Key Takeaways
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Morgan Stanley’s Mike Wilson says the share of S&P 500 stocks above their 200-day moving average fell from about 75% to below 50%, and he sees the index falling about 5% to 10% if bond volatility doesn’t settle down.
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Microsoft, NVIDIA, Meta, Apple, and Alphabet drove 93% of the S&P 500’s gains since July, according to Barron’s, so any index drop will probably run through them.
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The best counterpoint is earnings: forward S&P 500 earnings are up 36.7% over the past year, while the index is up 17.9%.
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A 5% to 10% pullback led by the five would be a chance to buy, as long as their earnings estimates keep rising and bond volatility is the signal to watch.
More than anything else, five stocks are holding up the S&P 500 right now: Microsoft (MSFT:NASDAQ), NVIDIA (NVDA:NASDAQ), Meta Platforms (META:NASDAQ), Apple (AAPL:NASDAQ), and Alphabet (GOOG).
According to Barron’s, those five have contributed 93% of the index’s gains since July, as Josh Brown noted on Tuesday’s episode of The Compound and Friends. Microsoft alone accounts for 181 points of the S&P 500’s 330-point advance since the end of July.
Everything else? Not so much.
On Tuesday’s Mad Money, Jim Cramer pointed out that 204 S&P 500 stocks are down 20% from their 52-week highs. “In other words, over 40% of stocks in the S&P are in a bear market.”
Morgan Stanley’s chief U.S. equity strategist, Mike Wilson, put a number on what that could mean for the index on Monday’s episode of the bank’s Thoughts on the Market podcast:
“If bond volatility does not settle down soon, it could spill over into equity vol and we would see the S&P 500 price come down about 5 or 10%.”
I’d expect that the five stocks that carried the market up now carry a real piece of its downside, too.
The gap Wilson is worried about
Wilson’s case rests on breadth, which measures how many stocks are actually taking part in a move.
His gauge is the share of S&P 500 stocks trading above their 200-day moving average. That is the average closing price over roughly the last 10 months of trading, and it’s a common check on whether a stock’s longer-term trend is up. In his words, that share “fell from roughly 75% to below 50%, while the index held up much better.”
“That divergence cannot persist forever,” he said. “Either breadth catches up to price, or the index comes down to meet breadth.”
Here’s why that’s uncomfortable for anyone holding the megacaps: Most of the market has already taken its hit. If the index comes down to meet breadth, the five names that did the heavy lifting on the way up would likely take the hit on the way down too.
