It’s generally considered a good idea to diversify your holdings, but there’s a flip side—if one sector is doing particularly well, the others can weigh on returns. And so it has been on the S&P 500.
Nvidia
,
which briefly became the biggest listed company recently, has more than tripled in value since this time last year and has driven much of the index’s 25% gain.
It’s enough to make you wonder if diversification is pointless. Even if you diversified with other semiconductor stocks, your returns might still be dragged down—
for example, is only up 50% in the past year, and
has only doubled. Though, to be fair, server maker
has done even better than Nvidia, more than quadrupling in value.
There’s no sign the rally in semiconductor stocks is going to end any time soon—valuations might look stretched by traditional metrics, but it’s still not clear how huge demand for artificial intelligence-enabling chips is going to get.
Yet diversification still makes sense, because when the rally does end, it’s almost impossible for investors to get the timing right. And there are a growing number of people who are starting to turn bearish.
Outside technology, there are three companies reporting this week that have potential—FedEx, Nike, and
All could benefit if the economy continues to nail the soft landing of slower growth without a collapse in consumer spending. And all could benefit from a Federal Reserve interest-rate cut—inflation data out Friday could add to those expectations.
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It’s true, anyone who only invested in Nvidia a year ago has done much better than someone who put money in an S&P 500 tracker fund. That doesn’t mean the same decision is the best one now.
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This Week’s Inflation Reading Expected to Show Cooling Trend
Friday’s inflation data in the form of the personal consumption expenditures index for May is expected to show inflation trending lower, including the core measure that excludes fuel and food and is the Federal Reserve’s preferred gauge as it examines its progress in nudging annual inflation back to 2%.
- Both the headline and core PCE readings are expected to be up 2.6% from a year ago, which would both be lower than April’s readings. But some economists see the creation of a two-tiered economy between the well-off and less-fortunate.
- Federal spending is keeping the economy strong. The Congressional Budget Office revised spending projections to $6.8 trillion, or 24.2% of gross domestic product, up from February’s 23.1%. American household net worth rose $5.1 trillion in the first quarter, driven by holdings of stocks and mutual funds.
- Also this week, the Bureau of Economic Analysis releases its final estimate of first-quarter GDP growth. It is expected to show a seasonally adjusted growth rate of 1.3%, unchanged from its previous estimate. But weaker data could spur the Fed to more quickly cut interest rates.
- Economists expect the Conference Board’s consumer-confidence index on Tuesday to increase to 102.5. In addition, May new family home sales are expected to rise to a seasonally-adjusted annual rate of 650,000, and new orders for manufactured durable goods are expected to climb 0.2% to $285 billion.
What’s Next: Both President Joe Biden and former President Donald Trump will focus on economic issues during the first presidential debate in Atlanta on Thursday. Despite the resilient economy and robust job growth, Americans continue to blame Washington for persistent inflation.
—Janet H. Cho and Karishma Vanjani
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Auto Dealers Grapple With CDK’s Cyberattack Fallout
The auto industry was grappling with the fallout from cyberattacks on CDK Global, which provides software to thousands of dealerships in the U.S. and Canada. CDK told Barron’s it could take several days to complete its restoration process, and that the company is providing customers with alternate ways to conduct business.
- Nearly 15,000 dealers use CDK’s software to manage sales, payroll, and office operations, and the attack effectively shut them down, forcing dealerships such as
and
to do tasks manually. CDK also warned dealerships about people misrepresenting themselves as company workers.
- North Carolina-based Sonic said in a filing that it lost access to its dealer management system, including dealership operations that support sales, inventory, accounting, and customer relations. Sonic said it doesn’t know if the issue will materially affect its finances.
- Michigan-based Penske said in its filing that its commercial truck dealership business used CDK Global systems, and that it was using manual or other workarounds. Brad Holton of Proton Dealership IT told The Wall Street Journal that some dealers are building homemade databases and spreadsheets to track parts and services.
- Online car dealer
was more minimally affected. CEO Bill Nash told analysts on an earnings call that CarMax doesn’t use the CDK software, but that a lot of dealers it works with do, saying that it could face some minor issues, such as a slowdown in ordering parts.
What’s Next:
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told its dealerships how to manually submit reimbursement claims for recall repairs and manually track service tech hours. The National Automobile Dealers Association urged its member dealerships to scrutinize their data for potential discrepancies when systems come back online.
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FedEx, Levi’s, Nike Earnings a Window on Consumer Spending
This week’s earnings from package-delivery and logistics company
FedEx
,
athletic-gear maker
Nike
,
and jeans brand
will highlight consumer discretionary spending patterns after some retailers reported shoppers pulling back amid continued higher prices. All three companies have trimmed costs and cut workers.
- On Tuesday, FedEx is expected to report earnings of $5.34 a share on $22 billion in revenue. TD Cowen analyst Helane Becker expects FedEx to update its cost-cutting progress and efforts to bring together its air, ground, tech, and communications services.
- On Wednesday, Levi’s is projected to report earnings of 11 cents a share on revenue of $1.45 billion, according to FactSet. Levi’s first-quarter sales fell as retailers got more selective about what they ordered, especially in Europe.
- On Thursday, analysts expect Nike to report earnings of 84 cents a share on $12.87 billion in revenue. UBS analyst Jay Sole said expectations are low, citing weak sales trends in stores and online, especially in China, amid increased competition, MarketWatch reported.
- Analysts expect
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second-quarter earnings to rise 8.8% from a year ago, its highest annual growth rate since the first quarter of 2022, FactSet said. They predict the S&P 500 will report aggregate earnings growth of 11.3% this year, and 14.4% in 2025.
What’s Next: The S&P 500 has gained 14.6% so far this year, on pace for its best performance in the first half of an election year since 1976, and its second-best-ever election-year performance, according to Dow Jones Market Data.
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Supreme Court Has Several Decisions to Issue as June Nears End
The Supreme Court has several decisions still to announce as the end of June approaches, including two cases involving social media regulation, a case that looks at the power of federal agencies, another case concerning abortion, and the question of immunity from criminal prosecution for former President Donald Trump.
- Social media companies face decisions about government efforts to curb misleading and false content posted on their platforms and how the companies themselves moderate content. Some groups want to prevent social media from banning users, while tech groups argue for their free speech rights.
- Federal agencies face potentially big changes if the Justices overturn decades-old doctrine that says courts accept how agencies interpret federal laws when they are ambiguous. It could upend regulations on everything from environmental protections to cryptocurrency.
- Having already upheld widespread access to the abortion drug mifepristone, the Court will also decide whether emergency room doctors in states with broad abortion bans at the state level have the ability to perform the procedure in urgent health situations.
- The decision about Trump’s protection by presidential immunity also awaits. Until then, a criminal trial in Washington, D.C., on charges Trump conspired to subvert the 2020 election has been delayed, though lower courts have rejected the immunity arguments.
What’s Next: The Court is expected to release opinions starting on Wednesday. Court watchers are awaiting rulings on 14 cases that were argued during this term. By tradition, the Court tries to clear its work by the end of June, though the release of decisions could extend into July.
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MarketWatch Wants to Hear From You
The S&P 500 SPX is on pace for its best first-half performance during an election year since 1976, as well as the second-best performance in an election year in its history, according to Dow Jones Market Data. How long can this rally last, and what could change things?
A MarketWatch correspondent will answer this question soon. Meanwhile, send any questions you would like answered to thebarronsdaily@barrons.com.
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—Newsletter edited by Liz Moyer, Patrick O’Donnell, Brian Swint
