The S&P 500 is close to a record high, but more than half of the companies in the broader US stock market have suffered sharp losses. The US stock market is showing two very different pictures. This means the index looks strong even as many individual stocks struggle.
Such flows can widen the gap between the S&P 500 and the broader market. A small number of large companies are helping the S&P 500 stay close to its record. This could help more stocks rise without the S&P 500 falling sharply. However, if interest rates keep rising or companies expect lower earnings, even the big companies supporting the S&P 500 could see their share prices fall.
This creates a gap between companies’ reported business outlooks and the sharp declines in their share prices, according to Forbes.
Morgan Stanley said earnings growth for the median company remains in the mid-teens. Investors may move money into index funds, which invest according to the companies and weights in a particular index. These businesses may have been hurt by higher interest rates, concerns about economic growth and investors favouring large technology companies, according to Forbes.
Some companies still have strong earnings despite falling share prices. Analysts are also raising more earnings estimates than they are cutting. Falling stocks can also face pressure from investors who are forced to sell. Portfolio managers whose investments are losing money may face pressure from clients. Some investors may withdraw money from funds, forcing managers to sell shares to meet those withdrawals. Risk-management systems may also require funds to reduce their exposure when market volatility rises. Money can flow towards the same large companies that are already supporting the index. This can direct more investment towards the largest companies while struggling stocks receive less support. Morgan Stanley sees possible opportunities in industrial stocks. The bank sees attractive risk and reward in some quality industrial companies whose share prices have weakened even though their earnings expectations remain reasonably strong. The performance of the biggest stocks remains a major risk. If these companies fail to meet investors’ expectations, their share prices could fall and put pressure on the entire index. The narrower the market’s leadership becomes, the more the index depends on those companies. The next move will depend partly on bond markets and company earnings. If bond market ups and downs become less severe and companies continue to report good earnings, investors may start buying stocks that have fallen sharply.
Wilson believes continued volatility in the bond market could lead to a 5% to 10% decline in the S&P 500. However, this is his outlook, not a confirmed prediction that the index will fall by that amount. Rising bond market volatility could put more pressure on stocks.
