You have to ‘cut multiple heads off’ to defeat this stock bull market

Hercules hydra myth
Hercules (embodying stock market scepticism) must slay more than one head of the hydra (tech) to end the eight-year bull market. Flickr/Niels Linneberg

It’s going to take a heck of a lot more than some tech stock selling to derail the eight-year bull market.

So says Morgan Stanley, which is currently the most bullish firm on Wall Street, with a year-end price target of 2,700.

Prior to some recent selling in tech, stock sceptics were decrying narrow leadership as mega-cap companies like Amazon and Apple dragged the broader market higher. But Morgan Stanley said the rotation out of tech into more cyclical and attractively-priced sectors like financials and healthcare is a “positive sign of broadening participation.”

“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,” a group of Morgan Stanley equity strategists led by Michael J. Wilson wrote in a client note.

Morgan Stanley is also quick to point out that while weakness in tech can have swift and ugly repercussions for investment portfolios — since owning the sector is such an overcrowded position — the effect on the rest of the market is way more muted.

Consider the 4.9% decline in the tech-heavy Nasdaq 100 index over the month ended July 6. The S&P 500 fell just 1% over the same period.

So while Morgan Stanley recognises that the Nasdaq may lose as much as 4% more, it’s not worried about the rest of the market. In fact, the firm calculates that a whopping 10% correction for tech stocks would translate to a loss of just 2.2% for the S&P 500.

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Tech weakness has a limited effect on returns for the rest of the stock market. Morgan Stanley

Morgan Stanley’s pessimism around the tech sector is so measured and short-term that it’s actually overweight the group for the second half of 2017, although it does note that the dynamics present in the sector are indicative of “classic late cycle behaviour.”

With Morgan Stanley’s view laid out, it’s important to note that Wilson sits at the most bullish extreme of Wall Street strategists. The average year-end price target for 20 strategists surveyed by Bloomberg is 2,439, less than half a per cent above Monday’s closing price.