Morgan Stanley: Half of Russell 3000 Constituents Have Entered Bear Market

Morgan Stanley's chief equity strategist Mike Wilson pointed out in a recent report that 51% of the Russell 3000 constituents have fallen more than 20% from their June peak. The median constituent of the S&P 500 is down 16% from its 52-week high, and market breadth has dropped to its lowest level since the dot-com bubble burst, with about a 12% divergence between index prices and market breadth. Wilson believes that the volatility of U.S. Treasuries will be key in determining how this gap is closed. Currently, the yield on the 10-year U.S. Treasury has risen to 5.25%, the MOVE index has surpassed 100, while the VIX remains below 15. If bond volatility remains high, the S&P 500 could pull back about 6% to around 7300 points in the next month; if bond volatility decreases first, individual stock rebounds may push market breadth to catch up with the index. Wilson stated that the current market weakness is primarily reflected in valuation compression rather than a slowdown in corporate earnings, and there is a preference for large-cap quality stocks with improving earnings expectations at this stage.

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