Morgan Stanley (MS  ) chief U.S. equity strategist Mike Wilson says the correction in the average American stock is nearly over, with the S&P 500 potentially climbing to 8,500 by mid-2027.

"I think we're in the final innings of this," Wilson told CNBC on Tuesday, although he expects another two to three weeks of turbulence before a stronger finish to 2026.

"I think 8,500 could be achievable by the middle part of next year," he said.

That represents roughly 10.5% upside from Monday's close of 7,690.73, above Morgan Stanley's official 8,300 target for mid-2027.

A Correction Hiding in Plain Sight

The S&P 500 has gained more than 12% this year, but individual stocks tell a different story.

More than half of Russell 3000 stocks had fallen at least 20% from their highs since June, according to Wilson's September podcast.

"It's been a really nasty correction since starting in June," Wilson said, citing unwinding momentum trades, AI spending concerns, geopolitical conflicts and midterm election uncertainty.

He believes markets have already absorbed much of that bad news.

Why Higher Rates May Not Derail Stocks

"The reason why rates are higher is because growth is so strong," Wilson said.

With nominal GDP growth running around 7%, he considers a 5% 10-year Treasury yield manageable, provided the Federal Reserve doesn't tighten enough to derail the expansion. Wilson expects no October rate hike, though he said December remains a possibility.

Traders on Polymarket are pricing in much the same view, with an 87% chance of no change in October and a 13% chance of a 25-basis-point increase. December has a hike as a 78% favorite.

AI Credit Markets Remain a Threat

His main worry is widening credit spreads among companies financing the AI infrastructure boom.

"That's probably a bigger risk than Treasury yields quite frankly, because that's where the spending is coming from," he said.

SoftBank Group's five-year credit-default swaps reached 432 basis points Tuesday, their highest since November 2022, Bloomberg reported.

AI infrastructure provider CoreWeave (CRWV  ) has faced similar concerns, with its bonds yielding nearly 15% last week, up from 9.7% at issuance in June. Goldman Sachs nevertheless upgraded the stock Monday, arguing that future borrowing costs could remain manageable.

Wilson expects the next phase of the AI rally to favor companies using the technology to boost revenues and profits, rather than the chipmakers and power suppliers that have benefited from building AI infrastructure.

"What the market's going to get excited about next year is the actual users of this technology leading to better revenue growth and profitability," he said.

What Prediction Markets Expect

On Kalshi, traders currently assign roughly 48% odds to the S&P 500 reaching 8,000 before 2027, falling to 23% for 8,200 and 11% for 8,400.

Those contracts expire at the end of 2026, while Wilson's 8,500 scenario extends into mid-2027.

Wilson expects the recovery to spread beyond the market's biggest names, reversing the narrow market rally that has left many stocks behind.

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