The stock market showed mixed results in the final stretch of a strong quarter, primarily driven by high-performing technology shares. A recent effort to diversify beyond mega-cap tech stocks was short-lived, highlighting ongoing concerns about market breadth and the rally’s sustainability. According to Bloomberg Intelligence data, the divergence between S&P 500 performance and market breadth is at one of its worst levels in three decades.
“The stock market is overly reliant on big tech,” said David Bahnsen of The Bahnsen Group. “Whether the recent volatility in tech is the beginning of a deeper trend or a short-term blip remains uncertain. However, excessive investor sentiment and momentum typically end the same way.”
The S&P 500 hovered near 5,470 points. Nvidia Corp. experienced volatility ahead of its shareholder meeting, while Micron Technology Inc.’s upcoming earnings will test the sustainability of its AI-driven rally. FedEx Corp. surged on a bullish forecast and share buyback plans. Additionally, the Federal Reserve is set to release the results of its bank stress tests later on Wednesday.
Treasury yields on 10-year notes rose above 4.3% ahead of a $70 billion five-year auction. The dollar hit its highest level since November, while the yen weakened to levels last seen in 1986, raising speculation about potential intervention.
“The market’s ‘Engine Warning Light’ is on as we head into the summer months,” said Craig Johnson at Piper Sandler. “Investors in tech-heavy indices are experiencing FOMO, while those in other sectors feel ROMO (regret of missing out) as market breadth remains weak outside of a few mega-cap stocks. The S&P 500 appears overdue for a correction.”
Mark Haefele at UBS Global Wealth Management maintains a positive outlook on artificial intelligence despite Nvidia’s volatility, citing strong AI adoption and monetization trends. He also holds a constructive view on broader equities due to solid fundamentals.
“We remain positive on the AI story but emphasize the importance of balanced tech exposure to navigate volatility while maintaining strategic investments in growth-driving technologies,” Haefele added.
Ryan Grabinski at Strategas noted that the “Magnificent Seven” megacap stocks are expected to drive the bulk of S&P 500 growth in the second-quarter earnings season. However, he pointed out that growth estimates for the remaining 493 companies are improving, which could signal a healthier, more sustainable bull market.
David Bahnsen highlighted that excessive valuations pose a significant risk to the stock market. “Valuations are a major risk, especially if conditions remain stable. Overvaluations are not just visible; they are inevitable.”
Greg Swenson at The Leuthold Group added that falling correlations, driven by the dominance of a few megacap stocks, present challenges for active managers. “Lower correlations are typically beneficial for active managers, but this time it’s different. Managers need to be correctly positioned in outperforming areas, and many are underexposed to top-performing names.”
Meanwhile, the largest U.S. banks have shown confidence in their capital levels, repurchasing over $14 billion in stock in the first quarter, a 73% increase from the previous year’s second half. The results of the annual regulatory stress tests, to be released Wednesday afternoon, will influence how aggressively banks return capital to shareholders through dividends and buybacks.
Corporate Highlights:
- Interactive Brokers Group Inc.: Took a $48 million hit after a New York Stock Exchange trading disruption and is considering legal action to recover the funds.
- Whirlpool Corp.: Surged following reports that Robert Bosch GmbH is considering an offer for the appliance maker.
- McDonald’s Corp.: Test of its plant-based burger in San Francisco and Dallas was unsuccessful, according to U.S. Chief Joe Erlinger.
- General Mills Inc.: Provided a disappointing sales outlook amid declining consumer spending due to rising supermarket prices.
- Southwest Airlines Co.: Reduced its second-quarter unit revenue estimate, indicating ongoing challenges and activist pressure for management changes.
- Volkswagen AG: Invested $5 billion in a partnership with Rivian Automotive Inc. to compete with Tesla Inc.
- Airbus SE: Warned airlines about potential delays in aircraft deliveries over the next two years due to supply-chain issues.
Key Events This Week:
- Thursday: China industrial profits, Eurozone economic and consumer confidence, US durable goods, initial jobless claims, GDP, Nike earnings.
- Friday: Japan Tokyo CPI, unemployment, industrial production, US PCE inflation, spending and income, University of Michigan consumer sentiment, Fed’s Thomas Barkin speaks.
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