Morgan Stanley: Half of Russell 3000 constituents have entered a bear market, with US Treasury volatility set to determine the future trajectory of US stocks.

Morgan Stanley’s chief equity strategist Mike Wilson said in a recent report that U.S. stock indexes remain near record highs, but internal market divergence is stark. Some 51% of Russell 3000 constituents have fallen more than 20% from their June peaks, while the median S&P 500 stock trades 16% below its 52-week high—market breadth has dropped to its lowest level since the dot-com bubble burst. Meanwhile, a roughly 12% divergence gap exists between index prices and market breadth. Wilson identifies U.S. Treasury volatility as the key factor determining how this gap will close. Currently, the 10-year U.S. Treasury yield has climbed to 5.25%, the MOVE index has topped 100, while the VIX remains below 15. If bond volatility stays elevated, the S&P 500 could pull back roughly 6% to around 7,300 over the next month before rebounding by year-end. If bond volatility eases first, a catch-up rally in individual stocks could drive market breadth to align with the index. The report points out that the deterioration in market breadth began mainly after the late-August Jackson Hole symposium, fueled by investors pricing in a more hawkish Federal Reserve policy path rather than rising oil prices. Wilson notes the current weakness is driven primarily by valuation compression, not a collapse in corporate earnings. He advises sticking to large-cap quality stocks with consistently improving earnings revisions at this stage—specifically light-asset companies with high free cash flow yields, low accruals, and high per-employee sales. If the index completes its pullback, there could be opportunities to add higher-risk stocks over the next month.