S&P 500: Range-bound and volatile – Morgan Stanley

A handful of familiar large-cap stocks continue to lead the market, but that pattern is likely to shift in the coming months, in the opinion of Lisa Shalett from Morgan Stanley.

Key quotes

“It is typical of bear market rallies, which we are in the midst of, for high quality, large-cap companies with the potential to grow earnings in the absence of underlying economic growth to lead the rebound.”

“Three key risks loom large. The first is concentration risk, which has risen for the S&P 500. Currently, the five largest stocks by market capitalization comprise 21.4% of the index, the highest level since 1978. But that top-five cohort accounts for only 7% of S&P 500 profits.” 

“The second, related risk is known as crowding. This describes when hedge funds and other big institutional investors pile into the same set of companies. If these large investors all head for the exits at the same time, high-quality stocks can fall much faster than you might expect.”

“A final risk worth highlighting is high valuations. The forward price-to-earnings ratio of those top-five S&P names averages 50, while the next 495 names have an average P/E of 17.”

“Expect markets to remain range-bound and volatile for at least the next several months.”