next move will be some form of tightening." Whether that means the Fed starts with scaling back monthly asset purchases or adjusts its near-zero interest rates, "we don't know, but the next move is a tightening," he said. The third reason for Wilson's near-term outlook has to do with potential margin pressures, even though corporate profits so far have been strong . "The inflation that people are now talking about we think is going to be a cost issue first," Wilson said. "A lot of companies won't be able to pass it on. The earnings revisions have basically peaked out at this point, so that's another reason the multiples can come down." Watch the full interview with Wilson above.

Mike Wilson, Chief U.S. Equity Strategist and Chief Investment Officer at Morgan Stanley.

Adam Jeffery | CNBC

"It's a bull market. There's always something to buy and own," the firm's chief U.S. equity strategist said in an interview on "Closing Bell."

Wilson described the market as being in a "rolling-type correction" that has so far hit high-multiple growth stocks, as well as small caps. "My guess is it's going to rotate now into some of the reopening stocks that have really run up," he said, suggesting that includes retail, consumer discretionary and, possibly, homebuilders.