(Bloomberg) — Stocks struggled for direction in the latter part of a strong quarter that has seen a small group of high-flying technology stocks lead the way.
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A renewed bout of volatility hit Nvidia Corp., which slipped during its annual shareholder meeting. The poster child of the AI craze has been on a rollercoaster ride, mostly driving the broad direction of the market. Fellow megacap Amazon.com Inc. hit a $2 trillion valuation in a rally that took the e-commerce giant deeper into record territory.
A recent attempt by the market to expand from the megacap group was short-lived, with a number of measures still showing how weak the market’s breadth remains – raising uncertainty about the rally’s staying power. The bifurcation between the performance and breadth of the S&P 500 has reached one of the worst levels in three decades, according to Bloomberg Intelligence.
“The stock market is very dependent on big technology — period and end of story,” said David Bahnsen at The Bahnsen Group. “Whether last week’s volatility in tech is the start of something deeper or whether that reckoning is still looming remains to be seen, but excessive investor sentiment, euphoria and excessive momentum always end the same way.”
The S&P 500 stood near 5,470. Micron Technology Inc. rally. The more than $62 billion AI-driven company will face a test when it reports earnings after the closing bell. FedEx Corp. rose after a bullish forecast and buying plans. The Federal Reserve will release the results of its annual bank stress tests later on Wednesday.
10-year Treasury yields reached 4.3%. A $70 billion sale of five-year notes showed signs of strong demand. The dollar hit its highest level since November. The yen’s fall to its weakest level since 1986 is raising the risk of intervention.
The market’s ‘engine warning light’ is on as we head into the hot summer months,” said Craig Johnson at Piper Sandler. “Investors in the tech-heavy indices are experiencing FOMO, while investors in the rest of the market are feeling ROMO (regret for the shortfall) as the overall market breadth remains weak outside of a handful of mega-cap stocks. We believe the S&P 500 is overdue for maintenance.”
The S&P 500 is on track to deliver a very positive performance for the first six months of the year, driven by a rally in the market’s biggest names. Breaking down Index 500 stocks by capitalization quintiles shows a consistent pattern of performance: the bigger the stock, the better it’s been, according to Jack Ablin at Cresset.
“Much of the divergence is attributable to a ‘higher for longer’ interest rate environment,” Ablin noted. “Investors think that megacap tech companies — thanks to their ability to generate cash — are less dependent on borrowing, and those companies that do need to borrow have much easier access to capital than their larger brethren. small. So where are the markets going in the second half of 2024?”
Ablin expects U.S. stock markets to rally later this year as the possibility of lower rates comes into focus.
“This means that high-quality companies, particularly those with consistent dividend growth, are likely to continue to lead their lower-quality counterparts in an increasingly restrictive borrowing environment,” he added.
Bloomberg Intelligence’s sector rotation model says it’s time for new leadership to emerge — and favors energy, health care and financials as the most supported sectors to lead the index in the second half.
“Tech and the tech-adjacent communications sector have the strongest price momentum – but declining earnings dominance and high relative multiples pushed both groups down our ranks,” wrote BI strategists led by Gina Martin Adams.
Mark Haefele at UBS Global Wealth Management, says that while Nvidia’s volatility has boosted sentiment, the structural investment case for AI remains intact in the positive trends of AI adoption and monetization. It also has a constructive outlook for broader equities amid stable fundamentals.
“We maintain our positive view on the AI story, but believe that strengthening technology exposure is key to navigating volatility while maintaining strategic exposure to technology that we think will drive growth in the coming years,” he added.
For the second-quarter earnings season, the Magnificent Seven megacaps are still expected to account for most of the growth for the overall S&P 500, according to Ryan Grabinski at Strategas.
“What remains encouraging for us is that valuations for the remaining 493 are improving starting in the third quarter, while growth rates for both the top of the market and the rest of the market are normalizing,” he noted. “If this extension comes to fruition, it would be an encouraging sign for the durability of the bull market.”
The S&P 500 is on pace to enter the second half with a gain of about 15% since the start of 2024. And July ranks as the strongest month of the year for the S&P 500 both since its inception and recently during the last two decades, according to data compiled by Bespoke Investment Group.
“What’s more interesting is that going back 20 years, July’s good performance is the eye of the storm,” Bespoke noted. July is sandwiched between June, August and September – all of which rank as the three worst months of the year with an average decline of 0.17%, 0.10% and 0.7% respectively.”
Corporate Highlights:
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Interactive Brokers Group Inc. took a $48 million hit after a New York Stock Exchange trading halt this month and is considering its options to recoup the money, including possible legal action.
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Whirlpool Corp. rose after Reuters reported that Robert Bosch GmbH is considering a bid for the appliance maker.
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A senior executive of McDonald’s Corp. reiterated that the company’s previous US test of plant-based meat did not work and added that the burger chain’s restaurants do not go to its restaurants for salads. Beyond Meat Inc. has partnered with McDonald’s to produce the McPlant burger.
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Shares of Moderna Inc. sank after new data showed that the efficacy of its RSV vaccine fell sharply in its second year and was lower than that of rival vaccines.
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General Mills Inc., the maker of Cheerios, gave a disappointing sales outlook as shoppers continue to retreat amid rising supermarket prices.
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Southwest Airlines Co. cut its estimate for second-quarter unit revenue, a sign of ongoing challenges at the airline as it fends off an activist push for a management overhaul.
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Volkswagen AG is making another move in its long fight to catch up with Tesla Inc., raising $5 billion in a tie-up with the U.S. company’s closest rival, Rivian Automotive Inc.
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Airbus SE has warned airlines that some of its plane deliveries due in the next two years are at risk of being delayed, an indication that supply chain problems at the world’s biggest planemaker could extend beyond the current year .
This week’s highlights:
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China’s industrial earnings on Thursday
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Eurozone economic confidence, consumer confidence, on Thursday
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US Durable Goods, Initial Jobless Claims, GDP, Thursday
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Nike releases earnings on Thursday
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Japan Tokyo CPI, unemployment, industrial production, Friday
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US PCE inflation, spending and income, consumer sentiment at the University of Michigan on Friday
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The Fed’s Thomas Barkin speaks on Friday
Some of the main movements in the markets:
INVENTORY
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The S&P 500 was little changed as of 2:42 p.m. New York time
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The Nasdaq 100 was little changed
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The Dow Jones Industrial Average was little changed
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MSCI World Index fell 0.2%
currencies
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Bloomberg Dollar Index rose 0.4%
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The euro fell 0.3% to $1.0678
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The British pound fell 0.5% to $1.2623
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The Japanese yen fell 0.6% to 160.70 per dollar
Cryptocurrencies
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Bitcoin fell 1.6% to $60,916.1
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Ether fell 1.4% to $3,361.5
BONDS
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The 10-year Treasury yield advanced seven basis points to 4.31%
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Germany’s 10-year yield advanced four basis points to 2.45%
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Britain’s 10-year yield advanced five basis points to 4.13%
wares
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West Texas Intermediate crude was little changed
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Gold in the country fell 0.9% to $2,299.03 an ounce
This story was produced with the help of Bloomberg Automation.
–With the help of Alexandra Semenova.
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