The S&P 500: Familiarity Breeds Contempt

The S&P 500: Familiarity Breeds Contempt

The S&P 500 has been confined to a tight range for the past few months, causing concern among investors and analysts. Many believe that the benchmark is overly dependent on a handful of giant growth stocks, leaving the majority of the market to languish. While there are some familiar echoes of past traumatic market episodes, such as narrow mega-cap leadership and the Federal debt-ceiling standoff, earnings have been better than expected, and the economy is slowing but not collapsing. The market is currently captive to strong opposing currents, and investors are unsure of what might get stocks moving in either direction.

The clustering of strength among the elite few Nasdaq stocks has been a cause of concern for Wall Street, with one firm suggesting that without 20 stocks riding the AI wave, the S&P 500 would be down 2% this year instead of up more than 7%. However, it is not clear what the precise complaint is, and the mega-cap tech dominance this year is merely a catch-up move by the most wounded part of the market in the 2022 downturn. The likes of Microsoft, Nvidia, Meta Platforms, and Alphabet have had their 2023 earnings forecasts revised up in recent months, restoring some of the predictable-growth advantage they lost last year.

Breaching the Banks

The bank-stress story has gone from acute emergency to chronic malaise, with deposit flight abating, but the stocks being bereft. Investors are mistrustful of stated book values, mindful of impaired earnings power and bracing for more regulation and credit stress. The three-month drop in the KBW Bank Index has reached 36%, and while the group might be getting toward “close your eyes and buy” levels, absolute valuations are not broadly scraping bottom. It is worth noting, however, that all of this is happening due to funding costs rising because consumers have good high-yielding options, not because of toxic credit conditions.

Does This Go to ’11?

With the posturing over the debt-ceiling and proposed spending cuts colliding with a twitchy stock market on alert for an economic downturn, the shadow of 2011 is tough to escape. The S&P 500 has followed a similar path so far this year as it did in 2011, with fear of fiscal austerity colliding with cyclical weakness driving a quick and queasy flush in stock prices. While the lack of a more decisive, cleansing flush in stocks last year is a cause of concern, forward returns from that low did not look terribly compelling. The recovery so far has been weak, and many investment pros seem to want another chance to buy the S&P 500 at 3600 or lower to refresh those expected-return models. Sometimes the market bows to the desires of the crowd, but not always and certainly not on command.


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