Morgan Stanley Strategist Predicts 5-7% Market Correction in Q3 Due to Tariffs

U.S. stock markets are preparing for a temporary downturn in the third quarter, according to Mike Wilson, the head U.S. equity strategist at Morgan Stanley. Wilson attributes this anticipated setback to the impact of trade tariffs, which he believes will become more evident during this period. The strategist predicts that the repercussions of these tariffs could manifest as increased costs of goods sold, potentially leading to a market correction ranging between 5% and 7%.

Wilson emphasizes that while some companies may experience more significant effects, the overall impact is expected to be temporary. He remains optimistic about the long-term earnings growth prospects, particularly as the market approaches 2026. The strategist suggests that the third quarter will likely be the period when the risks associated with trade tariffs are most pronounced, with their impact reflected in sales costs. However, he does not foresee a large-scale correction, estimating it to be around 5-7% for most companies.

Despite the anticipated downturn, Wilson believes that the current market upswing marks the beginning of a new bull market. He acknowledges the possibility of unexpected events leading to deeper corrections but notes that current data does not indicate a decline beyond 10%. Wilson advises investors to view potential price dips in the third quarter as opportunities for long-term investment. He suggests that while short-term risks may momentarily impact prices, the market's overall trajectory remains positive.

Financial experts concur that market corrections are expected occurrences and recommend that investors stay calm and focused on long-term trends, which still predict growth. This advice applies not only to traditional markets but also to the evolving crypto market. The long-term outlook for U.S. stocks remains optimistic, suggesting a stable environment for investors despite temporary disturbances from tariffs and broader economic conditions.

Adding to the market's concerns, U.S. President Donald Trump has accused China of violating a temporary tariff truce, leading to a lower opening for U.S. stocks. This accusation comes amidst escalating trade tensions, with Trump pushing for higher tariffs on various trade partners. The potential price increase in coffee, due to a 50% tariff hike announced by Trump's administration, further adds to market uncertainties. Additionally, the market is reacting to the potential impact of Trump's proposed spending cuts on core safety-net programs, which could affect consumer spending and overall economic stability.

Despite these challenges, the market's overall bullish sentiment suggests that the current setback might be temporary. Investors are expecting a rebound in the near future, indicating confidence in the market's resilience and long-term growth potential. The anticipated downturn is seen as a temporary phase, with the market poised for recovery and continued growth.