• Big tech lift the S&P 500 into bull market.
• Is the rally sustainable?
• Where do we go from here?

S&P 500 entered a bull market, up over 20% since the October lows of last year, putting an end to the longest bear market finishing only 10.5% below its peak. The index trader above 4300 for the first time since August 2022, defying the Fed rate hiking cycle. Over the last 14 months, the US central bank hiked rates 10 times totaling 5%, making it the fastest pace of rate bumps in the past 35 years.

Overconcentration

However, over the last six months, only a handful of stocks, META, AMZN, AAPL, MSFT, GOOGL, TSLA, and NVDA, have driven S&P 500 returns year-to-date. If we combined those seven tech giants in one index, it would be up 53% since the start of the year; without those seven names, the S&P 493 would have been flat over that same period. This insane tech outperformance and overconcentration have contributed to the abysmal market breadth.

The hunger for returns has led investors to chase growth stories – such as the AI wave that has catapulted many of these names to new highs, stretching the multiple valuations beyond normal. Of course, it is not uncommon for growth to outperform in the late cycle. However, investors need to exercise caution. The fear of missing out (FOMO) times has distorted the fundamentals for those tech titans as PE ratios have skyrocketed. These challenging multiples north of 30 are usually found on much smaller stocks with opportunities for rapid growth – not mega-caps with revenues already in the 100s billion (except for Nvidia).

The overconcentration in just a few names, while the remaining companies are barely flat, has left investors scratching their heads and questioning the sustainability of the rally if the tech sector pulls back at some point. Tech funds saw their first outflows in 2 months in the week ending June 7. Hence investors could hedge their positions just in case or even short the tech 2.0 bubble.

S&P 500 bulls – inflation continues to roll over.

All eyes will be on the CPI on Tuesday, followed by the FOMC on Wednesday.

Inflation continues to decline – the CPI has fallen for the 10 ^th consecutive month, up from 9.1% in June 2022 to 4.9% in April 2023. The Fed pausing and ultimately cutting rates before year-end is what the bull hopes for.

Median Analyst’s expectation is for a 4.1% for May, indicating a continued slowdown; this will bode well for the bulls penguin parade as it will give the (data dependent) Fed a chance pause; after all, there is no more significant point than the inflation print. And from there on, possibly one more 25 basis point hike followed by rate cuts.

This is very close to what the interest rate traders are pricing it. Pause this meeting, followed by a quarter-percentage-point increase and rate cuts by year-end.

S&P 500 bears – inflation turns out to be sticker does not fall ( would cause the Fed to continue hiking possibly until something in the markets break),and the overconcentration injust a handful of (tech) stocks continues will cause the Tech bubble 2.0 to burst.

As everyone piled into tech, it, as a percentage of the S&P 500, has grown to levels not since the “dot.com bubble.”

Market participants are trying to determine what the rate decision will mean for equities, especially considering the recent stock run-up and the interest rate traders are “pricing in.”

If the Fed “skips” at the June meeting and the data confirms a pause for the rest of 2023, yields will likely move lower. Should this happen, this will spell positive news for stocks that could extend beyond Tech. We could finally get some broader market participation and breadth! As Goldman points out in its recent memo: “episodes of sharply narrowing breadth have been followed by a “catch-up” from a broader valuation re-rating.”