Morgan Stanley on S&P 500
We continue to favor quality, but the opportunity set within quality is broadening as the correction beneath the surface matures. The de-rating is well advanced while earnings remain strong, and the market is increasingly rewarding revisions, free cash flow and earnings durability—the same characteristics we expect to matter through 3Q reporting season. We would add risk within that framework rather than move down in quality. The average stock has already absorbed considerably more price damage than the index, creating better entry points in higher-quality cyclicals where fundamentals remain intact. Capital Goods remains the clearest example, with revisions breadth improving from 16% in February to nearly 40% as manufacturing backlogs broaden across machinery, fabricated metals and other categories. The broader setup supports that view. Breadth and valuation are back near levels that marked support earlier this year: the share of S&P 500 members above their 200-day moving average feLl to 43% at the end of September, just below the late-March low of 44%, and has since recovered to 50%, while the forward P/E has re-tested its March low near 19x ( Exhibit 1). Importantly, that multipl
We continue to favor quality, but the opportunity set within quality is broadening as the correction beneath the surface matures. The de-rating is well advanced while earnings remain strong, and the market is increasingly rewarding revisions, free cash flow and earnings durability—the same characteristics we expect to matter through 3Q reporting season. We would add risk within that framework rather than move down in quality. The average stock has already absorbed considerably more price damage than the index, creating better entry points in higher-quality cyclicals where fundamentals remain intact.
Capital Goods remains the clearest example, with revisions breadth improving from 16% in February to nearly 40% as manufacturing backlogs broaden across machinery, fabricated metals and other categories. The broader setup supports that view. Breadth and valuation are back near levels that marked support earlier this year: the share of S&P 500 members above their 200-day moving average feLl to 43% at the end of September, just below the late-March low of 44%, and has since recovered to 50%, while the forward P/E has re-tested its March low near 19x ( Exhibit 1). Importantly, that multiple compression has come alongside stronger earnings.
This remains the classic mid-cycle combination we have been highlighting. 2x today, so equities do not need a large bond rally from here. If yields simply consolidate, valuation can stabilize and earnings can keep doing the heavy lifting.