Get ready for a feeling of déjà vu.
Once again, it was a busy week of earnings reports and economic data, and once again, the market’s biggest stocks—we’re looking at you,
Microsoft
(ticker: MSFT) and
Meta Platforms
(META)—did the best. Data showed a decelerating economy, but nothing to get worked up about. It’s a version of the market that investors have seen before and can expect to see again in the coming months.
And once again, the market moved only a little. The Nasdaq Composite gained 1.28% this past week, while the Dow Jones Industrial Average advanced 0.86% and the S&P 500 index rose 0.87%. That stretched the S&P 500’s year-to-date gain to 8.59%.
Just because the market is up doesn’t mean most stocks are participating. Less than a third of stocks in the S&P 500 have outperformed the index, the fewest at this point in the year since 1999, says Desh Peramunetilleke, head of microstrategy at Jefferies. Five stocks—
Apple
(AAPL), Microsoft,
Nvidia
(NVDA), Meta, and Amazon.com (AMZN)—have delivered 60% of the index’s return this year.
The recent preference for Big Tech is understandable: A banking shock in March and an uncertain outlook have pushed investors into what they’re comfortable with and what has worked for them in the past. That lift to the broader S&P 500 can’t go on forever, however, if only because Microsoft, Meta, and all the rest won’t have bullish earnings reports to announce during all 52 weeks of the year. But that doesn’t mean the stock market has to crash, either.
A backdrop of slowing-but-not-collapsing economic growth, an on-hold Federal Reserve, and continued progress on lowering inflation should shift investors’ focus increasingly from the macro, which has dominated the past few years, to the micro. It won’t be a universally good or bad environment, but one where stronger companies can separate themselves from weaker ones. At the index level, that could mean a potentially volatile but largely sideways market.
“In these choppy environments for risk assets, there’s alpha to be had in doing sector rotations or picking individual stocks,” says Evan Brown, head of multi-asset strategy at UBS Asset Management, referring to the industry term for outperforming the market.
Still, the macro will be back in focus for at least some of the coming week—the Federal Open Market Committee concludes a two-day meeting on Wednesday, with a monetary-policy decision and press conference with Chairman Jerome Powell—even as the micro-data deluge of earnings season continues with Apple,
Starbucks
(SBUX), and
Pfizer
(PFE), among others, reporting. This summer, the U.S. debt-ceiling showdown could move the entire market.
Still, a steady-rate and slower-growth environment should reward companies that can show the strongest and most consistent sales and profit margins, defensible characteristics, or a competitive moat. Peramunetilleke points to
Visa
(V),
Coca-Cola
(KO),
Caterpillar
(CAT),
Adobe
(ADBE),
Humana
(HUM), and
Activision Blizzard
(ATVI) as examples of stocks that offer just that. “The demand for moats should only grow as the economy slows, and hence quality at a reasonable price and low [volatility] remain key focus areas,” he writes.
It beats trying to guess where the market might be heading next.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com
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