Looking to the Futures

The S&P 500 crossed 5400 for the first time on Wednesday. The move is a continuation of a rally that started in October. This week’s gains were spurred by economic data and big upside move in mega-cap technology stocks.

Wednesday was an especially consequential day for market-moving news. Inflation numbers were lower than expected, with CPI flat versus expectations of a 0.1% increase with Core CPI at 0.2% month over month versus 0.3% expected. The FOMC meeting also ended with the Fed holding rates at 5.25%-5.50% as expected. The Fed made a minor adjustment to the statement, noting modest progress toward the 2% inflation target. The notable detail was a change in the quarterly dot plot. The forecast for year-end interest rates was raised from 4.5%-4.75% to 5.0-5.25%, indicating that rates will be cut only once this year. Longer-run rates were also revised modestly higher, with the terminal rate increased to 2.75% from 2.6% in March. Wednesday also saw a surprise increase in crude oil inventories, with inventories increasing by 3.7MMbbl versus an expected draw of 1.2MMbbl. That reinforces the narrative the CPI data showed, as energy was the biggest decliner in the CPI report. Wednesday’s news was followed by lower-than-expected producer inflation numbers and a surprise increase in unemployment claims. In response to the releases, the CME FedWatch tool now reflects a 2-in-3 chance of a rate cut at the September meeting.

In mega-cap tech stocks, Broadcom rallied over 14% after releasing earnings and announcing plans for a 10-for-1 stock split planned for July. The announcement echoes the one made by NVIDIA in May and consummated on Monday. Broadcom and NVIDIA are just two of the many top stocks that reached all-time highs this week. In addition to those two, Microsoft, Apple, Alphabet, Oracle, Micron and Applied Materials reached new highs. You may have noticed a trend among those companies, which together make up over 27% of the S&P 500. They are leaders in the two top-performing sectors in the S&P 500 this year: information technology (+30.4% YTD) and communication services (+24%). The other sectors have been relative laggards, ranging between utilities (+10.2%) and real estate (-4.5%). The tale of two markets is reinforced in examining performance by market cap. The cap-weighted S&P 500 (SPX) reached its all-time high this week and is up 14% this year. The S&P 500 equal weight index (SPXEW) reached its all-time high April 1^st and is up less than 4% for the year. But wait, there’s more: the S&P 500 Top 50 ($SP5T5) is up 20% in 2024 and the ten largest companies in the index are up over 28%.

In periods like these when the top 10 names make up over a third of the index, investors may have concerns about overconcentration among the top names. On the other hand, research by Goldman Sachs shows that periods of peak concentration have not consistently led to subsequent underperformance.

The S&P 500 e-mini futures contract (/ES)) reached an all-time high on Wednesday. The contract has rallied since a slump that started in March and ended in mid-April. It hasn’t closed below its 50-day SMA since early May, and the recent crosses have all been bullish with the 9-day crossing the 20-day and the 20-day crossing the 50-day in May. On the other hand, the 14-day RSI recently crossed above 70 into an overbought condition. MACD is positive, indicating potential for further upside. The contract is set to roll from June expiration (/ESM24) to September expiration (/ESU24) next week.
 

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