The concentration of large-cap stocks leading the overall market higher this year has raised skepticism among some analysts about whether the market can sustain its momentum. According to U.S. Bank Wealth Management, this year’s robust stock market gains have occurred among a small group of names, with most of the rest of the broader market not participating. The group says that is consistent with periods of uncertainty.
The S&P 500 ($SPX) (SPY) has been trading in a tight range below resistance levels in the 4100 area and above support near 4040. In a note to clients this week, JPMorgan Chase said large-cap stocks are keeping the broader U.S. equity market near a key resistance level, while current price action points to downside ahead. The Chase team surmises that a bearish technical pattern points to steep losses ahead for the S&P 500 heading into the summer months.
The next catalysts for stock direction to determine if the S&P 500 breaks out of its current range, aside from the debt limit negotiations, are upcoming retail earnings results that will show how consumers are fairing. U.S. Bank Wealth Management said, “Technically, the price action on the S&P 500 is on the high side of its six-month trading range, but if it breaks 4,200, there is probably more upside, but if that resistance level holds, then we probably back up some.”
According to JPMorgan Chase, the recent price action is not unusual for late-cycle market behavior, but it leaves the S&P 500 Index on the “cusp of a sharp slide.” If stocks do break to the downside, JPMorgan believes the move would reflect a market that is more accurately pricing the increased likelihood of a recession over the next year.
As of Thursday’s close, the S&P 500 is up +7.6% for the year, with six of 11 sectors higher even though market breadth remains narrow. Meanwhile, the Nasdaq 100 Index ($IUXX) (QQQ) is up +22% this year compared with a -0.9% decline in the small-cap Russell 2000.
DataTrek Research is optimistic that the earnings of U.S. large-tech companies can propel the market even higher. “They should continue to power the S&P higher, given they account for a quarter of the index. Big Tech has widely outperformed the broader U.S. equity market year-to-date, and their largely positive earnings momentum is an encouraging fundamental signal.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
