Morgan Stanley’s Wilson: Next rally attempt will fail as investors are punishing earnings reports.

So far, Wilson says the market has reacted more negatively to results than even what he called the “sell-the-news” second quarter. The average one-day stock price change for a company reporting results so far is a drop of 1.6%, compared to a decline of 0.5% last quarter. Relative to the broader market, the average company reporting sees a 0.8% drop, versus a 0.2% dip last quarter.

There’s also a smaller percentage of positive reactions. “With several of the mega cap leaders reporting this week, this trend bears close watching,” says Wilson.

That negative reaction has occurred even as earnings per share have come in a solid 7% more than expected, and sales also have slightly beat expectations. But since the end of August, expectations for S&P 500 earnings this year have dropped by 0.9% and dropped by another 0.6% for 2024.

Wilson adds that the breadth of the market continues to exhibit notable weakness. “While some may interpret this as a bullish signal—i.e., oversold conditions, we believe it is a reflection of our long-standing view that we remain in a late cycle backdrop where earnings fundamentals remain at risk,” he says.

He notes that a few sectors — staples, healthcare equipment, telecom and energy — have been better stock market performance than the change in their earnings estimates would suggest, while autos and semis have seen the opposite. He says that supports the idea “defensives are getting a relative bid more recently as the market begins to rotate in a more counter-cyclical manner.”

Wilson said it was positive that the S&P 500 dropped below its 200-day moving average on Friday. “We would not be surprised to see a further move lower in price this week below the early October lows before the next attempted rally. However, based on our views on earnings, valuations and policy (both monetary and fiscal), we believe the S&P 500 will have a hard time getting back above what were previously levels of support (i.e., 4300-4400) tactically,” he said.

He said it’s more likely the index will catch up to the average stock’s performance, than the other way around, so he’s comfortable with the 3,900 year-end target.

The market

The wait for the 10-year yield
BX:TMUBMUSD10Y
to cross 5% is finally over, though it was short lived. U.S. stock futures
ES00,
-0.21%

NQ00,
-0.27%
were lower. Gold
GC00,
-0.46%
and oil
CL00,
-0.90%
futures also fell.

The buzz

Over the weekend, there was modest progress in the Middle East — relief trucks entered Gaza, Hamas released two hostages, and Israel held off on a ground invasion.

Chevron
CVX,
-2.28%
reached a deal to buy Hess Corp.
HES,
+0.94%
for $53 billion in an all-stock deal.

Roche
ROG,
-0.94%
agreed to buy Telavant Holdings, which has an inflammatory bowel system drug under development and is 75% held by Roivant Sciences
ROIV,
-1.71%
and 25% by Pfizer
PFE,
+1.21%,
for as much as $7.25 billion.

Foxconn, Apple’s
AAPL,
-0.78%
contract manufacturer, is reported to be under a tax audit in China.

Best of the web

South Korea has been squeezed by the rise in U.S. interest rates.

Iceland is holding a one-day women’s strike over pay differences.

A story about Israel that’s not about the conflict — how a firm created an avatar so convincing that Russian agents in Africa wanted to meet him.

Top tickers

Here were the most active stock-market tickers as of 6 a.m. Eastern.

The chart

There’s a lot to unpack on this chart, courtesy of JC Parets of All Star Charts. First, he plots the ratio of inflation-protected securities to nominal yielding Treasuries, via two popular ETFs. He does this to come up with the bond market’s view of expected inflation. Then he overlays that ratio with crude-oil prices. Notice how bond market inflation expectations are almost entirely driven by what’s going on in the oil market. The big lesson here is probably not to put much faith in the bond market’s view of inflation, but his conclusion is the multi-year secular uptrend in commodities relative to stocks is continuing. “One thing we know about commodities bull markets is that they don’t just last a few years. Historically they last over a decade,” he writes. “So it looks like this party is just getting started.”

Random reads

Necrobots? Researchers have found a way to use dead spiders to grab things.

This rodeo features electric line workers.

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