There will be a 10% correction in the S&P 500 by the end of 2021, Morgan Stanley's CIO says

• Mike Wilson just predicted a 10% correction in the S&P 500 by the end of the year.
• The Morgan Stanley CIO said bullish news is "baked in" and earnings estimates are higher than what is "achievable."
• Wilson sees markets moving into a "mid-cycle transition" where price-to-earnings ratios usually fall.

Mike Wilson, the chief investment officer and chief US equity strategist at Morgan Stanley, believes the S&P 500 will see a 10% correction before the end of 2021.

In an interview with Bloomberg on Tuesday, Wilson said that bullish market news has been "baked in" and earnings expectations are higher than what is "achievable."

"A lot of good news has been baked in, I don't think that's an out of consensus view, people know that," Wilson said. "Where we're getting a little more concerned for the index levels are the expectations for next year are actually higher than what we think is achievable on earnings. That's the first time we've been able to say that since the recovery began."

The CIO added that his team has consistently believed earnings will be above analyst consensus estimates until recently. Now, new data shows Wall Street's expectations, particularly on margins, are too high, according to the analysts.

Wilson also noted that taxes are set to increase next year and he believes this hasn't been fully taken into account.

The CIO went on to explain how the markets are now in a "mid-cycle transition" where price-to-earnings ratios usually fall because "the market knows that we are past the peak rate of change."

"We think there's about 15% downside to the multiple, so the combination of estimates that may be kind of full and valuations that look, also, above where they should be, that leads to a 10% downside from here between now and year-end, to roughly 3900," he said.

Wilson's bearish tone contrasts with Bank of America analysts who said in a note to clients on May 19 that they believe the S&P 500 will see a boost to $4,900 by year-end.

Fundstrat's Thomas Lee is also bullish on the S&P 500's prospects. The head of research said the index could surge more than 350% to 19,350 by 2038 in a recent note to clients.

"Millennials are going to be a major incremental and additive driver to US economic growth, and better growth equals better equity returns," Lee said.