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Over the past few weeks, the S&P 500 has continued to make new all-time highs. However, underneath the surface, there has been a shift in leadership that may be telling us something about the future in the real world, Mike Wilson, Chief Investment Officer and Chief US Equity Strategist for Morgan Stanley, informs.

See:  S&P 500 Index climbs above 4,000, further upside ahead – UBS

Financial markets are excited with many stocks reflecting the inevitable reopening that is now at our doorstep

“The breakdown of small caps, the Nasdaq and cyclicals are potential early warning signs that the actual reopening of the economy will be more difficult than dreaming about it. While policymakers have provided tremendous support for the economy with both monetary accommodation and fiscal stimulus, the lockdowns have reduced supply – some of which is permanent. As a result, we are now seeing evidence of supply shortages, in everything from materials, logistical support and labor. The punchline is that first-quarter earnings season may disappoint on margins, particularly with respect to the second-quarter outlook and guidance.”

“The underperformance in IPOs and SPACs are a signal that the excess of liquidity provided by the Fed is finally being overwhelmed by supply. My experience is that when new issues underperform this much, it’s generally not a good thing for equity markets more broadly.”

“From an investment perspective, we have made some changes to our recommendations. First, we downgraded small caps three weeks ago. Second, last week we recommended investors upgrade their portfolios by adding higher quality stocks that have a better chance of managing through this reopening transition. More specifically, this would include stocks in the Consumer Staples, Healthcare and REITs sectors. It would also include reasonably priced large-cap technology shares.”