You have to 'cut multiple heads off' to defeat this stock 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 skeptics 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 recognizes 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.
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 percent above Monday's closing price.