Equities will have to try a little harder (and probably a lot harder) if they want to make a believer out of Morgan Stanley’s Mike Wilson.

“While we will keep an open mind, the move thus far looks more like a bear market rally rather than the start of a sustained upswing,” Wilson wrote Monday.

US shares are, of course, coming off their best week in a year. The S&P rose nearly 6% last week, spurred on by an outsized drop in long-end US yields. As discussed at length across at least half a dozen articles, where stocks go from here is in no small part a function of what happens across the US rates complex.

Wilson stated the obvious: The drop in Treasury yields was the proximate cause of the equity rally and the decrease in yields was largely down to smaller-than-expected coupon increases in the refunding announcement and soft data. He briefly recapped last week’s macro figures before returning to familiar talking points centered around earnings revisions and market breadth.

Revisions are still “firmly in negative territory with the big growth stocks’ earnings results providing only modest stability to this important leading indicator,” he said.

Wilson said 2023’s earnings recession is ongoing “at the stock level,” which helps explain underperformance for broader indices and the average stock within the S&P.

Time and again over the past several weeks, Wilson pointed to the discrepancy between the five-day average of the percentage of NYSE stocks trading above their 200-DMA and the S&P as a percentage of its 200-DMA.

Those two series track each other almost tick-for-tick going back decades. If the relationship holds, the index should trade with a three-handle (as shown on the left, below).

The simple figure on the right speaks for itself, but just in case: The equal-weighted S&P isn’t trading especially well and last week’s bounce left it well short of support.

“From a technical perspective, the underlying performance breadth remains weak while several broader/equal-weighted indices remain flat on the year with elevated volatility, a challenging risk/reward set up in the context of risk free returns of 5%+,” Wilson went on.

As for the “Santa rally” question, Wilson suggested multi-asset investors will likely look to sell rips or steer clear of stocks altogether into year-end given the highest T-bill yields in decades and a still attractive return asymmetry in bonds.

“The number one question we continue to get is whether there will be a rally into year-end,” Wilson wrote. “For equity-only investors, that’s an important question/debate but for asset owners and allocators, the prospect of adding additional equity risk at current levels seems less attractive given fixed income alternatives [so] we think this group is more likely to be sellers into strength at this point.”

Wilson may well be correct, and as ever, his analysis is eminently rational. But I’d caution readers that a lot depends on flow catalysts that Wilson simply doesn’t address. The chain reaction from options hedging flows (as puts decay into any prospective rally extension), vol bleed and systematic re-allocation/buying, can be a powerful accelerant assuming, of course, that the rally has legs.