One of Wall Street's biggest equity bulls said that if bond yields fail to stabilize, the stock market could face a "significant correction."

Morgan Stanley's chief investment officer, Michael Wilson, has long been bullish on U.S. stocks, and he hasn't completely changed his stance. However, he believes that the surge in bond yields triggered by the current war with Iran poses a short-term threat to recent stock market gains.

He stated in a report on Monday:

"If rising long-term yields are accompanied by rising bond volatility, we expect the stock market to see its first significant correction since bottoming out at the end of March."

The company just raised its year-end 2026 S&P 500 target price from 7,800 to 8,000, citing a robust economy, rebalancing from public to private markets, and broadening of earnings and performance.

Morgan Stanley explained:"Ultimately, this is a profit-driven market, not a valuation expansion market."

However, rising bond yields could derail the rally that has pushed major indices to record highs in recent weeks. U.S. Treasury yields continued their upward trend on Monday, with the 10-year yield rising to 4.6%, its highest level in a year. In international markets, the yield on Japan's 30-year government bonds has reached a record high.

The strategist wrote, "Over the past few weeks, we have been pointing out a significant negative correlation (-0.8) between stock returns and changes in bond yields."

Morgan Stanley marks a 4.5% yield on 10-year U.S. Treasury bonds as a “critical point where yields could pose a more significant headwind to stock valuations.”

Morgan Stanley strategists noted, "Ultimately, the jump in interest rates and the Fed's hawkish shift in tone are largely attributable to soaring oil prices and a hot economy."

The company explained that,The market needs to see a solution to the Iran war in order to stop bond yields from rising.They stated, "We may need to see a more lasting solution to the conflict before we see yields decline."

Christian Hoffmann, head of fixed income at Thornburg Investment, pointed out that...The 30-year US Treasury yield breaking through 5% is another signal that caution is needed in the short term..

Thierry Wizman, global foreign exchange and interest rate strategist at Macquarie Group, said there is a chance to stabilize bond rates if the Federal Reserve adopts a hawkish tone. He cautioned that:

"If this does not happen, traders will conclude that the Fed is lagging behind the curve, the U.S. inflation risk premium may rise further, and the yield curve may steepen again."