What should we make of a record market rebound that arouses more distrust than fear of missing out? The S&P 500 has hit an all-time high on nearly thirty days this year, including four in the last week. Wealth in American stocks has never been greater, and the evolution of the index has even been quite smooth: in eight of the last ten trading days, the S&P 500 index has moved less than 0, 3%. Yet the debate among investors is that this progress is unreliable, lacks broad participation and does not reflect an idealized soft landing scenario. Noting that everyone denounces the lack of scale of the gathering does not amount to denying or dismissing this point. The yawning divergence in performance between a select group of huge technology companies designated as the flagships of artificial intelligence and the few thousand other stocks left behind is inescapable. And that is, in fact, the source of these tiny daily movements – violently offsetting the currents suppressing movement in the index. The S&P 500, with 20% of its market value contained in three stocks (Microsoft, Apple and Nvidia), is up almost 14% this year and essentially at a record, with the equal-weighted version of the index having risen only only 3.4% and standing 4% below its peak at the end of March. The major S&P is up more than 3% in the second quarter while its median stock is down 5% since the start of the quarter. The broader Russell 1000 index, which covers the entire large-cap cohort, has been essentially flat year-to-date on an equal-weighted basis. .SPX mountain 2024-03-29 S&P 500 quarter to date The S&P 500 added $5.5 trillion in market capitalization in 2024, about half of which was injected by the big three. This combination of persistent gains in the S&P 500 and higher churn below has created a strange combination of an overbought benchmark with most member stocks stalled or correcting. The index looks a bit stretched to the upside based on its distance above its 50-day moving average and other metrics. Meanwhile, less than half of its components are even higher than their individual 50-day averages. Summing up the lopsided action Friday evening, Bespoke Investment Group suggested: “This week’s action looked like a blowout, with investors throwing in the towel and finally abandoning any hope of small-cap appreciation and buying at reluctantly mega-caps. which have already seen ridiculously large upward movements. This is a plausible hypothesis, but impossible to endorse or refute with confidence. There is no single correct way for a market to behave. Sometimes the low magnitude reverses to close the gap with the heavyweights, other times it portends a decline in the index. This still frustrates stock pickers looking to outperform a raging benchmark, while undermining the conviction of most investors. Familiar market conditions? None of this is new. Over the past decade we have seen the dominance of the “FANG”, then the “FAANMG”, the “Magnificent Seven” and now the “AI elite”. Periodically, as the macroeconomic landscape improved or the political outlook softened, a broad-based rally emerged, as in 2017, 2020 and late 2023, to provide a sizable cushion for the months to come. This is currently a market plagued by a lack of fundamental conviction, in which the largest companies are also those with the best long-term growth prospects, the healthiest forward earnings trends and the strongest balance sheets. more solid. All of the multi-year thematic extremes cited by skeptics—high value versus small, growth versus value, high quality versus low quality—essentially measure this same preference. Market concentration is exacerbated when the “best” are also the biggest. So these are familiar atmospheric conditions. However, the weather conditions specific to the macro market this month have changed noticeably. Treasury yields fell dramatically, with 10-year bonds falling from above 4.6% on May 29 to 4.22%, alongside a string of weaker inflation numbers and somewhat economic figures. little weaker. Lately, the decline in yields has been more extensive, with financials, cyclicals and small-cap stocks seeing some relief. That hasn’t been the case so far in June, as the market is implicitly more sensitive to signs the economy is decelerating more than the Federal Reserve or investors would like. Citi’s U.S. Economic Surprise Index illustrates the slowdown in domestic macroeconomic data compared to forecasts. This isn’t an alarming decline, but one that’s getting investors’ attention. It’s not entirely clear whether the Fed’s new collective rate outlook or Chairman Jerome Powell’s comments after last week’s policy meeting resulted in a radical overhaul of policy posture, but the outcome did not. nor was it particularly clarifying. Before the Fed meeting, the market was implicitly counting on a rate cut of one to two quarter points by the end of the year. In the “dot plot” of the committee’s projections, 15 of the 19 members made one or two pencil cuts. On the day of the decision and after, the CPI and PPI inflation figures were encouraging. The Fed held its overnight rate at the cycle high of 5.25% to 5.5% for 11 months, an unusually long pause. The economy performed better than expected during this period and inflation returned within sight of the Fed’s target zone. The Fed is therefore betting that the cost of waiting remains low, but the market is starting to worry – but not panic – that the Fed’s patience could outlast the resilience of the economy. The ideal, but far from guaranteed, scenario would be for the Fed to find a window to initiate “optional” easing measures at a measured pace, rather than hastily cutting emergency rates. All of this helps explain a somewhat indecisive market, characterized by weak investor sponsorship in favor of economically sensitive groups. Yet if the market was signaling imminent economic danger, purely defensive sectors like consumer staples and pharmaceuticals wouldn’t look so bad. And, as Chris Verrone, technical strategist at Strategas Research, notes, corporate credit indicators remain healthy, even if spreads have widened slightly in recent weeks. Fortunately, widespread dismay at the low market level drained the crowd’s enthusiasm, with unease over the tape’s uneven rhythms preserving a useful wall of concern. Wall Street strategists, as a group, forecast no upside for the S&P 500 in the second half, with their average and median targets both below Friday’s closing level. The American Association of Individual Investors’ weekly survey shows the gap between bulls and bears has narrowed lately, even with the S&P rising. This is not to suggest that “everyone is bearish” in a way that would make a contrarian bull play obvious, or that the nuance of caution inoculates the market from difficulty as the summer progresses. The second half of June is one of the most difficult periods on the calendar in recent years. The most bullish semiconductor stocks are incredibly overbought and flows into sector ETFs appear overheated. The manic and frothy action around the AI and stock split names has been localized but considerable. As I’ve suggested here before, the 5-6% pullback in the S&P 500 in April seemed necessary, but it may not have resulted in a burst of cleansing water that might have generated further upside more energetic and more inclusive. The mess that has occurred beneath the surface of the index since then might just be a way for the market to cool down over time. Nonetheless, with second-quarter S&P 500 earnings growth now projected at an annual rate of 9%; with the majority of stocks still in a longer-term uptrend; with Treasury yields back in the comfort zone; and with average stock and investor sentiment far from in turmoil, it’s difficult at the moment to transfer the benefit of the doubt to the bears.