Wall Street had high hopes for a stock market rally at the start of 2024, but it has not materialized as expected. Nvidia has been a major contributor to the S&P 500’s gains this year, but recent data suggests that the market may not see a significant extension of the rally. Mike Wilson, Chief Investment Officer at Morgan Stanley, pointed out that downward surprises in economic data are limiting the potential for further growth. The Citi Economic Surprise Index has been declining throughout the year, indicating a weaker-than-expected economy that may impact other areas of the market.
Investors have been shifting their focus to companies that have been able to thrive despite high interest rates and slowing economic growth. This trend is not limited to big tech names like Nvidia, but also includes stocks such as Eli Lilly, Chipotle, and Costco, which have outperformed the S&P 500. However, small-cap stocks may not benefit from this trend at this time.
Despite the lack of broad market participation, Wilson believes that this market environment can continue without a significant downturn. He noted that historically, narrow breadth readings have not necessarily led to weak returns in the future. Wilson concluded that the average cap-weighted index return six months after narrow breadth readings is 4%, suggesting that investors may still see positive returns in the coming months.
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