Morgan Stanley Maps a Path for the S&P 500-Breadth Gap

Morgan Stanley expects the gap between the S&P 500’s performance and weak market breadth to narrow toward a midpoint over the next month, unless bond-market volatility eases. Strategist Michael Wilson said in a Monday note that the firm leans toward that outcome if volatility does not calm down.

The bank continues to describe the market as being in a “classic mid-cycle phase.” It says strong earnings are offsetting lower valuations, while higher-quality stocks are taking the lead. Wilson also wrote that the equity market is “not complacent around the risks.”

More than half of Russell 3000 stocks have fallen at least 20% since June, according to Wilson’s note. At the same time, the S&P 500’s price-to-earnings ratio is back near 19 times, the level Morgan Stanley said marked its March low. Earnings growth for the median stock remains in the mid-teens.

Those measures frame the performance-versus-breadth gap at the center of the bank’s near-term view.