At the last Fed meeting they left interest rates unchanged for the 5th consecutive meeting weighing concerns over inflation versus weaker growth and damage to labor should rates move lower or higher. The fear is that if rates are lowered too much too soon then inflation will spike again, and as every consumer knows, prices are plenty high as it is. On the other hand, if rates are kept too high for too long it might damage the economy and increase unemployment. The stock market reaction to the Fed decision was not great but also not overly negative either. Regardless, the Fed announcement was quickly put in the rearview as investors salivated over the latest reports from Microsoft and Meta (Facebook). After reporting earnings, the two companies combined to add over half a trillion dollars in market value. That gain alone amounts to more value than 475 of the S&P 500 companies combined. Microsoft is now worth more than $4 trillion and META is on its way to $2 trillion. Along with Apple and Amazon, these companies make up about 20% of the S&P 500 and 40% of the Nasdaq 100. They are the drivers of the markets at the index level. But beyond that they are the drivers of innovation and at the forefront of the global economy. Their investment dollars matter, and their capital expenditures are watched closely. As the infrastructure for AI is built out, companies in the semiconductor and software space grow as a result of the demand from these market behemoths. Additionally, Apple and Amazon reports tell us about the demand for retail goods and the health of the consumer economy. Taken altogether the Magnificent 7 (NVDA, MSFT, AMZN, GOOG, META, APPL, TSLA) not only have significant impact on the major stock market averages like the S&P 500 and the Nasdaq, but they also impact companies across various industry groups sending shockwaves through the broader market. Cloud computing, AI companies, and even energy catch higher bids when the Mag 7 are growing.
The growth we have witnessed from these tech giants have been truly magnificent and we expect that trend to continue along with this bull market. Nevertheless, it would make logical sense for this to be a moment for some digestion of those gains. The ratio of Growth to Value in the market is at historic highs as returns in Growth companies have outpaced Value companies steadily since the Financial Crisis of 2008. This is coinciding with major averages like the S&P 500 looking a bit stretched with tech (Growth) doing most of the heavy lifting. If we do see some digestion and consolidation at this level, it will likely be while Value catches up. When we talk about Value we are talking about things like energy, utilities, consumer staples, and healthcare. It would make sense to see some rotation back into these more stable businesses because we are starting to see some froth in the market as evidenced by headlines like “Meme Stocks Are Back” (Fox Business). Overall, there are still record amounts of cash on the sideline ready to carry this bull market forward and giving us evidence that we are not at a market top quite yet. However, on the margins we are seeing speculative greed in weak companies with high short-interest (meaning institutions are betting against the company), like Kohls, Opendoor, and Krispy Kreme. Some of these names are doubling in a single trading day. Typically, by the time the headline hits the trend is getting close to being exhausted.
Another thing we are keeping an eye on is the dollar. Throughout this market-run since April the dollar has been dropping as is typical during periods of market strength. A weak dollar means more demand for our goods and services. However, over the past few weeks we have seen renewed strength for the greenback and that could potentially act as a headwind for stocks. But for the time being, earnings, technology, and sentiment are combining to keep trend in place and the bulls in command.