A long-time market cheerleader thinks there could be a brutal stock market correction arriving soon, which would spell trouble for your 401(k). One of Wall Street's most influential investment strategists warned that, while the recent inflation surge driven by the Iran war is very bad news for stocks, another corner of the market is flashing a huge warning.
Michael Wilson is the chief investment officer at financial giant Morgan Stanley, and he is worried about recent developments in the bond market that are ringing alarm bells on Wall Street and in Washington, DC. US government bonds are considered the safest investments on earth, but a key rate that shows investor appetite for federal debt is flagging, and that spells doom for stocks.
Global investors have been selling off 10-year government bonds, and the so-called 'yield' on this form of fixed income - the rate of interest investors demand to own a bond - has risen above 4.5 percent. 'We would expect the first meaningful correction in equity prices since markets bottomed at the end of March,' Wilson wrote in a note to clients on Monday, regarding the move up in the 10-year government bond yield.
Wilson has long been bullish on the continuing rally in stocks, and he's not changing his tune now - after all, Morgan Stanley released forecasts that still see stocks around all-time highs at the end of 2026. But the reality is that indigestion in the bond market coupled with Iran war fallout could drive a major hiccup in stocks.
A correction is when the stock market drops more than 10 percent from its most recent high (but less than 20 percent) in a short period of time measured in days or weeks. These are considered an unfortunate but standard phenomenon in the stock market, arriving about once a year on average, and typically lasting a couple of months.
Earlier in 2026, in the first month of the conflict in the Middle East, the S&P 500 fell around 9 percent from its most recent high, while the tech-heavy Nasdaq Composite fell almost 12 percent from its last high - putting it firmly in correction territory. The last official correction for the S&P 500 occurred in spring 2025 - after President Donald Trump announced his administration's 'liberation day' tariffs - the index fell 18.9 percent from its peak in mid February and bottomed out in mid April.
'Clearly everyone is on the lookout for a second wave of inflation like the 1970s,' Justin Bergner, a portfolio manager at Gabelli Funds, told the Daily Mail. Just last week, the April inflation showed prices surging at the fastest rate in three years - CPI inflation rose to 3.8 percent, a big jump from the 3.3 percent reported in March - as the gasoline price surge kept rippling through the economy.
According to Bergner, it's hard to see the situation in the bond market improving without a final resolution to the Iran war. And he also warns that the surge higher in the 10-year yield could be the bond market testing newly minted Federal Reserve chair Kevin Warsh as he begins his tenure.
Wilson is hardly the first Wall Street guru with a tale of stock market doom to tell this year. Earlier in May, legendary economist Gary Shilling said he thinks the benchmark S&P 500 stock index is so wildly overvalued that it could crash by 30 percent or more later this year. Shilling also warned that nothing could stop a recession from happening this year.
Then there's billionaire hedge fund manager Ray Dalio, founder of Bridgewater Associates - the world's biggest hedge fund - who warned that stubborn inflation and slowing growth would cause stagflation this year. In the background, the so-called Buffett indicator hit its highest reading ever - 232 percent - indicating that stocks are historically overvalued, meaning they are primed for correction.
