Stocks Up, Vibes Down

By Ben Norris, CFA, Senior Investment Strategist, Vice President   Stocks saw modest gains over the Juneteenth-shortened week, pushing the S&P 500 (SPX) to a new all-time high. In an encouraging development, the market saw a broadening in performance as value stocks outperformed growth as the NASDAQ Composite trailed both SPX and the Dow Jones Industrial Average (DJIA). At the same time, the equal-weighted S&P 500 Index, which is not dominated by mega-cap stocks, outperformed the cap-weighted SPX. For the week, SPX gained 0.6%, DJIA rose 1.5% and the NASDAQ was flat. Small-cap stocks also fared relatively well last week with the Russell 2000 gaining 0.8%. While the week was relatively quiet with markets closed on Wednesday, there were a few notable developments among individual stocks. NVIDIA, which has dominated markets so far this year (the stock is up more than 150% year-to-date and nearly 200% over the last year), briefly overtook Microsoft for the title of largest publicly traded company by market capitalization on Tuesday before relinquishing the title the following day. Microsoft, NVIDIA and Apple all boast a market capitalization of more than $3 trillion, a size that seemed unthinkable just a few years ago when Apple was the first U.S.-based publicly traded company to eclipse the $1 trillion mark in 2018. There are now six U.S.-based companies with a market cap greater than $1 trillion—the three previously mentioned companies as well as Alphabet (Google), Meta (Facebook) and Amazon. Companies of this size continue to have an outsized impact on broad market returns, with these stocks accounting for well over half of SPX’s 15.4% year-to-date gain. Here are a few details on just how large and influential these companies really are. NVIDIA, Microsoft and Apple are each larger than the totality of all stocks in the Russell 2000. The six companies have a total market cap of roughly $15 trillion, which is larger than the next 50 largest companies in the S&P 500 combined. From a revenue perspective, these six companies generate as much revenue as the entire gross domestic product (GDP) of countries like South Korea and Spain, the 14^th and 15^th largest economies in the world, respectively. A market dominated by a handful of stocks isn’t concerning on its own, but many of these stocks have seen a good deal of multiple expansion during this rally and are approaching levels that might not be sustainable. This isn’t to say that these stocks are set to fall, but rather than they may need time to grow into their demanding valuations. The good news is that history shows that a market dominated by a handful of large companies isn’t all that uncommon. There have been several similar market environments throughout the last several decades, and they often lead to a continued rally supported by smaller stocks as they begin to catch up. Research from Bank of America shows that when returns are dominated by mega-cap stocks, the market is up the following year 75% of the time, with an average return of 12%. In economic news, last week we saw some evidence that consumers are becoming increasingly cautious as the U.S. Federal Reserve’s (Fed’s) tightening campaign slowly takes hold. On Tuesday, the Commerce Department reported that retail sales came in below expectations for a second straight month while prior months were revised lower. Including these revisions, retail sales declined 0.3% in May compared to an expectation for a 0.3% gain, a sign that consumers are feeling the pressure of higher borrowing costs now that their pandemic savings have been spent. Notably, sales at restaurants and bars—which are considered services spending—are down at a 2.3% annualized rate through the first five months of the year. Inflation-adjusted retail sales are down 0.9% in the last year, and a pullback in a key services category is a sign that consumers aren’t as confident as they were just a few months ago. In fact, the University of Michigan Consumer Sentiment Index fell to a seven-month low in June. The index is 30% below its pre-pandemic level and just barely above its average during the Great Financial Crisis. Two additional factors that may be affecting consumer vibes are a lack of housing availability and cooling labor markets. Housing starts and building permits for May both came in below expectations, each hitting lows not seen since June 2020. At the same time, homebuilder sentiment has begun to fall off as mortgage rates remain above 7%, curbing affordability for many consumers. Existing home sales declined 0.7% in May to an annualized rate of 4.11 million, right in line with lowered expectations. The median price of an existing home rose to nearly $420,000 in May and is up 5.8% from a year ago. Assuming a 20% down payment, the rising in mortgage rates and home prices has led to a 43% increase in monthly mortgage payments for a 30-year loan on a typical home. Accordingly, existing home sales are down 2.8% from a year ago, despite consumer appetite for home ownership. Recent employment data also suggests that things are getting worse for consumers. The unemployment rate recently rose to 4.0%, a relatively low number by historical standards but above the levels we’ve grown accustomed to over the past two years. Job openings have declined by roughly 30% from their peak levels; the rate at which employees voluntarily quit their jobs is falling; and last week, jobless claims reached their highest level since November 2021. Consumers have been notably negative about their prospects over the past two years despite strong stock returns, a solid labor market and a growing economy. The most likely explanation for the deficit between consumer vibes and economic reality is inflation. The good news is that inflation continues to move in the right direction despite a bumpy path toward the Fed’s long-term goal of 2.0%. If the Fed is able to normalize rates (which will help the housing situation) in the coming quarters without reigniting inflation, consumers should regain confidence, which in turn will power continued economic expansion. This week’s economic calendar has a few data points that will be closely watched by the Fed and by those who remain hopeful for rate cuts in 2024. Thursday brings another revision to the first quarter’s GDP read, while a variety of housing data points are sprinkled throughout the week. The mostly closely watched data point will be the Personal Consumption Expenditures (PCE) Price Index on Friday as the Fed looks for a continued move lower from inflation. In noneconomic news, the first presidential debate between former President Trump and President Biden will take place on Thursday evening.  

TIME (ET)	REPORT	PERIOD	MEDIAN FORECAST	PREVIOUS
MONDAY, JUNE 24
	Fed speakers throughout the day
TUESDAY, JUNE 25
9:00 am	Case-Shiller home price index	April	—	7.4%
10:00 am	Consumer confidence	May	100.0	102.0
WEDNESDAY, JUNE 26
10:00 am	New home sales	May	650,000	634,000
THURSDAY, JUNE 27
8:30 am	Initial jobless claims	June 22	240,000	238,000
8:30 am	U.S. GDP (2nd revision)	Q1	1.3%	1.3%
8:30 am	Durable goods (less transportation)	May	—	0.4%
10:00 am	Pending home sales	May	1.0%	-7.7%
FRIDAY, JUNE 28
8:30 am	Personal spending	May	0.3%	0.2%
8:30 am	Personal income	May	0.4%	0.3%
8:30 am	PCE price index (y/y)	May	2.6%	2.7%
8:30 am	Core PCE price index (y/y)	May	2.6%	2.8%
10:00 am	Consumer sentiment	June	65.9	65.6

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