If you’re looking to explain recent weakness in equities, you don’t have to look very far: It’s those damn bonds, and specifically the long-end of the US Treasury curve, which can’t sustain a bid to save its life.

I’d say it’s not only that, but really it is. The bond selloff is a manifestation of the “higher-for-longer” narrative, and the reals-led character of the rout explains the nascent de-rating in equities — the prospect of A.I.-driven margin expansion at some distant point in the future ultimately proved insufficient to overcome the reality of sharply higher real rates in the here and now.

In his latest, Morgan Stanley’s Mike Wilson recapped it all. “The correction of the past few months has been driven by a couple of factors, in our view,” he wrote. Here are those factors, excerpted from Wilson’s Monday note:

1. The Fed may not be done hiking rates but more importantly it’s not likely to cut them anytime soon. This ‘higher-for-longer’ implication [helped] fuel the move higher we have seen in rates which has been a headwind for equity valuation.
2. We’ve seen some of the mega-cap tech winners underperform for the first time this year amid the rate move and as investors digest timelines around A.I. adoption and the subsequent proximity to revenue/margin/productivity benefits.
3. Consumer cyclicals have experienced a further leg of underperformance amid the recent move higher in gas prices, the exhaustion of excess savings and the resumption of student loan payments. In our view, the combination of higher rates and cyclical uncertainty will continue to weigh on the “market” multiple into year-end.

So, that’s the fundamentals story. For those interested, there’s also a technical story.

As regular readers know, I’m not a fan of technical analysis, particularly technical analysis divorced from any sort of context. If it were possible to get rich by studying lines, more people would do it. I once had to ban a reader for losing his mind when I suggested that line study was a waste of time. Judging by the conviction on display in his e-mails, he’s probably still staring at those lines to this day. My guess would be he’s no richer for it.

Anyway, Wilson pointed out that “many traders and investors alike have been laser focused on the 200-day moving average as a spot the S&P 500 would likely defend before a Q4 rally commences.” He called that “one of the more consensus calls in recent memory.” The current futures contract broke through the 200-DMA (and a trendline), but cash SPX and the rolling futures contract didn’t. “It’s no small coincidence that these levels many were focused on also coincided with the uptrends from October,” Wilson remarked.

He went to considerable lengths to explain the meaning of the lines, arcs, arrows and circles on the chart shown below. I do have a handful of readers who find value in technical analysis above and beyond the extent to which it can trigger systematics and momentum strats. For those readers, Wilson’s laborious explanation might be informative. To wit:

The upper trend line has contained rallies since the GFC secular bear market bottom. However, in late 2020, we experienced a break out of that upper trend line due to Covid vaccines being announced in November combined with the excess fiscal stimulus in Q1 2021. The Fed remained easy from a monetary policy perspective, and the equity market kept rising until the end of 2021 at which time the Fed came back into the picture with a historically hawkish policy path; hence, the bear market of 2022. We view that entire move in 2021 above the trend line as a false breakout based on the perception that the Fed would not raise rates all that much to fight the inflation viewed as “transitory.” Meanwhile, companies were over-earning due to that very inflation that did not prove to be transitory. This year, we remained beneath the trend line until May when we got the dual boost from A.I. and a view that the Fed was not only close to being done with rate hikes but would likely begin to cut rates pro-actively by year-end and into 2024. The breakout also coincided with NVDA’s massive earnings upside on May 24 which ignited optimism that A.I. was going to be transformative for the entire economy and raise productivity in the near-term. As support for this view, we experienced a period of better breadth in June/July which has now faded considerably.

As a fundamentals guy, that sort of analysis makes my eyes bleed, but I readily concede that investors whose fortunes and success I could never hope to emulate find at least some value in technical analysis, and many of the strategists I follow every week do too. So, I’m the idiot I guess.

For it’s worth, Wilson noted that the bottom-end of the channel in the cart coincides with Morgan Stanley’s year-end S&P target, which is 3900.

As it happens, that’s “just above where the rate of change on real rates implies index fair value to be,” Wilson added, citing a regression with the YoY change in 10-year US reals, shown below.