Key Takeaways
Dan Skelly of Morgan Stanley Wealth Management says the economy and financial markets are brushing off policy shocks that would normally trigger a selloff, raising the risk of a sudden repricing.
The S&P 500 has rallied more than 7% this year even as the largest oil supply shock in history pushed inflation to a three-year high, a divergence that Skelly warns reflects dangerous complacency.
"Markets and the economy are ignoring policy shocks that historically would have triggered significant repricing," Skelly, managing director and head of the equity model portfolio team at Morgan Stanley Wealth Management, said in a June 29 interview on Bloomberg Money.
The S&P 500 traded near 7,400 on Monday, up from its March correction low when the Iran conflict drove crude above $80 and the 10-year Treasury yield spiked past 4.5%. First-quarter earnings grew 28% year over year, the fastest pace since 2021, while analysts have raised full-year estimates by about 10% since January — an "unprecedented" revision cycle, according to JPMorgan.
The risk, Skelly suggested, is that the current calm masks a buildup of vulnerabilities. Investors have piled into speculative growth stocks more aggressively than in decades, and the VIX — while subdued — could spike if a single catalyst forces a reassessment of the policy landscape.
Earnings Strength Masks Policy Risks
The resilience of corporate profits has been the primary argument for staying invested. The S&P 500's 28% earnings surge in the first quarter beat Wall Street's start-of-year estimates by a wider margin than any year outside a recession rebound, according to Wells Fargo. The AI data center buildout — with hyperscalers including Alphabet, Microsoft, Amazon, Meta and Oracle expected to spend well over $700 billion on capital expenditures in 2026 — has boosted semiconductor and infrastructure names across technology, industrials and utilities.
But beneath the surface, policy shocks are accumulating. The Iran conflict drove oil prices to levels that pushed the Consumer Price Index to a three-year high in May, forcing the Federal Reserve to consider raising interest rates. While crude has since retreated to around $70 a barrel, the episode exposed the market's vulnerability to geopolitical supply disruptions.
Can the Rally Broaden Without a Correction?
Skelly's warning comes at a moment when market breadth is narrowing. The S&P 500's advance has been concentrated in AI-exposed names, with memory suppliers Micron and Sandisk among the best-performing stocks this year. The equal-weight index has lagged its market-cap-weighted counterpart, a pattern that historically precedes a rotation or a correction.
Barclays analysts argue the AI trade could broaden later this year to include companies implementing and monetizing the technology. But the transition may not be smooth. Apple recently raised prices on personal-tech products citing rising memory costs, a move that triggered a sharp selloff in the stock and raised questions about demand destruction.
The 10-year Treasury yield stood at 4.38% on Monday, while gold traded near $4,020 an ounce — elevated levels that reflect lingering inflation concerns. The dollar index remained firm, adding pressure on multinational earnings.
Skelly and his team recommend investors prioritize companies with strong balance sheets, pricing power and durable revenue streams — a defensive tilt that itself signals caution about the second half.
This article is for informational purposes only and does not constitute investment advice.
