All’s not well under the surface of what, notwithstanding a late-summer setback, remains an optically stable US equity market.

Although the Dow recently erased its gains for 2023, the only people who care about the Dow in the 21st century are the producers and editors at CNBC. The S&P and the Nasdaq 100 (the benchmarks that matter) are still up handily this year, and that continues to make for a stark juxtaposition with elevated real rates.

I realize this is a broken record, and that all related charts are thereby clichés, but the figure below never ceases to lose its relevance.

There’s elegance in simplicity, and what that chart shows is a complete obliviousness to higher reals on the part of heavily-weighted growth shares which, by virtue of being long duration equities, “should” be responsive to rising real rates.

But the “broader market is telling a much different story” than the cap-weighted S&P and the Nasdaq 100, Morgan Stanley’s Mike Wilson remarked. “The average stock is roughly flat on the year as is the S&P 500 excluding a handful of mega-cap tech leaders,” he added.

Again, this is well-worn territory, but the risk with ignoring ad nauseam bear refrains is that they eventually come back to haunt you. It’s easy enough to dismiss hyperbole (narratives suggesting a crash is imminent or a re-test of the cycle lows is assured and so on), but arguments based on market internals and other classic telltales have a way of being borne out just when everyone decides “this time is different.”

The figure above is, like the first chart, very simple. But, also like the first chart, it’s instructive despite being almost unbearably repetitive. Note that the equal-weighted S&P has moved in lockstep with the cap-weighted index excluding the “Magnificent 7.”

It’s certainly possible that Q3 big-tech earnings could perpetuate the situation. As Goldman recently pointed out, “the largest tech stocks have outperformed the equal-weighted S&P 500 in two-thirds of earnings seasons since 2016 [and] although consensus has set the bar high, the largest tech stocks in aggregate have beaten pre-season consensus sales growth estimates in 81% of quarters” looking back seven years.

That’s not likely to deter bears suspicious of a market running on tech euphoria, though. “The fact that 60+% of the S&P is already below the 200-day moving average is also reflective of a weaker breadth backdrop,” Wilson said.

The figure above shows the “tight relationship” between the index and the percentage of stocks above the 200-day moving average. “These current levels of breadth suggest downside,” Wilson cautioned.

As ever, he made a compelling, rational case. A.I., Wilson wrote, will be “a great driver of growth and productivity for the overall economy” over time, but Morgan Stanley’s tech analysts said investors would do well to “be cognizant of the longer time frames for enterprise technology adoption.”

Wilson translated that into a broader comment on the market and the macro. “It’s prudent,” he wrote, “not to look through the valley of shorter-term cyclical growth risk still in front of us before the next cycle/durable bull market can begin in earnest.”