What should we produce of a record-breaking business march that causes more distrust than fear of missing out? The S &, P 500 has made an all- occasion great on almost thirty days this time, four of them this past month. U. S capital money has never been greater, and the index way has even been quite easy: In eight of the last ten buying days, the S &, P 500 has moved less than 0.3 %. The all-consuming discussion among investors is about how the progress is unreliable, lacking in large cooperation, and uncritical of an imagined soft-land economic scenario. Not to dispute or refute the fact that everyone is praising the rally’s lack of depth is to notice that it is. It is inevitable that a small cluster of massive tech companies designated as unnatural intelligence flagships and the few thousand various stocks left behind will experience the yawning performance divergence. And it is actually the origin of those tiniest regular movements, fiercely opposing currents that stifle catalog movement. The S &, P 500, with 20 % of its market value contained in three stocks ( Microsoft, Apple and Nvidia ), is up nearly 14 % this year and essentially at a record, with the index’s equal- weighted version up just 3.4 % and sitting 4 % under its late- March peak. The main S&P, P, and its median stock have increased by 5 % in the second quarter, but that number is up by more than 3 %. The broader Russell 1000, the whole big- cap cohort, is basically flat year to date on an equal- weighted basis ..SPX mountain 2024- 03- 29 S &, P 500 quarter to date The S &, P 500 has added$ 5.5 trillion in market capitalization in 2024, with about half kicked in by the Big Three. This is an odd combination of an overbought benchmark with most member stocks stalled or correcting as a result of persistent gains in the headline S &, P 500, and more churning underneath. Based on other indicators, such as the extent to which it is above its 50-day moving average, and other factors, the index appears a little stretched to the upside. Meanwhile, fewer than half its components are even above their individual 50- day averages. Bespoke Investment Group summed up the uneven action late on Friday by saying,” This week the action felt like a blowoff move, with investors throwing in the towel and finally giving up on any hope of appreciation in smaller-caps and begrudgingly buying the mega-caps that have already seen ridiculously large moves higher. It’s a plausible take, but impossible to endorse or refute with confidence. There is n’t a single right way to act for a market. Sometimes, weak breadth reverses to close the gap with the heavyweights, other times it foretells an index pullback. Always, it frustrates stock pickers who seek to outperform a rampaging benchmark, while sapping conviction from most investors. Familiar market conditions? Nothing about this is novel. Over the past decade, we’ve been through “FANG” dominance, then “FAANMG”, the” Magnificent Seven” and now the” AI elite”. An all-in rally would appear periodically along the way as the macro landscape improved or the policy outlook improved, as in 2017, 2020, and late 2023, to build up a breadth cushion for months to come. The largest companies are also those with the best secular growth prospects, healthiest forward earnings trends, and strongest balance sheets in a market that is currently beset by a scarcity of fundamental convictions. Large over small stocks, growth over value, high over low quality, large over small stocks, growth over value, and all the multiyear thematic extremes being cited by skeptics essentially measure this preference. Market concentration is exacerbated when the “best” are also the biggest. So then, these are familiar atmospheric conditions. However, this month’s specific macro-market weather patterns have shifted in a notable way. Treasury yields have retreated dramatically, the 10- year falling from above 4.6 % on May 29 to 4.22 %, alongside a series of cooler inflation readings and somewhat softer economic numbers. In recent times, yields down has meant stronger breadth, with financial, cyclical and small- cap stocks getting some relief. The market has historically been more sensitive to hints of an economy slowing down than the Federal Reserve or investors would suggest, but that’s not the case in June. The decline in domestic macro inputs in response to forecasts is illustrated by the Citi U.S. Economic Surprise Index. Hardly an alarming descent, but one that has investors ‘ attention. It’s unclear whether the Fed’s new collective rate outlook or Chair Jerome Powell’s comments from the policy meeting last week caused a radical change in the policy position, but neither one of the outcomes was particularly lucid. The market was implicitly pricing in between one and two quarter-point rate cuts by year’s end prior to the Fed meeting. In the “dot plot” of committee projections, 15 of 19 members penciled in either one or two cuts. CPI and PPI inflation readings were encouragingly positive both on and after the decision-day. The Fed has kept the overnight rate steady at the cycle high of 5.25- 5.5 % for 11 months, an unusually long pause. Over the past decade, the economy has performed better than expected, and inflation has fallen below the Fed’s target level. The Fed is betting that the cost of waiting will remain low, but the market is starting to become agitated at the thought that the Fed’s patience might outweigh the resilience of the economy. The Fed finding a window to begin “optional” easing moves at a measured pace, as opposed to haste emergency rate cuts, is the ideal but far from guaranteed scenario. All of this helps to explain a somewhat ambiguous market with weak investor support for economically sensitive groups. However, purely defensive sectors like consumer staples and pharmaceuticals would n’t appear as ill if the market were raising alarms of imminent economic danger. Corporate credit indicators remain stable, even though spreads have widened a little in recent weeks, according to Strategas Research technical strategist Chris Verrone. Helpfully, the general dismay over the uneven market breadth has drained the audience’s enthusiasm, keeping a useful wall of worry at bay. The second half’s S & P 500 and Wall Street strategists ‘ group projects no upside, and both their average and median targets are both below Friday’s closing level. The spread between bulls and bears is currently narrowing, according to the weekly survey from the American Association of Individual Investors, even as the S &, P and S &, P are both moving higher. Not to suggest that “everyone is bearish” in a way that makes a contrarian upside play sound obvious or that the undertone of caution inoculates the market from difficulty as the summer progresses. The second half of June has historically been one of the toughest calendar months in recent years. The stocks of the upside-focused semiconductor industry are colossally overbought, and ETF flows into the sector appear overheated. The manic, frothy action around the AI and stock- split names has been localized but considerable. The 5- 6 % April pullback in the S &, P 500 appeared necessary, as I’ve already suggested, but it ultimately fell short of a cleansing flush that might have resulted in a more upbeat and inclusive new up leg. The messy churn that has followed since that time may just be the market’s way of renewing itself over time. It’s still difficult to give the benefit of the doubt to the bears with the second-quarter S &, P 500 earnings growth now projected at a 9 % annual rate, with the majority of stocks still holding in a longer-term uptrend, with Treasury yields back in the comfort zone, and with the average stock and investor attitudes already on the verge of a boil.
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