Investors have enjoyed a stellar 2017 with double-digit stock gains across major indices, led of course by the big technology stocks. The Nasdaq 100 Index (NDX), a barometer for the tech industry, reached an all-time high of 5897 on June 9 and is 21 percent year-to-date. But tech stocks have moved sideways and down since the peak on growing concerns about exceedingly high valuations. Both on a trailing earnings and price-to-book metrics, large-cap tech stocks are at their highest levels since the Great Recession.
Despite the weakness in tech, Morgan Stanley sees no cause for concern and, in fact, a smooth ride ahead for the broader equities market.
Just as Hercules had to cut multiple heads off the hydra to defeat the creature, we think that it will take more than the recent unsteadiness in tech to bring the equity markets down, Morgan Stanley said in a recent note to clients.
While the Nasdaq lost ground in June, falling 2.7 percent, the S&P 500 (SPX) and Dow Jones Industrial Average (DJIA) both finished higher, as other sectors such as financials, health care and industrials picked up the slack. That’s a positive sign for the stock market and the economy. (See also: 6 Growth Stocks That Will Outlast a Bear Market.)
Financials picked up the slack
As the tech sector has wobbled, it’s the financials that have come to the rescue. For the period of June 8 to July 7, the S&P 500 was essentially unchanged, but the tech sector and telecommunications were both lower by 4 percent. The S&P 500 was able to hold steady thanks to financials and health care. A modest rise in interest rates and uptick of confidence President Donald Trump’s stimulus plan pushed bank stocks higher during the period. JPMorgan Chase & Co. (JPM) was the best performing U.S. bank, rising 12 percent.
In addition to the recent pro-cyclical tilt in the market, we note that value has been outperforming growth, Morgan Stanley said. Given the appreciation seen in financials and health care, two of the three sectors trading at the largest discount to the market, the shift augurs well for the market and economic outlook, said Morgan Stanley. Telecom is the third major sector selling at a large discount.
Morgan Stanley notes that the rally in the financial sector has been partly fueled by positive economic data such as ISM manufacturing and non-manufacturing, as well as the June employment report.
Mostly Clear Sailing
With second-quarter earnings set to kick off this week, Morgan Stanley remains upbeat about the equity markets. Its base target for the S&P 500 is 2700 with a bull target range of 2950 to 3050. While we expect that the shakeout in Tech may have a bit farther to go, and would not be surprised to see the Nasdaq 100 briefly touch 5450-5500, we think the broader market can continue on its upward trajectory, buoyed by newfound legs in sectors like Financials, Morgan Stanley said.
So, all this adds up to one thing: life can go on splendidly for i