The stock market has reached all-time highs according to recent reports, with the S&P 500 surging over 10% in April - marking its best month since November 2020. However, a closer examination reveals concerning trends beneath the surface. The equal-weighted S&P 500 is providing investors with a more comprehensive view of market health, showing patterns that suggest underlying weakness in the broader market structure despite the strong headline performance. According to Morgan Stanley's Mike Wilson, equity markets move on two things: earnings and liquidity, with earnings currently more than offsetting lingering liquidity concerns.
The median earnings surprise for the first-quarter reporting season is 6%, representing the best performance since 2022. As reported by Morgan Stanley, the strength of earnings is consistently outstripping expectations, with earnings-per-share growth currently running at 16%. The breadth of earnings momentum extends beyond just the tech sector, with financials XLF, industrials XLI and consumer cyclicals VCR also generating upward revisions. Wilson notes that companies are adapting to rising challenges, including increased freight costs, higher input prices and tighter supply chains, but their impact on earnings remains negligible so far.
According to reports from CNBC TV18, the equal-weighted S&P 500 is revealing troubling breadth patterns that contrast with the headline market performance. These breadth indicators suggest that while the market may appear strong at the surface level, the underlying participation and distribution of gains across different sectors and companies is showing signs of stress. The Magnificent Seven stocks have been carrying the majority of the market's gains, creating an uneven distribution of returns that is becoming increasingly concerning as the market reaches new highs. However, Wilson's analysis suggests that the breadth of earnings momentum, rather than just narrow Magnificent Seven market leadership, persuades him that something more sustainable is being created.
Despite reaching all-time highs, market valuation has compressed from around 23 times 2026 earnings to more like 20 times due to the strong earnings growth. As reported by Morgan Stanley, the S&P 500 is very close to all-time highs but this valuation compression reflects the improved earnings trajectory. Wilson acknowledges that the Fed remains concerned with mounting inflationary pressures, which is forcing traders to reprice the yield curve with interest-rate cuts this year now seeming unlikely. He concludes that the U.S. equity market will grind higher for the rest of the year with intermittent bouts of volatility.
