However, big tech got hit in late US trading after Micron Technology Inc.’s outlook failed to meet the lofty expectations for the industry that has powered the bull market in stocks.
A $285 billion exchange-traded fund tracking the Nasdaq 100 (QQQ) slipped after the maker of computer memory chips projected sales that trailed the estimates of some investors. Micron slumped in late hours, dragging down some chipmakers including giant Nvidia Corp. Also after Wall Street’s close, the Federal Reserve said the biggest US banks passed the annual stress test, paving the way for higher shareholder payouts.
The recent market attempt to broaden out of the megacap group was short-lived, with a bevy of measures still showing how market breadth remains weak — boosting uncertainty about the rally’s staying power. Bifurcation between S&P 500 performance and breadth has reached one of the worst levels in three decades, according to Bloomberg Intelligence.
“The stock market is way too reliant on big tech — period and end of story,” said David Bahnsen at The Bahnsen Group. “Whether or not the past week’s volatility in tech is the start of something deeper or if that reckoning is still forthcoming remains to be seen, but excessive investor sentiment, euphoria and overdone momentum always ends the same.”
The S&P 500 edged up to around 5,480. FedEx Corp. surged on a bullish forecast and buyback plans. Amazon.com Inc. reached a $2 trillion valuation in a surge that took the e-commerce giant deeper into record territory.
Treasury 10-year yields topped 4.3%. A $70 billion sale of five-year notes showed signs of good demand. The dollar hit the highest since November. The yen’s slide to the weakest since 1986 is boosting 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 F.O.M.O, while investors in the rest of the market feel R.O.M.O (regret of missing out) as overall market breadth remains weak outside a handful of mega-cap stocks.”
The S&P 500 is on track to deliver a strongly positive performance for the first six months of the year, fueled by a rally in the market’s largest names. Dividing the 500 Index stocks by capitalization quintiles shows a steady stairstep pattern of performance: the larger the stock, the better it did, according to Jack Ablin at Cresset.
Ablin expects US equity markets to broaden later this year as the possibility of lower rates comes into focus.
“That means high-quality companies, particularly those with persistent dividend growth, will likely continue to lead their lower-quality counterparts in an incremental restrictive borrowing environment,” he added.
Bloomberg Intelligence’s sector rotation model says it’s time for a new leadership to emerge — and favors energy, health care and financials as the best-supported sectors to lead the index in the second half.
“Tech and the tech-adjacent communications sector have the strongest price momentum — but waning earnings dominance and lofty relative multiples pushed both groups down our ranks, wrote BI strategists led by Gina Martin Adams.
For the second-quarter earnings season, the “Magnificent Seven” megacaps are still expected to account for the bulk of the growth for the overall S&P 500, according to Ryan Grabinski at Strategas.
“What remains encouraging to us is that the estimates for the remaining 493 are improving starting in the third quarter as growth rates for both the top of the market and the rest of the market normalize,” he noted. “Should this broadening come to fruition, it would be an encouraging sign for the sustainability 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 has ranked as the strongest month of the year for the equity gauge both since its inception and more recently over the past two decades, according to data compiled by Bespoke Investment Group.
