The market's relentless climb continues to surprise even the most seasoned analysts. Tariffs, political uncertainty, and even the occasional stumble from tech giants like Nvidia and Tesla haven't managed to derail the upward trajectory. But what's fueling this impressive run, and how long can it last? Let's examine the current market dynamics and try to answer these crucial questions.
Tuesday's Market Surge: A Deep Dive
Tuesday saw a significant rise in the S&P 500 and US stocks. Upbeat economic data helped offset concerns raised by the OECD regarding potential harm from President Trump's tariffs. The gains were widespread, with a notably strong performance in the tech sector. Nvidia, along with other mega-cap tech names like Apple and Microsoft, led the charge. Apple, for example, saw a remarkable increase, while Microsoft also experienced substantial growth. This broad-based green wave extended across software, hardware, and infrastructure companies.
However, the rally wasn't completely universal. Amazon experienced a slight dip, while Google and Meta saw more significant declines. This dip in the communication services sector is directly linked to the underperformance of Google and Meta, highlighting the sector's vulnerability despite the overall market's strength. This wasn't entirely unexpected, given the recent volatility in these tech giants.
Beyond tech, defensive sectors showed mixed results. Some experienced minor declines. XLC, the communication services sector, was down a fraction of a percent. This slight dip is yet another reflection of the mixed performance of major tech players, but the broader market shows a strong green wave across the board, and we still see positive price action in other sectors.
Economic Data: The Unexpected Upside
The market's strength stems directly from surprisingly positive economic data. The Redbook index, a weekly measure of retail sales, came in at a robust 4.9%, indicating strong consumer spending. Even more impressive was the JOLTS report, which showed job openings rising to 7.39 million. This exceeded the consensus forecast of 7.1 million, suggesting a surprisingly healthy labor market. While quits fell slightly, the overall picture painted by the JOLTS report is undeniably positive, especially when combined with other indicators of strong economic performance. The market clearly reacted favorably to these economic reports, brushing off fears associated with recent market sentiment and concerns about negative implications.
Outperforming Stocks: Nvidia and Ford
Beyond the broad market gains, several individual stocks made significant moves. Nvidia, with a remarkable 2.69% increase, briefly became the world's most valuable company, surpassing Microsoft (which, despite its gains, remained behind). Meanwhile, Ford stock rose 2% after reporting a 16.3% jump in May sales. While this surge was partially driven by promotional price cuts, this was not entirely unexpected, given that the company implemented cuts to mitigate the effect of President Trump's tariffs on the overall market, which could potentially slow down demand. The increase highlights Ford's ability to take market share from competitors (especially considering the general lack of sales cuts for GM and Stalantis). However, the question remains: Can Ford sustain this momentum and level of discounting? The answer might depend on the availability of pre-CAR inventory.
Earnings Reports: CrowdStrike and Beyond
CrowdStrike’s performance was a mixed bag. While the company beat expectations on EPS, it missed on revenue. Despite the solid earnings, a high forward PE ratio of 131 indicates that there might be some risk associated with future performance and volatility. This is especially relevant given the company's post-earnings decline in after-hours trading. A more in-depth analysis of CrowdStrike's earnings will be provided on a different platform.
Other notable market movers included Hims & Hers Health, a higher-beta stock. The stock saw a dramatic intraday swing, peaking at an 18% increase before settling at a 3% decline for the day. This volatility is directly attributed to the company's announcement of acquiring the UK-based startup Zava, an expansion move for Hims & Hers Health. However, despite the positive underlying move for the company's future, some financial institutions, such as Citygroup, chose to maintain an underperform rating due to current valuation, expressing their expectation of a decline to the $30–$28 range. Yet, this valuation feels completely out of line with the company's growth trajectory.
Market Breadth and Momentum
Tuesday's gains were broad, showcasing clear risk-on sentiment. The market breadth was strongly positive, with a significant number of stocks advancing, outpacing decliners by a considerable margin. This positive sentiment reflected in the gains seen across multiple indices, such as the S&P 500, NASDAQ 100, and Russell 2000.
While large-cap stocks underperformed mid- and small-cap stocks, the overall momentum was quite strong across all sectors except for defensive ones. This is significant, suggesting that investors are looking beyond safe havens and moving towards sectors and companies more exposed to market fluctuations (higher beta). Small-cap value stocks, in particular, saw impressive gains, highlighting a clear shift in investor preferences. The consistent strength in small-cap equities, especially those in the value category, implies that the market believes the economy remains relatively healthy, despite some headwinds.
Technical Analysis: A Look at the Charts
A closer look at the charts revealed a very positive market outlook. Several key technical indicators are bullish, suggesting that the market may continue to rally. However, it's important to note that the market may experience short-term fluctuations before the continued upward movement.
The IWM, a key small-cap index, saw a particularly strong gain (1.61%), suggesting that this might be where significant alpha can be generated for equities. Mid-cap and S&P 600 indices also performed exceptionally well, further emphasizing the outperformance in smaller-sized companies. The current market positions and technical indicators suggest that a breakout is in the offing, particularly for small-cap indices.
The 5-day and 20-day moving averages were retaken, indicating robust momentum. We are approaching the 100-day moving average, which would represent a major resistance level if retaken. However, many shorter-term averages are showing a strong upward trend, making this a strong point for buyers. While longer-term averages remain in the 40% range, the shorter-term picture suggests increased strength for the market.
Macroeconomic Factors and Outlook
Macroeconomic factors also played a role in the market's performance. The 2-year and 10-year Treasury yields showed minor gains. This movement is largely consistent with the overall trend of the last couple of years, reflecting a period of stability rather than dramatic change. However, the 10-year yield itself has been relatively stagnant, suggesting little change in long-term investor sentiment. The dollar, which had been weakening, saw a strong increase (55%) likely fueled by the drawdown of the Treasury General Account (TGA) due to government funding measures. I believe that this trend may soon reverse, predicting a move towards the 104 range as a new budget is passed. This prediction comes from a combination of my observations on the underlying economic and fiscal factors that will impact future growth.
In the commodities market, gold and silver fell, while WTI crude oil showed a modest gain due to escalating tensions in the Middle East. This highlights the impact of geopolitical events on energy prices, which may still continue to be affected by global political events and policy.
The options market is providing some clues. The gamma core wall and gamma flip were moving up, which means options traders are adjusting their bets higher. This upward movement suggests potential for further market gains, especially in the positive gamma range (buy dips, sell rips). The next move higher could lead to all-time highs for many key indices.
Rate Cuts: The Fed's Next Move?
The possibility of interest rate cuts by the Federal Reserve is at the forefront of investors' minds. Market expectations for rate cuts at the June 18th FOMC meeting have decreased significantly. However, this should not signal a shift in sentiment. I am of the opinion that a rate cut is necessary, especially given the recent decline in inflation (PC inflation at 2.1%). While Waller, a Federal Reserve governor, suggested that rate cuts are still possible this year, assuming inflation continues to cool, the market clearly suggests otherwise.
The current federal funds rate (4.25%–4.5%) is out of sync with the 2-year Treasury yield (around 4%). Therefore, I still believe that a 25 to 50 basis point cut is needed, especially with the negative consequences of higher interest rates being felt in the housing market and overall economic conditions. While the market may not agree yet, this does not change my view of this situation, which I have based on sound technical and economic factors.
Key Takeaways and Future Predictions
The current bull market demonstrates surprising resilience. Positive economic data has fueled optimism, pushing the market higher. However, several factors are worth carefully considering for the future.
- Economic Data: The Redbook and JOLTS reports paint a positive, yet somewhat contradictory picture of the current economic climate. While the retail sector is showing strong growth, some sectors seem to be experiencing slowing growth.
- Earnings: While some companies are beating expectations, valuations should be carefully examined, as some sectors are simply too overvalued.
- Geopolitical Risks: Tensions in the Middle East continue to affect the energy markets, while trade policies also pose significant risks.
- Interest Rates: While the market is discounting rate cuts, I believe that this is likely necessary, given the overall economic climate and the need for the Federal Reserve to align its monetary policy with the economic realities.
The market's recent performance, though impressive, might not be sustainable in the long term. While we may see short-term corrections, many indicators suggest that the broader upward trend could continue. The market's strength, the positive technical indicators, and the surprisingly positive economic data all suggest a positive outlook for the near future, and that investors should remain invested in the market, taking advantage of these opportunities. However, volatility may still continue, so a cautious and measured approach is recommended.