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Warning: Scenario for 10% Fall in S&P 500

Mega market capitalization companies like Alphabet (GOOG), Microsoft (MSFT), and Meta Platforms (META) laid off tens of thousands of workers. They pivoted to offering AI solutions. This sent the S&P 500 (SPY, IVV) to all-time highs.

The unabated market rally may end with the benchmark S&P 500 index falling by 10%. Morgan Stanley (MS) Chief Investment Officer Mike Wilson said that a drop of this size is highly likely before the U.S. holds its presidential election in November.

The strategist cited uncertainties in the pace of the Federal Reserve’s interest rate cutting cycle hurting stock markets. The Fed Funds rate is at an almost 20-year high. As a result, companies have weaker pricing power. Already, retail and consumer goods stocks are trending lower. Pepsi (PEP) peaked at over $190 and closed at $162.12. Chipotle (CMG), after its historic stock split, is $10 below its 52-week high, at $59.51.

McDonald’s (MCD) peaked at $302.39 and closed at $247.85. Costco (COST), however, is holding its uptrend.

Wilson said that the index did not have companies reporting good earnings. In effect, the S&P 500 benefited from just a few firms.