The US stock market continued its climb into new record territory in the 2nd quarter of 2024, finishing the first half of the year up 15.29%. But a thorough look under the hood makes this market look like a car cruising down the freeway that is about to suddenly lose power and stall on the side of the road. Such a look would reveal a list of worrisome fundamental and technical conditions including:
- Reliance on a literal handful of stocks – Nvidia (NVDA) alone accounts for 33% of the S&P 500 YTD gain. The largest 10 companies comprise 36% of the total market value of the index; the other 490 companies make up the rest. The equal-weighted S&P 500 index, in which all 500 stocks are given the same weight, actually fell 61% in the 2nd quarter as the cap-weighted index rose 3.92% in the 2nd quarter.
- Sector dominance – the technology and communications services sectors, driven by the likes of Nvidia, Microsoft, Google, Meta/Facebook, and Apple, are up 28% and 27% respectively YTD, and are the only sectors beating the broad index. The energy sector comes in a distant third place with a first half gain of 11%.
- Growth vs value – the dominance of those few mega-sized companies in the high-growth sectors has resulted in a huge gap between ‘growth’ and ‘value’ stocks; the Russell 1000 Growth index bested the Russell 1000 Value index by a margin of 20.70% to 6.62% over the first half of 2024.
- Lack of Breadth – the advance/decline line compares the number of stocks that are rising and falling. When the market closed on June 17th, the A/D line for the S&P 500 companies had declined for five straight days in which the index value rose – the longest such streak since 1999 as the dot.com bubble was getting ready to burst. How healthy is a market that rises in overall value when more company’s stocks are falling than rising?
- Small cap underperformance – the Russell 2000 index of small cap stocks gained just 1.73% in the first half, and is down roughly 8% over the past three years while the S&P 500 index has gained over 33%. Small cap underperformance has historically been indicative of a struggling economy.
- Valuations – stocks are selling at historically high prices relative to earnings. As of June 30th, the 12-month forward P/E ratio for the S&P 500 index stood at 21 times expected earnings, a 23% premium over the historical average P/E of 17 times earnings.
- Muted volatility – the VIX index, which measures market volatility, has traded in a range between 11 and 23 in the past 12 months, and has touched 20 just one trading day in 2024. It’s been 18 months since the last VIX reading over 30, the level considered highly volatile. Might this be the calm before the storm?
Wall Street traders continue to cling to the belief that the Fed is ready to grease the axles with interest rate cuts to keep it rolling, despite the lack of any rational economic reason for doing so. In a stunning display of misplaced optimism, bond futures traders priced in 1.5 rate cuts over the next six months immediately after Fed Chairman Jerome Powell hinted there might be NO cuts before year-end.
Dispensing with the sarcasm, our message is simple: proceed with caution in navigating the financial markets. The index performance paints a rosier picture than the underlying reality.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The Russell 1000 Index is a stock market index used as a benchmark by investors, and represents the 1,000 top companies by market capitalization in the United States.
Because of their narrow focus, investments concentrated in certain sectors or industries will be subject to greater volatility and specific risks compared with investing more broadly across many sectors, industries, and companies.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
Stock investing includes risks, including fluctuating prices and loss of principal. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities