The share of S&P 500 stocks trading above their 200-day average has fallen to 49%, marking the sharpest deterioration in market breadth since the Fed’s hawkish pivot at Jackson Hole.
The S&P 500’s market breadth has weakened sharply, with just 49% of its stocks now trading above their 200-day average, down from 75% this summer.
The decline marks the sharpest deterioration in breadth since the Federal Reserve’s hawkish pivot at Jackson Hole and means fewer stocks are supporting the benchmark than at any point since the spring.
The weakening participation comes as the S&P 500’s forward earnings multiple hovers near 19 times earnings, its lowest level since March. More than half of Russell 3000 stocks have also fallen more than 20% since June.
Together, the figures point to a market in which the headline index is holding up better than many of its individual constituents.
Semiconductors face pressure as market leadership shifts
Semiconductor stocks, among the strongest performers of the previous cycle, have been among the hardest hit.
Morgan Stanley views the weakness as a sign of market rotation rather than evidence of a broader bearish shift. Earnings revisions also remain near cycle highs, providing some support for the underlying market outlook.
At the same time, falling valuations suggest investors are already pricing in several risks, including geopolitical uncertainty, rising bond yields and the prospect of interest rates remaining elevated for longer.
Bond volatility could determine what comes next.
Morgan Stanley strategist Mike Wilson sees the bond market as an important factor for the direction of market breadth.
“If bond volatility doesn’t calm down, we see breadth and price meeting in the middle in the next month followed by a strong finish to the year,” Wilson wrote in a note to clients this week.
If bond volatility eases sooner, Morgan Stanley expects market breadth to catch up with the index, allowing both to move higher together.
The MOVE Index, a measure of Treasury-market volatility, closed at 106.61 on Tuesday, its highest level since spring. The VIX, which tracks expected volatility in the S&P 500, stood at 16.04, close to its average despite the uncertain macroeconomic backdrop.
Wilson said Morgan Stanley remains focused on large-cap quality and asset-light companies, while planning to add more risk-on exposure in October.
What weakening breadth means for investors
Weak market breadth has preceded periods of increased volatility and bear markets in the past. When fewer stocks participate in an index’s gains, the market can become increasingly dependent on a smaller group of companies.
This time, however, the earnings backdrop offers a different signal. Corporate earnings revisions remain strong, even as market participation has weakened.
That leaves the market facing two competing signals. Breadth has deteriorated significantly, while earnings continue to provide support for asset prices.
The direction of bond volatility could help determine which of those forces becomes more important in the months ahead.
Photo: Getty Images
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Source: Inc.
