Markets closed higher last week, with the S&P 500 advancing 1.5% and the Nasdaq Composite gaining 3%, continuing a strong second quarter trend. Volatility has remained near year lows, with the VIX closing at 12.66 on Friday, marking a nearly 5-year low. This lack of volatility has been encouraging for bulls in the market, but some are starting to feel nervous when things get this quiet. Despite the positive market trends, there are concerns about growing concentration risk in equities, with the ten largest stocks in the S&P 500 now accounting for 37% of the index’s total value.
Looking ahead to this week, there are mixed expectations due to the mid-week holiday impacting trading volume. Economic data releases, including Retail Sales and the Purchasing Managers Index (PMI), will be closely watched. Last week’s data showed weaker-than-forecast Producer Price Index and Consumer Price Index reports, raising hopes for a potential interest rate cut in September. However, the significantly weaker-than-expected Consumer Sentiment report may have implications for consumer spending and the upcoming earnings season. Analysts are projecting strong second quarter earnings growth of 9%, but any surprises could impact equities trading above historical valuation levels.
In the broader market, copper prices are down nearly 2%, affecting stocks like Freeport McMoran, while chip stocks continue to show strength. Broadcom’s announcement of a stock split has boosted its shares, with Micron also seeing indications of higher trading levels. As the week begins with lower trading volume and a lack of attention due to the holiday, there is the potential for surprise market movements. Investors are advised to stick with their long-term objectives and investment plans despite any short-term fluctuations in the market.
It is crucial to consider both actual economic data and consumer perceptions when assessing market trends. Consumer perception can impact spending behavior, which is why the Retail Sales report is highly anticipated. The current market is trading at 21x its 12-month forward looking earnings, well above the 10-year average. Therefore, any unexpected weakness in earnings could result in equities reverting to historical valuation levels. The Consumer Sentiment report’s implications for consumer behavior and spending habits are worth monitoring as it could provide insights into the upcoming earnings season.
Overall, this week is expected to be eventful with economic data releases, mixed market expectations, and potential market movements due to lower trading volume. The concentration risk in equities and the implications of consumer perceptions on spending behavior are key factors to watch. As markets continue to hover near year lows in volatility, investors are advised to stay focused on their long-term objectives and investment strategies despite short-term fluctuations in the market. This content is for educational purposes only and is not intended to be trading or investment advice.
