The most dangerous divergence in US stocks: ordinary stocks have already plummetedhow much longer can AI giants hold up?

Title context: The most dangerous divergence in US stocks: ordinary stocks have already plummetedhow much longer can AI giants hold up? Text: The US stock market is staging a rare internal rupturethe index stands firm, but beneath the surface there is devastation. Mike Wilson, Chief Equity Strategist at Morgan Stanley, warned in his latest report that tightening financial conditions are quietly doing part of the Federal Reserve's work, except that this shock is being absorbed disproportionately by ordinary stocks rather than the handful of AI-centric giants. With the 10-year Treasury yield breaking above 5.3%, the dollar rising to a new high for this cycle, and oil prices staying elevated, the triple pressure has pushed Morgan Stanley's composite financial conditions index up to about 1.4 standard deviationsa level breached only a few times in the past 35 years, the last time being in 2022 when the Fed raised rates by 75 basis points at every meeting. Meanwhile, Goldman Sachs has revised its forecast to one more rate hike at the October FOMC. The key fissure in the market is now clearly visible: the S&P 500 equal-weight index has lagged the cap-weighted index by 6% over the past six months. In September, when the 10-year yield broke above 5%, the equal-weight index fell 5% for the month while the cap-weighted index was nearly flat. Goldman Sachs' Tony Pasquariello, while partially reserving judgment on the "breadth collapse" thesis, acknowledged that the median S&P 500 constituent has fallen 15% from its 52-week highthe worst reading since the dot-com bust. The disagreement between the two major institutions precisely outlines the most central suspense in the current market: how will this divergence end? Financial conditions have already tightened substantially beneath the surface On the surface, stock market indices appear calm. But Wilson points out that the real tightening has long been unfolding beneath the waterline. Morgan Stanley's composite financial conditions gaugecombining 52-week Z-scores for interest rates, the dollar, and energy priceshas climbed to about 1.4 standard deviations, second only to the level of the 2022 aggressive hiking cycle. This tightening does not come from a single variable but from a confluence of multiple factors: the Fed raised the federal funds rate by 25 basis points last month to 3.75%-4.00%, with Fed Chair Warsh citing strong labor data, sticky inflation, and geopolitical upward pressure on commodities as justification; at the same time, the 10-year Treasury yield has risen about 130 basis points since February, of which roughly 120 basis points came from the increase in real yields. Wilson emphasizes that the composition of yield drivers is crucial. Historically, yield increases driven by breakeven inflation expectations have typically been digestible by the stock market; increases dominated by real yields, however, tend to put more direct pressure on valuationswhich is precisely why the stock-bond correlation has turned significantly negative. He also notes that with nominal GDP growth near 6%, a 10-year yield above 5% is not abnormalthe ultra-low rates of the 2010s were the historical anomaly, and the bond market is merely returning to equilibrium. Ordinary stocks have already borne the real shock The cost of rising yields is being disproportionately absorbed by ordinary stocks. Wilson's breadth gauge shows that the percentage of S&P 500 constituents trading above their 200-day moving average fell to 43% at the end of September, close to the late-March low of 44%. Although it has since rebounded slightly to 50%, overall pressure has not dissipated. The S&P 500 forward P/E has also retested around 19x near the March low. More notably, the S&P 500 equity risk premium (forward earnings yield minus the 10-year yield) has fallen below zeroa level almost unseen since 2002. The "stability" at the index level masks structural damage. Financials are another warning signalthe sector has fallen 7.7% over 30 days, and its relative performance versus the S&P 500 has dropped to the lowest level since 2019. Wilson views the trajectory of financial stocks as "one of the most important reference indicators for near-term stock market direction." Before the large bank earnings season kicks off, whether this sector can stabilize will be a key window for judging market direction. Is this a valuation problem or a growth problem? Wilson believes the current shock remains at the valuation level and has not yet evolved into a growth threatbut this judgment itself is contentious. The data supporting his relatively optimistic stance include: nominal GDP growth just came in at 8.5%, and median S&P 500 constituent earnings growth is running in the low-to-mid teens percentage range; the gap between the federal funds rate and core CPI is about 1.4%, "far below peak levels before past recessions"; the spread between 10-year and 2-year Treasury yields maintains a positive slope of about +45 basis points, indicating the market has not yet priced in a recession. Wilson concludes on this basis that with the above conditions met, "growth deterioration within 12 to 18 months has been rare historically." However, he himself acknowledges that an equity risk premium falling to zero is also a historically rare state. Goldman Sachs' Pasquariello flags risk from another dimension: the wave of lock-up expirations in 2027 may push net US equity supply to the highest level since the 2000 dot-com bubble, and the market's supply-demand dynamics may come under pressure at that time. Two convergence pathswhich is more likely? The divergence will eventually convergewill ordinary stocks catch up to the index, or will the index move down toward ordinary stocks? Wilson offers two trigger conditions to watch: first, stabilization in financial stocks; second, a pullback in the MOVE index, which measures Treasury volatility. He notes that both have shown some signs of stabilization, but more follow-through is needed. According to Bloomberg, Goldman Sachs' Rich Privorotsky recently observed that long-end bond implied volatility has fallen about 30% from its recent high, providing the market some breathing room. The coming weeks will be a critical testing period. September CPI data, Warsh's remarks at the IMF, and the October 28 FOMC meeting will follow in succession. Consensus expectations show that, affected by a 9.6% month-on-month surge in gasoline prices, September CPI may jump 0.6% month-on-month and rise to 3.6% year-on-year. Wilson believes that if core CPI is moderate and Warsh acknowledges that tighter financial conditions have partially substituted for rate hikes, current pressure may ease at the margin. But Wilson's bullish base case (corresponding to an S&P 500 target of 8,300) and Pasquariello's trade logic of "short fixed income, long Nasdaq 100" are essentially bets on two diametrically opposed outcomes. With the equity risk premium at zero, breadth indicators approaching dot-com bubble levels, and a potential supply shock loomingunder the combination of these three, the market's preparation for the tail risk of "the index converging downward" may be far from sufficient. This article is reprinted from "Wall Street See" (), author: Zhang Yaqi; GMTEight editor: Yan Wencai.