Stocks are disconnected from the macro.

How often have you heard that in your investing lifetime? If you’re like me, the answer is every week, at least. Somewhere, somebody can always make the case that equities are trading rich to the macro fundamentals and that invariably, the alleged disconnect will be resolved by falling stock prices.

After years (decades) I’m admittedly desensitized to that sort of analysis. It’s not that I don’t find it compelling on occasion, it’s just that there’s always a disconnect somewhere, which means that if you let such things dissuade you from owning equities, you’ll never own any stocks. Indeed, I once knew a man whose job it was to sit at a Bloomberg terminal all day and make compelling charts depicting ostensibly ominous disconnects. This was before standing desks were trendy. Small wonder he had back problems. I digress. He was a nice enough guy. I’ll never forget him. Good ol whatshisname.

Currently, the S&P is disconnected from ISM manufacturing, or at least if you think it makes sense to plot the YoY percentage change in a PMI with the same for an equity benchmark. I’ve never been convinced that’s apples-to-apples, but in defense of anyone who is, I’ll concede the chart is at least somewhat compelling.

The red annotation suggests the S&P should be trading around 15% lower.

You’ll recall that ISM manufacturing spent a seventh month in contraction territory in May, according to data released last week. On Monday, ISM services printed a wide miss, suggesting the engine of US economic growth is sputtering alongside the nation’s factories.

Around a dozen pages into his mid-year US equity review, Morgan Stanley’s Mike Wilson endeavored to add nuance and context to the relationship between equities and the ISM surveys.

“Recognizing that certain sectors are more (and less) correlated to these metrics, we calculated an implied composite (combined manufacturing and services) PMI based on where sectors are current trading,” he wrote. The table below shows the results.

The takeaway is clear enough: There isn’t a cheap sector on the board with a meaningful correlation or at least if “cheap” can be determined by reference to the PMI backdrop.

“Every single sector with a strong correlation is pricing in a higher composite PMI than the current level,” Wilson wrote, noting that even sectors which have struggled in 2023 are priced for a higher PMI.

As for this year’s winners, they’re “implying a reading that would be both higher than the current level and elevated versus history,” Wilson went on, calling that “overly optimistic and dismissive of the economic and earnings risks which remain well above average.”