What We're Seeing: Magnificent Seven Momentum – 20 May 2024

The Week in Brief

Big-cap tech continued to carry markets last week. The S&P 500 held near record levels, powered by further gains in the Magnificent Seven and other large-cap growth names. The concentration of returns in a handful of stocks remains a feature of this market, even as some rotation into value and cyclicals persists underneath the surface.

Fed minutes from the April meeting showed policymakers were still reluctant to cut rates too soon. The market took this in stride, choosing to focus on declining inflation expectations and the prospect of an eventual easing cycle.

Style and Sector Moves

Financials, industrials, and materials posted decent gains as the rotation into value continued. This is a healthy development. When only a narrow group of stocks drives the index, the market becomes vulnerable to sudden reversals. Broader participation suggests more sustainable foundations.

Bonds were essentially flat. Treasury auctions drew lukewarm demand, with the 5-year yield actually ticking higher. The bond market is waiting for clearer signals on the inflation trajectory before committing to a direction.

Commodities

In commodities, gold drifted lower as China’s buying slowed. The precious metal had enjoyed a strong run on central bank demand, but that bid appears to be fading for now. Oil firmed on renewed Middle East tensions, with geopolitical risk providing a floor under crude prices.

Our Read

The reliance on mega-cap tech for index returns is both a strength and a vulnerability. These companies have genuine earnings power and are benefiting from structural trends like AI adoption. At the same time, their valuations are stretched by historical standards, and any disappointment could trigger a sharp pullback.

We think the right approach is to maintain exposure to quality tech names while diversifying into areas that offer better value. Financials look attractive at current levels. Industrials tied to infrastructure spending and the energy transition are worth considering. The barbell approach, owning both growth and value, makes sense in this environment.

The Fed remains the wild card. If inflation surprises to the upside, the patience that policymakers have shown will evaporate. For now, the base case is that rate cuts arrive later this year, but the timing remains uncertain.

What Could Change Our View

We would reassess our constructive stance if tech earnings disappoint or if the breadth we have observed starts to fade. A sharp narrowing of leadership back to just a handful of names would be a warning sign. On the macro front, persistent inflation or a meaningful slowdown in consumer spending would alter the calculus significantly.

This is informational commentary, not investment advice.