Stocks are overbought and investors are underestimating the risk of a correction, says Morgan Stanley's investment chief

• Morgan Stanley's chief investment officer told Bloomberg on Wednesday investors may be overlooking the risk that a pick up in treasury yields may spark a correction for US equities.
• "The market is overbought and the market is probably a little bit overvalued quite frankly because interest rates now are finally starting to catch up," said Mike Wilson.
• Wilson added that corrections are normal in a bull market, and that he would use a downturn as a buying opportunity.
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US stocks have gotten frothy and may be at risk for a correction, according to Morgan Stanley's Mike Wilson.

The bank's chief investment officer told Bloomberg on Wednesday that investors may be overlooking the risk that a rise in treasury yields may spark the potential correction. The 10-year has jumped sharply this week to above 0.9%.

"The market is overbought and the market is probably a little bit overvalued quite frankly because interest rates now are finally starting to catch up," Wilson said. "The risk in the market now is that as 10-year yields finally start catching up, we have a valuation reset because stocks are long duration assets, particularly the U.S. stock market, and that could create a bit of a correction."

But Wilson, who is also the chief US equity strategist, argued that corrections are normal in a bull market, and any dip in the stock market would be an opportunity for him to put additional capital to work.

Read more: Morgan Stanley handpicks 42 stocks to buy as their company-specific strengths help them deliver strong growth for many years to come

"Bull markets tend to overshoot a little bit in the short term, any kind of pullbacks will probably be bought," he added. "We've had a big move, and we have to digest some of this, but that's okay that's what bull markets do."

The S&P 500 finished off November at a record high as vaccine progress excited investors about an economic reopening. Beaten-down small-cap stocks also saw their best month on record.

At the end of November Wilson forecasted that the S&P 500 could tumble as much as 12% before the end of 2020 as the vaccine-driven rally runs out of steam.

Read more: Value investor Adam Schwartz explains why Warren Buffett's Berkshire Hathaway slashed its JPMorgan and Wells Fargo stakes, cheers its record buybacks, and praises its patience