A renewed bout of volatility hit Nvidia Corp., which dropped during its annual shareholder meeting. The poster child of the artificial-intelligence frenzy has been on a roller-coaster ride, mostly driving broad-market direction. Fellow megacap Amazon.com Inc. reached a $2 trillion valuation in a rally that took the e-commerce giant deeper into record territory.
A 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 hovered near 5,460. Micron Technology Inc.’s more than $62 billion artificial intelligence-driven rally will face a test when it reports earnings after the closing bell. FedEx Corp. surged on a bullish forecast and buyback plans. The Federal Reserve will release the results of its annual bank stress tests later Wednesday.
Treasury 10-year yields topped 4.3%. A $70 billion sale of five-year notes showed signs of strong 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 as overall market breadth remains weak outside a handful of mega-cap stocks. We believe the S&P 500 is overdue for maintenance.”
Mark Haefele at UBS Global Wealth Management, says that while Nvidia’s volatility has driven sentiment, the structural investment case for artificial intelligence remains intact on positive AI adoption and monetization trends. He also holds a constructive outlook for broader equities amid solid fundamentals.
“We maintain our positive view on the AI story, but believe rightsizing tech exposure is key to navigate volatility while maintaining strategic exposure to the technology that we think is set to drive growth in the coming years,” he added.
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.”
Meantime, Bahnsen says that the biggest risk for the stock market right now is excessive valuations.
“The stock market right now is very expensive. Valuation is the largest risk, if everything stays good, and anything that is bad that may come about is unforeseeable by definition,” he added. “The need for overvaluations in stocks to correct is not just visible, it is inevitable.”
Falling correlations are another byproduct of a handful of stocks occupying hefty portions of headline indices, according to Greg Swenson at The Leuthold Group. With the “Magnificent Seven” megacaps driving returns on a daily basis, the other 593 stocks have become less correlated with the S&P 500’s day-to-day changes.
“Although dropping correlations are typically a good thing for active managers, we think this time is different, Swenson said. “Lower correlations are only a good thing if the manager is correctly positioned in the areas that are outperforming — and we doubt the average all-cap, and even large-cap manager has anywhere near the benchmark’s exposure to the top names.”
Meantime, the biggest US banks haven’t waited for this week’s stress tests to signal optimism about their capital levels.
The six largest lenders bought back more than $14 billion of stock in the first quarter, a 73% jump from the meager pace in last year’s second half.
The annual exam from regulators — with results set to be released Wednesday afternoon — tends to set the tone on how aggressive banks are in returning capital to shareholders through dividends and buybacks.
Corporate Highlights:
Key events this week:
Some of the main moves in markets:
Stocks
Currencies
Cryptocurrencies
Bonds
Commodities
This story was produced with the assistance of Bloomberg Automation.
With assistance from Alexandra Semenova.
This article was generated from an automated news agency feed without modifications to text.
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Published: 26 Jun 2024, 11:38 PM IST