Christopher Schwarz

Market Can’t Have It’s Cake and Eat It Too

The Fed just paused it’s rate increases, but the market is taking it on the chin. Why? The Fed signaled two more rate increases are coming this year. As I’ve been saying, the market isn’t going to get good growth AND rate cuts.

Here’s the progression of Fed Fund’s expectations this year. I have plotted expectations back in march prior to SIVB blowing up, right after, and now after the Fed meeting.

After SIVB blew up, the market thought the Fed was done and anticipated 3 or 4 cuts by the end of the year. Now? We’re back where we started before the banking issues. The market is expecting another hike or two and then no cuts before the end of the year.

If the labor market and economy stay strong, then the Fed is going to raise more. The market isn’t going to get good earnings growth and Fed rate cuts. Which is why I don’t see a strong market the second half of the year.

By Christopher Schwarz, ago

The Market is Really Concentrating

So far this year the S&P500 is up 13%. Of that 13%, the top 5 components – Apple, Amazon, Google, Nvidia, and Tesla – account for 12.5%. In other words, the other 495 companies are flat for the year. It’s by far the most concentrated market EVER.

Here’s a dot plot of the S&P500 return through June 12th for each year from 1965 to 2023. The y-axis is the S&P 500 overall. The x-axis is the contribution from the top 5 stocks.

As you can see in a typical year, the top 5 components account for about 20% of the SP500 return (either positive or negative). There are very, very few years that deviate. This is because the top 5 components make up about 20% of the index weight in an average year.

This year? it’s not even close. It’s an outlier of outliers. Essentially 100% of the return is made up of 5 stocks. One of which is now trading ta 40 times sales. Note all of these are NASDAQ stocks, which is why the NASADAQ is up 30% and the Dow is up 2%.

The question is what happens the second half of the year. That’s hard to say. We are in unprecedented territory here. The one thing I know for sure is that these companies can’t go up another 40-50% the rest of the year and the rest of the market goes nowhere. If that happened, they would represent 40% of the market cap of the S&P 500.

By Christopher Schwarz, ago