Welcome to Thoughts on the Market. I'm Mike Wilson, Chief Investment Officer and Chief

U.S. Equity Strategist for Morgan Stanley. Along with my colleagues bringing you a

variety of perspectives, I'll be talking about the latest trends in the financial marketplace.

It's Monday, October 28th at 9 a.m. Eastern, so let's get after it.

Last Friday, the S&P 500 touched its all-time highs and at first reached back in July.

However, it may surprise first-time listeners if I told you the best performing sectors since those

old highs have been utilities, reets, and consumer staples.

On the other hand, it shouldn't surprise our regular

listeners nevertheless it's unusual for the major averages to make new highs

when defensive sectors are leading. So what's going on? We think these conflicting

dynamics can be explained by the divergence

between weakening fundamentals and the ever-expanding monetary policy all over the

world and progress on trade. The weakening fundamentals have led bombs up investors away from the more aggressive stocks and sectors and towards the defensive ones.

However, the expanding liquidity and improving sentiment has continued to drive passive investment flows into the S&P 500.

By our estimation, the S&P 500 is about 10% overvalued based on our leading growth indicators

and valuation metrics.

In the absence of a re-tightening a policy policy or retracement of progress on trade,

there's no reason to think that the broader market can't stay overvalued in the near term.

However, there are some things that could lead to a modest correction as we go into the final months of the year.

First, sentiment has improved a lot since August when there was growing concerns about

recession risk thanks to escalating trade tension fears and uninspiring second quarter

earnings results.

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