Stocks surged to new all-time highs last week and completed an impressive and intense rebound, rallying more than 5% in a virtually straight line since June 29. The catalysts for the rebound are clear: The Situational Awareness and solid MSFT/AMZN earnings triggering “chasing” in beat-up AI tech stocks, the cessation (for now) of U.S./ Iran attacks and hopes for an Iran/Oman deal that opens Hormuz, and some Goldilocks economic data that has pushed back against rate hike fears.
If we were to “rank” the positive forces that have pushed stocks higher, the No. 1 reason would be chasing in AI/tech—and while that’s pushed the S&P 500 to new all-time highs, the reality is that none of the positives of the past 10 trading days have eliminated previous concerns. So, don’t mistake the 5% rally in the S&P 500 in just 10 trading days to mean market risks have been eliminated.
Underscoring that is the fact that since July 29, the Nasdaq is up 9%, SPY (market-cap weighted S&P 500) is up 5%, but the equal-weight of the S&P 500 is up 2%. So, while we all should enjoy the new highs, I want to make sure we understand they didn’t occur with any fundamental, positive resolution of market headwinds.
So, risks that caused the July pullback still could cause another one, i.e., 1) Concerns about sustainability of AI cap ex/earnings, 2) Structurally higher oil prices due to the situation in Hormuz and Bab el-Mandeb Straits, and 3) Higher yields/rate hike possibility on inflation risks and worries about Fed process/independence/ communication.
Bottom line, while we’re happy about the new highs, the surge in stocks over the past 10 days has been more about chasing than actual, fundamental improvement, so don’t get complacent about market risks because they’re still out there. For that reason, we will maintain our moderately conservative position.