Morgan Stanley’s Mike Wilson warns that the S&P 500 is priced for perfection and could plunge 25% if problems crop up.
Wilson, Morgan Stanley’s chief investment officer and chief US equity strategist, is concerned about the current market for a number of reasons. He points to manufacturing and loan-officer surveys signaling an impending economic downturn, depressed outlooks for revenue and earnings growth, and many companies having to refinance at higher interest rates within the next few years.
| Symbol | Company | Weight |
|---|---|---|
| AAPL | Apple | 6.45% |
| MSFT | Microsoft | 6.24% |
| AMZN | Amazon | 5.86% |
| NVDA | Nvidia | 2.98% |
| GOOGL | Alphabet Class A | 2.69% |
| GOOG | Alphabet Class C | 2.69% |
| TSLA | Tesla | 2.20% |
| BRK.B | Berkshire Hathaway | 1.74% |
| UNH | UnitedHealth Group | 1.69% |
| JNJ | Johnson & Johnson | 1.60% |
| JPM | JPMorgan Chase | 1.52% |
| META | Meta Platforms | 1.48% |
| HD | Home Depot | 1.44% |
| V | Visa | 1.35% |
| PG | Procter & Gamble | 1.29% |
| WMT | Walmart | 1.27% |
| BRK.A | Berkshire Hathaway | 1.18% |
| XOM | Exxon Mobil | 1.15% |
| CAT | Caterpillar | 1.13% |
| CRM | Salesforce | 1.09% |
| COST | Costco Wholesale | 1.07% |
| BAC | Bank of America | 1.04% |
| ABBV | AbbVie | 1.01% |
He also cites historically low earnings quality, and argues that heavy spending on artificial intelligence today might only generate future benefits for a minority of businesses. Moreover, he cautions that recent increases in energy prices could take consumers — many of whom are struggling to afford inflated living costs and larger monthly credit-card, car-loan, and mortgage payments — past their breaking point.
Wilson suggests that the S&P 500’s headline performance is distracting from problems elsewhere. He singles out small- and mid-cap companies, businesses with weaker balance sheets, and retailers serving less affluent customers.
In general, Wilson believes that investors are pricing in a powerful economic rebound, impressive revenue and earnings growth, and the Fed cutting rates sooner rather than later. However, he warns that this is a risky bet, and that any bad news could bring things crashing down.
He flags the risk to stocks of further regional-bank troubles, China’s real-estate bubble bursting, and the Bank of Japan raising rates sooner than expected. He suggests that a shock to the system of that kind could send the S&P 500 plummeting from nearly 4,500 points today to the low 3,000s — a drop of more than 25%.
In short, Wilson sees very limited upside and material downside to investing in the S&P 500 today. He believes that the market is pricing in a lot of good news, and that any bad news could have a significant impact.
Investors should be aware of the risks and should carefully consider their investment goals before making any decisions.
S&P 500 is a market capitalization-weighted index, which means that the weight of each stock in the index is determined by its market capitalization. This means that the largest companies in the index have the most weight, and the smallest companies have the least weight. As a result, the S&P 500 can be skewed towards certain sectors of the economy, such as technology and healthcare.
Second, the S&P 500 is a US-centric index. This means that it only includes companies that are listed on US exchanges. As a result, the S&P 500 can be a poor reflection of the global economy.
Third, the S&P 500 is a price-weighted index. This means that the price of each stock in the index is used to determine its weight. This can be problematic because the price of a stock can be affected by factors that are unrelated to the underlying fundamentals of the company. For example, the price of a stock can be affected by short-selling or by rumors and speculation.
As a result of these factors, the S&P 500 can be a poor reflection of the US economy. Investors should be aware of these limitations when using the S&P 500 as a measure of the overall health of the economy.
Here are some other ways that the components of the S&P 500 and their percentage of the total can create a false reflection of the US economy:
- The index does not include all publicly traded companies in the United States.
- The index is not rebalanced frequently enough to reflect changes in the market.
- The index is not adjusted for inflation, so its performance over time can be misleading.
Overall, the S&P 500 is a useful tool for tracking the performance of the stock market, but it should not be used as the sole measure of the health of the US economy. Investors should also consider other factors, such as economic growth, employment, and inflation, when making investment decisions.
Shayne Heffernan
