As we kick off the first day of trading in June, it is helpful to consider how wrong many market strategists have been about the stock market in 2023. Even those that have been correctly bullish failed to predict the manner in which the action unfolded.
The story of the year is the artificial intelligence revolution. AI has been promoted as the biggest technological shift since the advent of the internet, but the market action so far has been unlike anything we have seen as other major themes, such as EVs and solar, have developed.
The AI surge has been almost exclusively in big-cap stocks. While hundreds of smaller companies are employing AI technology in a variety of ways, it is only a few names such as Microsoft (MSFT) , Nvidia (NVDA) , and Meta Platforms (META) that have seen bubble-like action. There is very little speculative action in any stocks outside that small group of giants.
It is likely that this will evolve as smaller companies show how AI is increasing sales and profit margins, but so far, there are very few companies that are showing how using AI will help them. On the other hand, the companies that are selling AI tools are seeing huge returns.
The AI revolution is occurring in the context of the most difficult economic environment since 2008-2009, which is a big part of why it has surprised so many market players. All the bearish economic arguments were rendered meaningless when it came to a few of the large-cap names.
The market is now in the unusual position of having just a dozen or so big stocks producing all of the gains for the indexes. About 90% of stocks are still struggling and mired in bear-market action. However, many market players believe that the indexes are the market and they are celebrating, but anyone with a diversified portfolio of stocks likely has had difficulty keeping pace with the market.
The AI theme will not go away as a market driver anytime soon. While there are bears arguing that expectations are too high and many stocks are overvalued, the nature of major themes like AI is that they persist much longer than many think they will. Traders and investors are going to continue to hunt for the next opportunity, and that may help some of the speculative action to spread to small stocks.
The debt-ceiling issue is now passed, and the market is now considering the Fed interest-rate decision in two weeks. The Fed is signaling that they are likely to pause, but there is an important jobs report on Friday that could shift expectations.
The big question is the same one that has been in place for a while: Will the narrowness of the market shift? So far, big-caps are not acting as effective leaders. Breadth has remained poor, and the strength in these names is not spreading. The longer that large-caps exhibit superior relative strength, the more they are viewed as safe havens during the economic storm.
It is an extremely difficult trading market as we have some very extended big-cap names on the one hand and a huge amount of stocks with very poor technical conditions. There is no middle ground, and that makes stock-picking very hard.
We have a mildly positive start to Thursday, but the focus is going to shift more to economic conditions now that the debt-ceiling deal is resolved.
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