(Bloomberg) — Stocks struggled in the final stretch of a strong quarter in which a small group of blue-chip technology stocks led the way.
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A new bout of volatility hit Nvidia Corp., which fell as the chipmaker held its annual shareholder meeting. The example of the artificial intelligence frenzy has been on a rollercoaster ride in recent days, particularly heading towards the broader market. Fellow megacap Amazon.com Inc. has reached a $2 trillion valuation in a rally that has taken the e-commerce giant deeper into record territory.
Treasury sells $70B over 5 years at 4.331% vs 4.335% forward WI yield
A recent attempt by the market to broaden out of the mega-cap group was short-lived, with a suite of measures still showing how market breadth remains weak – increasing uncertainty about the staying power of the recovery. The bifurcation between the performance and breadth of the S&P 500 has reached one of the worst levels in three decades, according to data from Bloomberg Intelligence.
“The stock market is too reliant on big tech – period and end of story,” said David Bahnsen of The Bahnsen Group. “Whether or not last week’s volatility in technology is the start of something deeper or whether that reckoning is yet to come remains to be seen, but excessive investor sentiment, euphoria and over-the-top momentum always end in same way.”
The S&P 500 hovered near 5,465. Tesla Inc. led the gains in megacaps. Micron Technology Inc.’s more than $62 billion rally powered by artificial intelligence is about to face a test when it reports earnings after the bell. FedEx Corp. rose with an optimistic forecast and buyback plans. The Federal Reserve will release the results of its annual bank stress tests later on Wednesday.
10-year Treasury yields reached 4.3%. The dollar reached its highest value since November. The yen weakened to its lowest level since 1986, spurring intervention bets.
“The market’s ‘engine warning light’ is on as we head into the hot summer months,” said Piper Sandler’s Craig Johnson. “Investors in the high-tech indexes are experiencing FOMO, while investors in the rest of the market feel ROMO (regret of missing out) as overall market breadth remains weak outside of a handful of mega-cap stocks. We believe the S&P 500 is overdue for maintenance.”
Mark Haefele of UBS Global Wealth Management says that while Nvidia’s volatility has boosted sentiment, the structural investment case for artificial intelligence remains intact in positive AI adoption and monetization trends. It also maintains a constructive outlook for broader stocks amid strong fundamentals.
“We maintain our positive view on the AI story, but we believe that right-sizing technology exposure is critical to navigating volatility while maintaining strategic exposure to technology that we believe is poised 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 majority of overall S&P 500 growth, according to Ryan Grabinski of Strategas.
“What continues to be encouraging to us is that estimates for the remaining 493 are improving starting in the third quarter as growth rates for both the top end and the rest of the market normalize,” he noted. . “If this expansion comes to fruition, it would be an encouraging sign for the sustainability of the bull market.”
However, Bahnsen states that the biggest risk for the stock market at the moment is excessive valuations.
“The stock market is very expensive at the moment. Assessment is the biggest risk, if everything continues well, and anything bad that could happen is unpredictable by definition,” he added. “The need to correct overvaluations in shares is not only visible, it is inevitable.”
Declining correlations are another byproduct of a handful of stocks taking up large portions of major indexes, according to Greg Swenson of The Leuthold Group. With the “Magnificent Seven” megacaps driving returns daily, the other 593 stocks have become less correlated with the S&P 500’s daily changes.
“While eliminating correlations is normally a good thing for active managers, we think this time is different,” Swenson said. “Lower correlations are only good if the manager is correctly positioned in the outperforming areas – and we doubt that the average all-cap, and even large-cap manager, has anything close to the benchmark exposure to the top names.”
Meanwhile, the largest US banks did not wait for this week’s stress tests to signal optimism about their capital levels.
The six largest lenders repurchased more than $14 billion in shares in the first quarter, a 73% jump from the weak pace in the second half of last year.
The regulators’ annual review – with results expected to be released on Wednesday afternoon – tends to set the tone for banks’ aggressiveness in returning capital to shareholders through dividends and buybacks.
Corporate Highlights:
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Interactive Brokers Group Inc. suffered a $48 million loss after a New York Stock Exchange trading halt this month and is considering its options for recovering 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 home appliance maker.
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A test by McDonald’s Corp. with its plant-based burger in San Francisco and Dallas “wasn’t successful in either market,” Joe Erlinger, the chain’s U.S. chief, said Wednesday. Beyond Meat Inc. partnered with McDonald’s to produce the McPlant burger.
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General Mills Inc., maker of Cheerios and Old El Paso taco shells, offered a disappointing sales outlook as shoppers continue to pull back amid rising supermarket prices.
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Southwest Airlines Co. lowered its second-quarter unit revenue estimate, a sign of the airline’s ongoing challenges as it fends off an activist push for management reform.
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Volkswagen AG is taking another step in its long struggle to catch up to Tesla Inc., investing $5 billion in a partnership with the U.S. company’s closest rival, Rivian Automotive Inc.
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Airbus SE has warned airlines that some of its aircraft deliveries scheduled for the next two years are at risk of being delayed, an indication that supply chain failures at the world’s biggest plane maker could extend well beyond the current year.
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Novo Nordisk A/S said it will take an impairment charge of about 5.7 billion Danish kroner ($820 million) after halting a late-stage study of an experimental heart drug it acquired last year.
Main events this week:
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China’s industrial profits, Thursday
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Eurozone economic confidence, consumer confidence, Thursday
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US Durable Goods, Initial Unemployment Claims, GDP, Thursday
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Nike releases results Thursday
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Japan Tokyo CPI, unemployment, industrial production, Friday
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US PCE Inflation, Spending and Income, Consumer Sentiment from the University of Michigan, Friday
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Fed’s Thomas Barkin Speaks on Friday
Some of the main movements in the markets:
Actions
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The S&P 500 was little changed as of 1:04 p.m. New York time
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The Nasdaq 100 has changed little
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The Dow Jones Industrial Average has changed little
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The MSCI World index fell 0.2%
Coins
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The Bloomberg Dollar Spot Index rose 0.4%
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The euro fell 0.3% to $1.0684
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The British pound fell 0.4% to $1.2629
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The Japanese yen fell 0.6% to 160.64 per dollar
Cryptocurrencies
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Bitcoin fell 1.3% to $61,106.17
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Ether fell 1.9% to $3,343.94
Titles
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The yield on the 10-year Treasury note rose five basis points to 4.30%
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Germany’s 10-year yield rose four basis points to 2.45%
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Britain’s 10-year yield rose five basis points to 4.13%
goods
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West Texas Intermediate crude rose 0.2% to $81.01 a barrel
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Spot gold fell 0.8% to $2,300.71 an ounce
This story was produced with help from Bloomberg Automation.
–With assistance from Alexandra Semenova.
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