With all the ups and downs over the last 18 months, it wouldn’t be surprising if the average investor has lost track of where the “hot” segment of the market currently sits. But as of this week, it is clear that the winner this year (so far) are Mega-Cap companies. For this discussion, we’ll define Mega-Cap as Apple ($2.7T), Microsoft ($2.3T), Alphabet ($1.5T), Amazon ($1.2T), Nvidia ($740B), Meta ($620B), and Tesla ($550B). It should be clear to see right away that these are absolutely massive companies, with market capitalizations between $550 billion and $2.7 trillion and totaling almost $10 trillion between them. Combined, these seven companies are up over 40% year-to-date, which is staggering. Even more astonishing is that with the S&P 500 up 9% for the year, these seven companies account for approximately 95% of the total return. Or said another way, without these seven companies, the S&P 500 would be just above zero.
But, if our memories are not too short, while this year has been phenomenal for the Mega-Cap names, it was just last year that all of these companies saw dramatic declines in their share prices. Moreover, from the start of 2022, six of the seven companies are still below where they started (Nvidia is the only one higher), with Amazon, Meta, and Tesla still more than -25% lower. And in aggregate, the seven companies are still about -15% below where they started in 2022. So while the rebound has been dramatic, there is still ground that needs to be made up for most of these companies to return to where they were. Considering all of the movements, it’s another clear example of how the market is so unpredictable, and taking a long-term measured approach can help you weather the bumps in the road.
Moving on, there are a few updates related to the debt ceiling that we wrote about last week. By all accounts, significant progress is being made in the negotiations between President Biden and Speaker McCarthy. Both have stated clearly that they believe an agreement will get done and that it has to be done, as the consequences would be unacceptable. President Biden said, “I’m confident that we’ll get the agreement on the budget, and America will not default.” Similarly, McCarthy stated, “I think at the end of the day, we do not have a debt default.” However, on Friday, it looks like some cold water was poured on the whole process when Garret Graves (R-LA) walked out of the meetings saying negotiators would “press pause” on the talks. All eyes will continue to be on this as the timeline is tight, but there is no doubt the optimism from early this week helped propel equity markets.
Lastly, the Federal Reserve members were out in full force this week, delivering speeches and attending briefings on the Hill. And while the tone of the remarks was not entirely surprising, overall, it was more hawkish than most expected. What makes this even more interesting is how dovish some of these individuals were in 2021 when inflation began to take off. For instance, Atlanta Fed President Raphael Bostic said this week, “My baseline case is we won’t really be thinking about cutting until well into 2024,” and that “if I had a bias between going up and going down as our next action, I would say we might have to go up.” Contrast this to 2021, when Bostic was adamant that “transitory moves in inflation don’t warrant a response.”
Another example is from Minneapolis Fed President Neel Kashkari, who said this week that “we at the Federal Reserve probably have more work to do on our end to try to bring inflation back down,” implying the possibility of additional rate hikes. While in 2021, when inflation was at about the same level as today, he stated he wasn’t worried about the rising prices because “higher inflation will likely be transitory.” And while it is entirely understandable that both Bostic and Kashkari got the inflation spike wrong (no one has a crystal ball), it is surprising that having just lived through this, they are equally adamant in their views that inflation is so sticky that it will require additional action from the Fed. It will be fascinating to see how this plays out and what will transpire for their opinions to change.
Economy
- U.S. equity markets were higher for the week ending May 19, with the S&P 500 up +1.6%, the Nasdaq up +3.0%, and the small-cap Russell 2000 up +1.9%. There was little in the way of market-moving news, but the positive developments on the debt ceiling early in the week seemed to give the market a boost.
- Retail sales in the U.S. increased +0.4% MoM in April, rebounding from two consecutive months of declines but well below market forecasts of a +0.8% increase.
- According to a preliminary estimate, building permits in the U.S. declined by -1.5% to a seasonally adjusted annual rate of 1.416 million in April. This marks the second consecutive month of decline and falls short of market expectations of 1.437 million permits, suggesting housing demand remained subdued due to higher interest rates and increasing consumer prices.
- The Philadelphia Fed Manufacturing Index in the U.S. increased to -10.4 in May from a nearly three-year low of -31.3 in April. This was better than market forecasts of -19.8; however, general manufacturing activity in Philadelphia continued to decline but at the slowest pace in four months.
Stocks
- U.S. equities were in positive territory. Technology and Communication Services were the top performers, while Utilities and Real Estate lagged. Growth stocks led value stocks and small caps beat large caps.
- International equities closed higher for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield increased 24 basis points to 3.70% during the week.
- Global bond markets were in negative territory this week.
- High yield bonds led for the week, followed by corporate bonds and government bonds.
