Why so many investors have trouble swallowing this record move | Wilnesh News
How to explain a record market rally that has stoked more distrust than fear of missing out? The S&P 500 has hit record highs on nearly 30 days this year, including 4 days last week. U.S. stock wealth has never been greater, and index trends have even been fairly flat: The S&P 500 has gained less than 0.3% in eight of the past ten trading days. However, the main discussion among investors is how this progress cannot be trusted, lacks widespread participation, and does not reflect the ideal soft landing economic scenario. It’s worth noting that everyone is denouncing the rally’s lack of breadth, but that’s not denying or dismissing it. The gap in performance between the big tech companies, known as the flagships of AI, and the thousands of stocks that remain is inevitable. In fact, it is the source of these tiny daily fluctuations—violently counteracting the currents that dampen exponential fluctuations. The S&P 500, whose three stocks (Microsoft, Apple and Nvidia) account for 20% of its market value, is up nearly 14% this year, essentially hitting an all-time high, while the equal-weighted version of the index is up just 3.4%, compared with The peak in late March was 4% lower. The main S&P index gained more than 3% in the second quarter, while the median share price is down 5% so far this quarter. The broader Russell 1000 index of large-cap stocks is essentially flat so far this year on an equal-weighted basis. .SPX mountain 2024-03-29 S&P 500 Index Quarter to Date The market capitalization of the S&P 500 Index increased by $5.5 trillion in 2024, about half of which was injected by the Big Three. The combination of continued gains in the S&P 500 and more volatility below has created a strange combination: the benchmark is overbought and most member stocks are stalling or correcting. Judging from the extent to which the index is above its 50-day moving average and other indicators, the index appears to be on the upswing. Meanwhile, less than half of the constituent stocks are even above their respective 50-day averages. Bespoke Investment Group summed up Friday night’s uneven moves by saying: “This week’s move feels like a blowout, with investors throwing in the towel and ultimately giving up on hopes of small-cap appreciation in favor of buying willingly. Large-cap stocks. This is a plausible point, but it’s impossible to endorse or refute with confidence. There’s no one right way for the market to behave. Sometimes a weak reversal narrows the gap with heavyweights, and sometimes it signals an index recovery. It always frustrates stock pickers looking to outperform wild benchmarks while eroding the confidence of most investors. These are nothing new over the past decade. “Domination”, then “FAANMG”, “Seven Heroes”, and now “AI Elite”. In the process, as the macro situation improves or the policy outlook eases, a comprehensive rebound will suddenly appear, just like at the end of 2017, 2020 and 2023, thus building a broad buffer for the coming months. Currently, this market lacks fundamental conviction, with the largest companies also being those with the best long-term growth prospects, the healthiest expected earnings trends, and Companies with the strongest balance sheets. All of the extreme themes that skeptics have cited over the years—big stocks over small stocks, growth over value, high quality over low quality—are essentially measuring the same preferences. When the “best” is also the biggest, market concentration increases. Well, these are familiar atmospheric conditions. However, there has been a noteworthy change in specific macro market weather patterns this month. U.S. Treasury yields fell sharply, with the 10-year Treasury yield falling to 4.22% from over 4.6% on May 29. At the same time, a series of inflation data cooled and economic data also softened. Falling yields have meant broader investing in recent times, with financials, cyclicals and small caps all seeing some relief. That hasn’t been the case so far in June, as markets have shown greater sensitivity to hints that the economy is slowing more than the Fed or investors expect. Citi’s U.S. Economic Surprise Index shows that domestic macro input momentum is weakening relative to forecasts. The magnitude of the decline wasn’t shocking, but it caught investors’ attention. It’s not entirely clear whether the Fed’s new collective interest rate outlook or Chairman Powell’s comments after last week’s policy meeting triggered a complete rethink of the policy stance, but the results aren’t particularly clear either. Ahead of the Fed meeting, the market had implicitly priced in an interest rate cut of one to two basis points before the end of the year. In the “dot plot” of the committee’s predictions, 15 of the 19 members penciled in one or two cuts. CPI and PPI inflation data were encouraging on Decision Day and beyond. The Federal Reserve has held overnight interest rates steady at cycle highs of 5.25-5.5% for 11 consecutive months, an unusually long pause. During this period, the economy has performed better than expected and inflation has fallen within the Fed’s target area. So the Fed is betting that the cost of waiting remains low, but markets are getting anxious – though not panicked – on the idea that the Fed’s patience may outlast the economy’s resilience. An ideal but far from guaranteed scenario would be for the Fed to find a window to begin “optional” easing measures at a measured pace, rather than rush into an emergency rate cut. This all helps explain why markets are somewhat hesitant, with investor support for economically sensitive groups weak. However, purely defensive sectors like consumer staples and pharmaceuticals won’t look so bad if the market sends urgent signals of impending economic danger. And, as Strategas Research technical strategist Chris Verrone noted, corporate credit indicators remain healthy even if spreads have widened slightly in recent weeks. Helpfully, general consternation over poor market breadth has drained the crowd of enthusiasm, and uneasiness about the market’s uneven rhythms has retained a useful wall of worry. Wall Street strategists don’t see room for gains in the second half of the year for the S&P 500, with their average and median targets below Friday’s close. A weekly survey from the American Association of Individual Investors shows that the spread between bulls and bears has narrowed recently despite the S&P’s gains. It’s not that “everyone is bearish” making a counter-trend apparent, or that a cautious tone will keep the market from trouble as the summer progresses. Late June has been one of the toughest times in recent years. Leading semiconductor stocks have become alarmingly overbought, and flows into ETFs for the sector look overheated. The frenzied, frothy action surrounding artificial intelligence and stock split names is local but sizable. As I have suggested before, a 5-6% correction for the S&P 500 in April appears to be warranted, but may not reach the level of a complete cleanup that could produce a new uptrend that is more dynamic and inclusive . The chaotic turbulence beneath the index’s surface since then may just be the market’s way of renewing itself over time. Despite this, second-quarter earnings for the S&P 500 are expected to grow at an annual rate of 9%; most stocks are still in a long-term upward trend; U.S. Treasury yields are back in the comfort zone; as general stocks and investor attitudes have become less intense , it’s difficult to transfer the benefit of the doubt to shorts just yet.
