Key Takeaways
- 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.
- 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.
- 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%.
- 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), NVIDIA (NVDA), Meta Platforms (META), Apple (AAPL), 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.
Ironically, though…
This looks like a buying opportunity
The S&P 500’s 12-month forward earnings are up 37% year over year, while the index is up around half that.
So earnings expectations have climbed about twice as fast as prices. Run that through the math, and the index trades at a forward P/E roughly 14% lower than it did a year ago, even after the rally.
You can check the same thing at the company level. Here’s Microsoft, the single biggest contributor to the rally, and its normalized EPS, actual and consensus…
Hard to see the price sinking with forward EPS growth expectations clearing 20% annually.
And if the megacaps were running on hype, you’d expect their multiples to have stretched. Here’s NVIDIA’s forward P/E over the last three years…
Which, again, is a sign of some level of bearish sentiment…which is being offset by frankly incredible growth.
I see no reason why this can’t continue as the AI buildout keeps churning.
A pullback worth buying
To be clear, Wilson isn’t rooting for a crash. He said he would “welcome” that 5-10% drop.
My view is that a 5% to 10% drawdown is a real possibility over the coming months, and the five megacaps would probably lead it.
Still, I’d treat that drop as a chance to buy, as long as earnings estimates for those five keep rising. Right now expectations are climbing faster than prices, and that isn’t what a bubble usually looks like.
Of course, Wilson’s warning depends on the bond market, and the 30-year yield (and the 5-year yield, and the 10-year yield) keeps inching higher. If bond volatility doesn’t ease, at some point that’s going to cause problems for the stock market too.
So what is Microsoft stock actually worth?
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any of the stocks mentioned. Thank you for reading, and happy investing!
