2/12/2024

Traders fear a fall in the S&P 500

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Key points:

  • The S&P 500 index hit new records, but analysts and traders fear a pullback if market leaders falter.
  • The “Magnificent Seven” companies accounted for 60% of the S&P 500’s gains earlier this year.
  • Markets were expecting the Fed to cut rates later in March, but Powell shot down those hopes.

Last week witnessed a significant surge in the S&P 500, reaching unprecedented levels. Nevertheless, concerns are mounting among financial experts and traders who worry that the recent upswing might be undone should the leading players in the market encounter setbacks.

Investors generally view a substantial number of stocks propelling a broader index upwards as a positive indication. This suggests that profitability is not overly reliant on a few select companies, contributing to a healthier market. Conversely, the current trend is showing the opposite scenario.

Reasons for the forecasts

Throughout much of 2023, the market has experienced limited diversity, with the S&P 500’s substantial 24% growth mainly propelled by the “Magnificent Seven.” This elite group, featuring heavyweights like Apple Inc.’s meta platforms and Amazon, has been the primary driving force.

Although market coverage expanded towards the end of the year, indications suggest a potential reversion to narrowness in 2024. The Nasdaq index, despite reaching new peaks, descended to its lowest point since July.

Simultaneously, by Thursday’s close, only 62% of large-cap stocks remained above their 50-day moving average, a decline from the 87% reported in December, as noted by analysts. Remarkably, the Magnificent Seven have contributed to nearly 60% of the S&P 500’s overall gains this year.

US stock market vulnerability

The limited selection of stocks propelling the market could heighten its susceptibility to a swift downturn in case of disappointing earnings or other issues affecting its major stocks.

Despite the general upward trajectory of most mega-cap stocks this year, Tesla shares have experienced a notable 22% decline, ranking as the third-worst performance within the S&P 500. This highlights how rapidly market favorites can lose favor.

Some investors posit that the narrowing range is partly a result of market expectations for the Federal Reserve to delay rate cuts compared to earlier Wall Street projections. This has led to the abandonment of optimistic expectations in rate-sensitive sectors. Notably, Federal Reserve Chair Jerome Powell dismissed immediate rate cut hopes after the March meeting, emphasizing the need for the central bank to have greater confidence in inflation returning to its 2% target.

US December consumer price report was mixed

This week, traders are anticipating the release of consumer price data for January, simultaneously reflecting on the December figures. In December, monthly U.S. consumer prices recorded a rise that was lower than initially anticipated. However, the overall revision in inflation was mixed, and it did not alter expectations regarding the timing of the Federal Reserve’s anticipated interest rate cut for this year.

The annual surveys unveiled by the Labor Department on Friday indicated a slightly higher increase in the consumer price index for October and November than previously reported. Economists suggest that while the Consumer Price Index (CPI) data is not likely to significantly impact the market, it could serve to further reinforce the Federal Reserve’s confidence in abstaining from rate cuts in March.

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