Morgan Stanley’s Mike Wilson warns equities face their first meaningful correction since late March if bond volatility persists, even as the bank raises its 12-month S&P 500 target to 8,300.

Before you go on, Trump reacted to rising yields and falling stocks, as he reliably does, with a TACO:

Back to Morgan Stanley. Summary:

• Equities face a significant pullback risk if bond market volatility intensifies and long-term yields continue to rise
• The S&P 500 pulled back from an all-time high late last week, with futures pointing to further losses on Monday
• Inflation fears tied to prolonged elevated energy prices from the Iran conflict have pushed Treasury yields higher across the curve, with the 30-year at its highest in nearly three years
• Japanese yields also surged to multi-decade highs
• Morgan Stanley raised its 12-month S&P 500 target to 8,300 last week, citing the strongest earnings growth in more than two decades outside of major shock recoveries
• Wilson flagged that investors have underestimated how broadly profit growth has extended beyond AI names, but noted positioning for that broadening remains limited
• A resolution to the Iran conflict is seen as the key prerequisite for yields to retreat and the broadening earnings trade to accelerate

Morgan Stanley strategists are warning that the global bond selloff poses a serious threat to equity markets, with the AI-driven stock rally at risk of its first meaningful correction since markets bottomed at the end of March.

The team led by Mike Wilson said in a note that if bond market volatility intensifies and long-term interest rates continue to climb, a significant pullback in equity prices should be expected. The S&P 500 retreated from a record high late last week, and equity index futures pointed to further losses at the start of the new week, giving the warning immediate relevance.

The catalyst is familiar. Inflation fears driven by persistently elevated energy prices tied to the Iran conflict have pushed Treasury yields higher across the maturity spectrum. The 30-year yield rose to its highest level in nearly three years, while Japanese yields surged to levels not seen in several decades, underscoring that the bond pressure is not a purely American phenomenon. Wilson tied the Treasury selloff directly to surging oil prices and a strong economy, while noting that the Federal Reserve’s increasingly hawkish tone under new chair Kevin Warsh is amplifying the move. A lasting resolution to the Iran conflict, he argued, is what bond markets need before rates can meaningfully retreat.

Despite the near-term caution, Morgan Stanley maintained its longer-term bullish stance on equities. The bank raised its 12-month S&P 500 target to 8,300 last week, underpinned by what it described as the strongest earnings growth in more than two decades, excluding recoveries from major economic shocks.

Wilson identified a broadening of that earnings recovery as the trade that markets are most poorly positioned for. Profit growth has extended well beyond the core group of AI beneficiaries, he argued, but investor appetite to position for that broadening remains limited. The key triggers to watch, in his view, are oil prices and yields pulling back from recent highs, developments that hinge heavily on progress toward ending the Iran conflict.