Wall Street isn't typically cautious after a roaring week for stocks, particularly headed into a hotly anticipated earnings season that should underscore its most important driver-AI. But it is, even though it doesn't look like it on the surface.
The S&P 500 is fewer than 100 points from the all time high it set in mid-August, and looking to gain 12% heading into the close of the third quarter. The benchmark rose 1.2% last week, while the Nasdaq Composite gained 2% after setting a fresh record high only a week ago.
And October should be a knockout for both earnings and the economy. Third-quarter earnings are expected to rise more than 30% from last year-to about $770 billion-and the economy could post one of best quarterly advances since the Covid pandemic.
Underneath, however, tells a very different story, and it has a fair number on Wall Street bracing for a correction over the coming weeks as Treasury yields surge, oil prices spike, and a handful of megacap AI stocks do the market's heavy lifting.
"While it may look like overall equities are reasonably stable by looking at the index, underneath the surface there is a tremendous amount of weakness," said Tavis McCourt, institutional equity strategist at Raymond James. "Namely, an increasingly concentrated market."
No doubt.
The S&P 500 has gained 3.8% since reaching its midsummer trough on July 29, with a record high on Aug. 18. But the gains have come almost entirely from a handful of names. The index's other players are fighting a 10-year yield that just won't stop climbing, a hawkish Fed, and $100-a-barrel crude.
Only one S&P 500 sector-information technology-is up in the past month. Only four of the 11 sectors have advanced over the past two months.,
Five stocks, in fact, have contributed the vast majority-an astounding 93%-of the S&P 500's gains since late July. All are tech megacaps and Microsoft, believe it or not, is leading the pace with 181 points of the benchmark's 330 point advance.
And the narrowing doesn't stop there.
"The percentage of constituents trading above their 200-day moving average has declined from 73% to 51%, a notable deterioration...when the index itself has been making new highs," said Adam Turnquist, chief technical strategist at LPL Financial.
"Historically, healthy and sustainable advances have been characterized by expanding participation, with a growing number of stocks confirming the move," he added. "The latest rally has instead become increasingly dependent on a handful of megacap companies."
That's not a strong setup for third-quarter earnings season, which kicks off in two weeks, if you aren't in that exclusive AI club. Plus, there are two other things coming down the pike that will affect everybody: another Fed rate decision and the midterms.
CME FedWatch is putting the odds of another quarter-point rate hike at 70% in October and the Nov. 3 elections could turn over both the House and Senate to the Democrats. That would surely change the economic backdrop for the next two years.
For BTIG's chief market technician, Jonathan Krinsky, either everybody else plays catch-up to tech or tech retreats.
"It's no secret breadth has been weakening, but the question is, who blinks first?," asked Krinsky, who sees similarities in today's market with the pre-tech bubble era of 2000.
Where the market goes right now depends on the Iran War, he said.
"Short-term direction hinges on Iran de-escalation," Krinsky added. "While a 'deal' won't fully reverse recent damage, hardest-hit sectors [consumer discretionary, financials, and utilities] will likely rebound most while tech/AI lags."
There's little sign of that at present.
Global crude prices topped $108 a barrel on Monday, the highest since late May, after President Donald Trump rejected a plan by Iran to open the Strait of Hormuz. By afternoon, though, the price was down to just under $93.
And bond yields were tested new high. The 2-year note topped 4.9% and 10-yeartraded at 5.23%, its highest since 2007. And the gap between the two is worrying.
Morgan Stanley's Mike Wilson thinks those factors, along with Fed Chairman Kevin Warsh's hawkish tone at last month's Jackson Hole symposium, are the principal reasons behind the market's autumn narrowness.
And Wilson, whose title is chief U.S. equity strategist, is worried that bond market volatility, which has picked up notably since Warsh's Jackson Hole address, could stoke it even further.
"We believe this divergence between breadth and the S&P 500 needs to reconcile before the bull market fully resumes," he said.
Such caution is rare when the Nasdaq and S&P 500 are both on fire and a big earnings season is on deck.
And it's rarer still when the market is preparing to celebrate four years as a bull market in only a matter of days.
But bond yields and oil prices and the Fed and AI have a way of concentrating the mind, and overwhelming even the most steadfast of bulls in a complicated market.
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