Morgan Stanley’s Mike Wilson isn’t convinced US equities are poised for a “Santa rally.”
Wilson on Monday cautioned on market breadth, a familiar concern in a year when a handful of mega-caps are responsible for the lion’s share of index performance.
“The S&P 500 Equal Weight Index and Russell 2000 [are] down on the year and closer to the bear market lows last year than the bull market highs in 2021,” Wilson remarked.
Wilson called that “a more holistic view of the YTD price action.”
I’m not one for technical analysis, but if you ask Morgan Stanley, the equal weighted gauge might’ve put in a “classic double top” (the red line in the figure). In addition, Wilson reiterated that just 39% of S&P 500 stocks sit above their 200-day moving average. Small wonder, he wrote, that “it’s been a challenging year in terms of keeping up with the high quality large-cap benchmark.”
The figure on the left below makes both the “double top” point and the breadth point. Breadth, Wilson insisted, “leads price.”
The chart on the right, above, is familiar to Wilson acolytes. He’s employed it countless times since late-spring, when Nvidia’s “guide heard ’round the world” turbocharged the cap-weighted indexes.
It’s not just an index-level phenomenon. Wilson looked at performance breadth across sectors. The only place it’s improving is utilities. Equal weighted versus cap weighted performance is especially poor in comms services and tech, for obvious reasons.
Wilson also pointed to what he said is the sharpest two-week drop in revisions breadth in over a year (on the left, below).
Maybe it’s just seasonality, but whatever it is, it “comes as we head into an important Q3 earnings season from a guidance standpoint,” Wilson remarked.
Over the next three weeks, analysts will refine their Q4 expectations based on guidance from the C-suite and that’ll have meaningful ramifications for 2024 revisions.
Based on the seasonality, as illustrated by Wilson in the right-hand figure above, “we should see an upward inflection in earnings revisions into year-end from here.” If that’s how it turns out, the sharp drop in revisions breadth can safely be written off to “normal seasonal weakness.” If not, Wilson cautioned, “it would be a sign that other cyclical risks including macro headwinds are driving the earnings revisions backdrop.”
Ultimately, Wilson appears to be in the “bah humbug” camp vis-à-vis the prospects for a Santa rally. “The breakdown in various breadth measures, cautious factor leadership, the recent decline in earnings revisions and fading consumer confidence reduces the odds of a Q4 rally, in our view,” he said.
Consumers are still spending. Companies still hiring. I suspect Q3 results will disappoint equity bears again.
I visited my daughter and son-in-law in LA this weekend- airports were packed and restaurants were quite busy.
My son-in-law told me that the rent vs. buy analysis in LA is currently such that owning is almost twice as expensive as renting for the equivalent space. They have decided to stay in her 1 bedroom and use the cash they would have otherwise spent on a home to save for a future, larger down payment (when, hopefully housing prices are not so high) and also spend more on travel/enjoying life than they would have been able to do if they had jumped into homeownership.
When I multiply this thought process across many people, aged 25-35 in the US, this has to be one of the current drivers of the economy.
Having said that, I could never live in LA- besides being “LA”, the homeless/ drug problem is very bad….maybe while saving for a down payment, they will come to their senses 🙂
Los Angeles is a fantastic town. Don’t be such a humbug @empty
I will try- however, I have been visiting LA 2-3 times/year for the past decade and the conditions in LA have worsened significantly over this time period (imho).
H-Man, seems to be talking about the coming recession, it will be bad, not sure now is the move or any reason to doubt Santa. Q1 and Q2 will tell the tale of what we see in 2024 which banks on the consumer showing up. No consumer, you know the drill.
Wilson’s been wrong all year. I don’t really see any compelling evidence to think he’s right this time.